Overheated Economies Don’t Cause Inflation

Analyst, Author, and Owner of Kelsey's Gold Facts
May 13, 2021

Janet Yellen said the following last week…

It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat” 

Later that same day, she said this…

“It’s not something I’m predicting or recommending. If anybody appreciates the independence of the Fed, I think that person is me, and I note that the Fed can be counted on to do whatever is necessary to achieve their dual mandate objectives.”  

Also last week, we heard from the Federal Reserve which released the following statements  on Thursday, May 6, 2021…

  • Rising asset prices are posing increasing threats to the financial system, the Federal Reserve warned in a report Thursday.
  • “Asset prices may be vulnerable to significant declines should risk appetite fall,” the central bank said.

Before we can understand how to interpret these statements and any possible conflictions, there are four key topics which need to be explained: inflation, the Federal Reserve, interest rates, and the economy. 


Inflation is the debasement of money by government and central banks. The debasement is accomplished by continually expanding the supply of money and credit. Also, the inflation created by the Federal Reserve is intentional.

The Federal Reserve has been expanding the supply of money and credit intentionally for more than one hundred years.


The purpose of the Fed is to provide a structured environment for the creation of money, so that banks can lend money (i.e., a banker’s bank). The expansion of the supply of money and credit (inflation) allows banks to continue to lend money in perpetuity.

The Fed’s inception in 1913 was authorized by Congress with the understanding that the Federal Reserve would try to manage financial activity in such a way as to avoid panics and crashes.

What wasn’t publicly known was that in order to harness political support for the bill authorizing the Fed’s creation, a  promise was made to the United States Government that it would always provide whatever money was necessary for the government to fund its operations.


The effects of inflation are volatile and cannot be quantified in advance, no matter how much we know about money supply growth.

Panics and crashes have become more severe and their damaging economic effects are longer lasting than prior to inception of the Federal Reserve.

In order to induce economic activity that will encourage retail lending and consumer spending, the Fed has resorted to interest rate manipulation.

Artificially low interest rates for the past several decades have fostered an economy dependent on cheap credit. A rise in interest rates to more normal levels would create cataclysmic conditions.

On the other hand, if the Fed continues to maintain artificially low interest rates, they run the risk of overstimulation (think drug overdose).

There is a difference between higher asset prices and economic activity. Higher asset prices themselves are not a cause or symptom (effect) of inflation and they are not indicative of an economy in danger of overheating.

The reason for the high, over-inflated asset prices is the cheap and abundant credit supplied by the Fed.

Sometimes, statements are made that imply a link between growth in our economy and inflation:

“We have to “manage the growth” so the economy doesn’t “grow too quickly” and “trigger higher inflation”.

Statements like this are false and misleading.


Ms. Yellen knows all of this, of course; so why the subterfuge?

Her allegiance has not changed. She is still a member of the same team (see Powell And Yellen – Team Fed), but she plays the game at a different position.

Secretary Yellen has said that “interest rates will have to rise somewhat…”.

What she is saying is that rates cannot remain at artificially low levels without expectant, long-term damage.

Chairman Powell has said that as long as interest rates stay low, the valuations are justified. That is not exactly correct…

The reason for the high, over-inflated asset prices is the cheap and abundant credit supplied by the Fed. An abundance of cheap credit does not justify the extreme valuations; but it does explain them.

Taken together, both Chair Powell’s and Treasury Secretary Yellen’s statements, coupled with statements released by the Fed on May 6, 2021, are telling us that something big is about to happen.


Here is what you need to know…

Both the Federal Reserve and the United States Treasury have warned us that something big is about to happen.

The warnings are an indirect admission that those who are supposedly charged with maintaining the integrity and stability of our financial and economic systems have lost control.

Expect interest rates to rise. Expect asset prices and financial markets to drop.

An asset price crash and credit collapse are likely upon us soon.

(Also see Asset Price Crash Dead Ahead. You can read about the Electronic Communications Network here.)


Kelsey Williams has more than forty years experience in the financial services industry, including fourteen years as a full-service financial planner. His website, Kelsey's Gold Facts, contains self-authored articles written for the purpose of educating and informing others about gold within a historical context. In addition to gold, he writes about inflation and the Federal Reserve.


Kelsey Williams is available for private consultations, public speaking, and interviews at [email protected]

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