Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers. And every Friday, I answer as many as I can.
This week, we unpack a common question: Why does it feel like prices for goods and services aren’t coming down?
Like reader Anders S., who asks…
I am a Swedish citizen who follows the American economy and the Fed because our “Riksbanken” is following like a disciple!
What do you think about the huge debt in your economy? Most of it is money borrowed from yourself through printing new dollars.
I heard from analyst Louis Navellier about the amount of dollars being printed over just two years. From about 14 trillion to over 19 trillion of all the dollars that exist!
National economy laws say that it releases huge inflation. Which triggered an unnecessary rise in prices everywhere, or “greedflation.” How dangerous is this development?
– Anders S.
Hi Anders, thanks so much for writing in from Sweden! Last summer, I spent time researching Sweden’s near-cashless economy (catch up here).
You bring up some concerns that I share about the national debt and the relationship of “money printing” to inflation and “greedflation.”
Let me unpack that for readers here.
First, high public debt worries me for a number of reasons.
Governments must pay interest on that debt.
That interest comes from current taxes. And this means they can’t use that money for today’s needs, such as upgrading power grids or fixing roads.
In the U.S., the amount of public, or national, debt outstanding exceeds $34 trillion. Before Covid, it was $27 trillion. In 2002, it was $10 trillion.
It gets worse.
The U.S. debt-to-GDP ratio is about 124%. That means the U.S. is borrowing $1.23 for every $1 the economy produces.
That ratio is a bit lower than its all-time high of 133% in the second quarter of 2020, according to the Federal Reserve Bank of St. Louis.
But it’s still high by historical measures. (For context, the historical average was 62% of GDP from 1966 to 2023.)
Plus, it has been rising during the past year.
Sweden’s debt-to-GDP ratio is much lower – at about 30%. That’s much better.
You are right. According to the laws of economics, money printing or borrowing can lead to inflation.
However, it’s important to understand that inflation is driven by two main factors: monetary and economic.
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Monetary – Excess money supply flowing through an economy causes inflation to rise.
Money that’s either “printed” by a central bank or borrowed by a finance ministry or treasury department in the form of debt can increase prices.
When a central bank creates, or a government borrows, money, it injects this additional money into circulation.
That causes an increase in the money supply. This can lead to inflation.
That happens when the total money supply is greater than the total available goods and services (or GDP) of the economy.
This inflation can lead to a decline in the value of your money.
That’s because more money in a system chasing the same amount of goods or services basically competes with itself.
That’s why it can drive the costs of goods and services higher.
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Economic – The economic relationship of supply and demand drives inflation.
If the supply of any good, say oil, is restricted and demand for it remains neutral or increases, the price rises.
That’s why supply disruptions can cause price hikes. And that’s whether those disruptions are due to COVID-19, a war, the weather, or geopolitics.
High inflation can also distort economic decision-making.
People and businesses adjust their behavior based on expectations that prices will keep rising. That could mean taking on more debt to pay for extra costs.
More debt can lead to less economic or financial stability.
The main money supply figure is M2.
M2 refers to the total amount of money in an economy. It includes cash, checking and savings deposits, money market funds, and other deposits.
It encompasses M1, which covers only very liquid forms of money such as cash and checking deposits.
Central banks use quantitative easing (QE) as a monetary policy tool.
With QE, they “print” money to buy financial assets, such as government bonds. This increases the money supply and lowers interest rates.
That money goes through the banking system into the economy or markets. So, it becomes part of M2 by default.
The chart below provides a more detailed view of M2…
From the start of 2020, M2 rose from $16 trillion to $22 trillion in two years.
It has declined to $21 trillion since that height. But it remains near historical highs. That’s one reason we see monetary inflation lingering.
Now, let’s move on to greedflation. The term combines “greed” plus “inflation.” It is impacted by the monetary and supply and demand factor I discussed above.
The two create a vicious cycle. That’s because “money printing” inflation can ignite greedflation.
When central banks print excessive amounts of money, it floods the market with extra currency instantly.
This fuels the greed of investors and large financial institutions with the easiest access to that money.
They use that money to bid up the prices of assets, hoping to profit from those rising prices. This distorts the price of those assets.
Greedflation can lead to stock market and housing bubbles. It’s one reason we see the U.S. stock and housing market so historically high.
But, if bubbles burst, that can cause severe market crashes and economic instability.
We’re seeing that unfolding now with the U.S. commercial real estate sector that I’ve written about (catch up here).
Some cryptocurrency markets can also produce extreme price fluctuations driven by greedflation.
Investors can engage in risky trading practices, such as leveraged trading, to chase quick profits. These practices can cause major price swings, both up and down.
That’s why I encourage all my readers to be careful where they invest their money.
Beyond that, here’s what everyone should keep in mind when it comes to their money and investments.
Even though we have seen the rate of inflation decline recently, prices are still rising. Prices are up 3.1% over the last 12 months, according to the latest Consumer Price Index (CPI) data.
That’s why it’s critical to invest in assets that protect your money from inflation.
Two of my favorites are gold and Bitcoin. Both have hit historical highs recently, but I believe they have more upside to come.
And that’s all for this week’s mailbag! Thanks again to everyone who wrote in.
I do my best to respond to as many of your letters as I can every Friday. If I didn’t get to your letter this week, please write me at [email protected].
I can’t give personal investment advice, but I’ll address common questions and comments.
Happy investing… and have a fantastic weekend!
Regards,
Nomi Prins
Editor, Inside Wall Street with Nomi Prins