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U.S. Inflation Surge Is Harbinger Of What’s To Come

May 14, 2021

Yesterday’s headline inflation number of 4.2% per year shocked most observers. It didn’t shock me, and it wouldn’t have shocked Milton Friedman either. We know that money dominates, but our monetarist perspective is not held by most. Indeed, most people adhere to the precepts of fiscalism. Even Fed Chairman Jerome Powell has confessed that the Fed pays little attention to the growth of the money supply. During congressional hearings on February 23rd, he proclaimed that the relationship between economic growth and the money supply is something we have to unlearn. It’s rather obvious that Chairman Powell has followed his own advice. But contrary to Chairman Powell’s musings, the rate of growth in the money supply, broadly measured, dictates the course of a country’s nominal GDP growth and its inflation rate. 

To gauge the current U.S. monetary temperature, one needs a model of national income determination. A monetary approach requires us to determine the “golden growth” rate for the money supply (the rate that would allow the Fed to hit its inflation target of 2%) and to compare it to the actual growth rate of the money supply. 

I calculate the golden growth rate as follows: inflation target + average real GDP growth – average percentage change in velocity. According to my calculations, the average percentage real GDP growth from 2010 to 2020 was 1.8% and the average change in the velocity of money was -2.5%. Using these values and the Fed’s inflation target of 2%, I calculated the U.S. golden growth rate for 2010–2020 for Total Money (M4) to be 6.3%.

The growth rate in M4 skyrocketed to 28.9% per year by the end of 2020, and is still growing at 24% per year today. That rate dramatically exceeds the golden growth rate of 6.3% per year, a growth rate that would be consistent with the Fed’s inflation target of 2% per year. This means that the recent April year-over-year CPI inflation rate of 4.2% is simply a harbinger of what is coming in the future—more inflation. This haunting specter could spell the end of President Biden’s triumphal march.

Why Currencies Fail

In an interview with David Lin of Kitco News, I discuss how hyperinflation will lead to a currency’s demise. A currency fails when domestic hyperinflation diminishes its domestic purchasing power and depreciation against a foreign currency diminishes its external purchasing power. The Hanke-Krus Hyperinflation Table, first published in the Routledge Handbook of Major Events in Economic History, contains all 62 episodes of hyperinflation in world history. In each of these cases, the underlying currency has failed, and failed fast.

Steve H. Hanke

Professor of Applied Economics

cato.org/people/steve-hanke

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Steve H. Hanke is Professor of Applied Economics at the Johns Hopkins University in Baltimore, MD. He is also a Senior Fellow and Director of the Troubled Currencies Project at the Cato Institute in Washington, D.C. You can follow him on Twitter: @Steve_Hanke

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce
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