Column #456       May 24, 2024FRED M2 Money as of May 22 2024

So, what is inflation? Does it lead to a stronger country? Is it needed for long-term growth? What about deflation and what is that? Does it lead to a weaker country? Historically, why was inflation against the law? Who’s to blame for inflation? If it robs purchasing power from all citizens, why do our representatives insist on 2% inflation being a good thing?

The definition of “inflation” no longer means what it used to mean. It used to describe an event—not a symptom. The event would be the money supply increasing faster than “all things for sale” and its symptom would be generally higher prices for all goods and services. Therefore, inflation was first and foremost a monetary matter. The modern (woke) definition is that inflation means the general price level, for goods and services generally, is increasing. No longer is there a word for “monetary debasement.”

The consequence of inflation is that the same monetary unit buys less of everything because of excessive increases in the quantity of monetary units. Before paper money (which is an IOU) money was specie of some kind—coined money. Even with a gold standard, inflation could be a sharp increase in the quantity of gold in a country. Spain experienced hyperinflation when the conquistadors brought back boat loads of gold and silver from the Americas from 1500 to 1800. This inflation was a sharp increase in gold and silver chasing the limited supply of goods and services for sale. That resulted in sharply higher prices and eventually Spain went from being a strong, influential country to weak shell of its former self.

Prior to using paper money, inflation would describe several other forms of increasing monetary units. Coin clipping and coin debasement were two popular means of increasing the supply of money versus goods. When coins were made of gold and silver, it was popular for people to clip the edges of their coins and sell the slivers to bullion dealers who made new whole coins. At times kings would tax people based on old coins of a specific weight, while using its new coins of the same denomination that weighed less to buy their goods and services. Another inflation tactic, as we learned in our own country since 1971, is for crooked governments to issue new copper clad coins replacing coins of the same denomination that were made with silver or gold. Of course all of these tactics were illegal.1 2

Paper money is a substitute for specie (metallic coins) when it’s an IOU. A scrap of paper is meaningless unless it states that it can be redeemed by the bearer for something tangible. Starting in 1792 the “dollar” was redeemable in gold at the rate of $19.75 for one ounce of gold. Then the official U.S. Government gold price was raised (the dollar was devalued) to $20.67 in 1834 and $35 in 1934. In 1972, the dollar was devalued again by raising the gold price to $38 and then to $42.22 in 1973. A two-tiered pricing system was created in 1968 with the market price for gold free to fluctuate and today it takes nearly $2,500 dollars to buy an ounce of gold.3

The “modern” paper dollar is a “Federal Reserve Note” that’s “legal tender for all debts public and private.” Essentially it’s backed by U.S. Treasury bills and bonds that are payable in Federal Reserve Notes. Yes, it’s a circular ponzi scheme. But it is the money of the realm and it works as long as people believe it works. Its supply is measured by what is known as M2 money and this has become the ultimate in coin clipping on steroids.

It has taken 110 years to destroy the purchasing power of the dollar. It started with Woodrow Wilson creating the Federal Reserve in December 1913. Then dollar debasement was taken up a notch by Franklin D. Roosevelt on April 20, 1933. The final blow occurred under Richard Nixon when he closed the gold window internationally on August 15, 1971. The dollar has been printed willy-nilly ever since.

In 1933 the general price level for all goods and services was approximately the same as it was in 1800. For more than 100 years the general price level of goods and services would increase as consumptive credit expanded (inflation)—but, with a gold standard, prices would be pulled back by deflation—a pay down or bankrupting of debt (shrinking the money supply). Over time the result was stable prices with the last deflationary period ending in 1932. During that initial period of generally stable prices the country grew substantially from 16 states to 48; from the horse and buggy to transcontinental railroads, the automobile, and airplane; from written messages to the telephone, radio, and airmail; it survived many wars and matured into a country to be reckoned with.

Today’s government-sponsored ponzi scheme of government deficits and bank credit expanding unchecked for decades has resulted in the money supply, as measured by M2, doing nothing but grow. Initially from 1932 this growth was relatively moderate, except during WWII. But in the past 50 years it has accelerated and, following the 2008 flirtation with deflation, it has really grown unchecked as the Fed lowered interest rates to zero and consumptive deficits (both public and private) soared following the COVID scare.4

Measuring the debasement process is not crystal clear. The government’s Consumer Price Index (CPI) isn’t perfect. For instance computers and televisions get cheaper every year. But there are prices for certain things that encompass many aspects of the economy (even computers) all wrapped up in one item or service. For instance a low-cost haircut in 1955 cost about $1.00. Today it’s $15.00 to $20.00. Here are prices from McDonald’s:5 6 7

As one can see, the CPI index totally understates the increasing costs of basic goods and services. I believe the basic costs of a haircut and a fast food meal take into account all the costs for goods, services, and energy required by the most basic of businesses to survive. Therefore they are a more accurate price index than the CPI.

The main image for this article is M2 as measured by the Federal Reserve Bank of Saint Louis. Study it along with the original from FRED. A couple of weeks ago, Peter Schiff debated Steve Hanke, professor of economics at Johns Hopkins University, on inflation, the debt crisis, and the future of the dollar. There’s one quote from Steve Hanke that deserves repeating.8

I’m in a clarifying mood here, and that is that the idea and the propaganda that was put out by the Fed and the White House and the Congress that non-monetary factors caused the inflation problem that we’ve gotten ourselves into. That Putin oil, supply side shocks, all this rubbish— and it’s pure rubbish. What caused it is the explosion in the money supply that went up at the peak, 27% year over year, in early 2021. We’ve never seen it that high before. And as night follows day, when the money supply explodes like that with a long and variable lag, you’ll get inflation [rising prices].9

This is good time to point out that in a stable non-inflating environment, prices will stay relatively flat over time. But still, prices for some things will fluctuate and that won’t change matters much. Say the price of oil goes up. When the supply of money is limited, the prices of some other things must go down. Just because something as important as oil goes up in price, it cannot cause all other goods and services to go up in price at the same time because the limited money supply won’t allow it.

For many years the Federal Reserve (Fed) tried to maintain an inflation rate of 2%. This means that, as a matter of policy, the government would steal 2% from everyone every year. But when the pandemic hit and Fauci and Birx sold the nation on shutting down for four weeks. The shutdown was extended for many additional months mostly by Democrats and RINOs wanting to continue the shutdowns in their states. A consequence of the shutdown meant that starting in February 2020 the Fed monetized government debts and bought securities and lowered interest rates to zero.

The M2 money supply quickly soared like never before. Eventually M2 peaked in April 2022 up 42.1% in 26 months before the Fed started to rein in its printing mania. Then over the next 18 months M2 actually decreased 5.9% until October 2023. But by March 2024 the Fed had increased M2 by 1.71%—which in five months is an annualized 4.1%. Then the Fed members stood around and wondered why prices continued to increase. So, even before the economy could adjust for the 42.1% increase in M2 the Fed was back at inflating the money supply at a 4.1% rate while the government (Congress and the lame-brained president) continued to spend like drunken sailors—increasing the government’s deficit at the rate of $1 trillion every 100 days!

There’s only on way to stop inflation and that’s deflation which requires M2 to be reduced—and underwater debt written off. It means the government must at least balance its budget. Of course those steps along with higher interest rates will slam consumers and banks up against the wall and a long-delayed depression will commence. That’s the only cure and, believe it or not, it will make America stronger in the long term. The alternative is runaway prices caused by hyperinflation which will cause problems far worse than deflation. Hyperinflation will take America to its knees and make it more vulnerable to disintegrating than today’s corrupt leadership has already.

That’s what inflation is all about.

To better understand the long-term implications of a weakened America check out The Epoch Times review of Victor David Hanson’s new book: "The End of Everything." Plus read VDH’s recent comments from American Greatness on the same topic.10 11

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

For additional reading:

1. What Was Coin Clipping & Why Did it Carry the Death Penalty? by tinstaafl from No Free Lunch

2. Inflation Isn't A Bug In The System, It's A Feature by J. Kennerly Davis from Real Clear Policy

3. Historical Gold Prices—1833 to Present

4. 100 Year Charts M2 Money Supply Growth vs. Inflation

5. Out Of Control Inflation: It Now Takes At Least $177,798 For A Family Of 4 To Live Comfortably In The US by Michael Snyder from The Economic Collapse blog

6. $1 in 1955 Is Worth $11.70 Today

7. Consumer Price Index Data from 1913 to 2024 from US Inflation Calculator

8. FRED M2 Chart

9. Schiff vs. Hanke: Who’s to Blame for Inflation? From Schiff Gold

10. "The End Of Everything": Victor Davis Hanson On The Gravest Threats To America by Jan Jekielek and Jeff Minick from The Epoch Times
VDH’s brand new book is recommended reading for everyone. I’m reading it now.

11. Loose Talk About The End Of Everything by Victor Davis Hanson via American Greatness