Here's a super simple, 2 minute video, explaining fiat money. What we call the U.S. dollar (a Federal Reserve Note) is a fiat currency, meaning there is not gold or silver somewhere to back up every dollar. There's debt, U.S. Treasury bills and bonds, instead. It's a fancy IOU, basically.
This morning, scanning through articles on what's happening in economics and business, I saw this CNN article "explaining" inflation. And it pissed me off, I just thought, "This is bullshit!" There are so many articles like this one, which are written specifically to confuse average people. The article is not complete BS, there are bits and pieces of truth in it. But it is confusing, and doesn't actually help you understand inflation. Everyone is seeing rising prices (inflation) in something we buy, probably many things. So here's the simple question, and the simple answer.
Q: Where does inflation come from?
A: The agency who creates the fiat money simply creates far too much money.
That's it. That's where inflation comes from. It really is as simple as that. Where did I learn this? From Alan Greenspan's 2007 book, The Age of Turbulence.* Greenspan was a longtime chairman of the Federal Reserve. I believe Greenspan referred to it as "government spending," the money creation that leads to inflation. Before the Great Recession of 2007-09, the government would spend money it didn't have, then The Fed would create more money, year by year. Afterwards, The Fed just started creating more and more money, at increasingly high levels, and the government keeps spending, at increasingly high levels. By "agency," I mean the organization that actually creates the money in a country. In most major countries today, that's the "central bank." In some countries, it may be the treasury department, or ministry of finance, or have similar name.
The "velocity" of money, and other factors play a role in how soon, and how much inflation happens, but inflation comes from a government, or a central bank, creating far too much money. When they create a huge amount of new money, either minting bills and coins, or creating digital money, usually both, then inflation will come afterwards. Usually it takes about 12 to 18 months after a huge, new batch of money, for prices to start rising noticeably for consumers.
This chart is the M2 money supply chart, one way they measure how many U.S. dollars exist. See that big spike on the right? That's it, that's the 2020-2021 huge increase in money, created by The Fed. That's where our inflation is coming from.
On March 2, 2020 (beginning of Coivd pandemic) there was $15.5219 Trillion in M2 money supply. On Feb. 1, 2021, there was $19.4119 Trillion. The Fed created $3,890,000,000,000 that shows up in this measurement, in 11 months. increasing the money supply by 25%. More money, though not as much, has been created every month since.
Usually they try to hit 3% per year inflation. In the 2010's, they couldn't create that much, the economy is really out of whack. That money was used, and is still being created and used, to bail out the U.S. banking system, to keep it from collapsing, and to bail out major corporations, and keep them from going bankrupt during the Covid-19 shutdowns last year.
Us Americans got a small chunk of that money. Our stimulus checks and unemployment money are part of this, but a small part. No one is sure just how much money was actually created (M2 is one measurement, there are other ways, because money and investments exist in so many forms today. I've heard estimates that up to $6 Trillion was created in 2020-2021. In short, that means we are going to have high inflation for a long time to come. This is why stock prices and real estate prices went up during a depression (another fact, we were in an official depression, not a recession in 2020, subject for another day).
This money creation, in many different major countries, comes from the central banks, primarily. The U.S. central bank is called the Federal Reserve (The Fed), in the European Union, it's the European Central Bank (aka ECB), in Japan, it's the Bank of Japan (BOJ).
Since the Great Recession in 2007-2009, all of these banks have been working together to create too much money, trying to get the world economy growing again at their preferred pace, which is about 3% inflation per year. They couldn't make that happen, except in China. China's massive growth (due to demographics), has been powering the world economy for 12-13 years. But now China is slowing down, and screwing up their economy even worse with political pressure. That's a whole different mess, which will affect us over the next year or two.
Nomi Prins is a former Wall Street quant (math geek) who worked at Goldman Sachs and Bear Stearns, she's an incredibly intelligent woman, and wrote a book in 2018 called Collusion,* explaining how all the central banks were working together. In this Talk at Google, she explains what she found in her research.
Obviously, the whole idea of inflation, our rising prices on things we buy, can get really complicated, when you get into all the details. But the reason inflation happens is simple, the central banks (or nations) create too much money. That's it. Now you know.
* Not paid links.
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