In our current economic environment, I got to thinking about the parallels to the early 1980’s. Having graduated from high school in the Rust Belt, my economic ideas were heavily influenced by the recession, stagflation and gasoline crisis of the times.
Inflation is caused by an imbalance of supply and demand or when you have too many dollars chasing around items of limited supply. I don’t buy all the current rhetoric of supply chain crisis, labor shortages, etc. and started to look at what my hero Paul Volcker did at the Fed to beat down the last inflation. He constricted the money supply and raised interest rates.
I looked at the Fed M2 growth and saw some startling data. The M2 which is a broad measure of the dollars that our in our banking system grew by 36% from the start of the pandemic March 2020 until this year. Compare that to the same time period prior to the 1981 recession, when monetary growth was only 13%.
The solution is obvious, but painful, we must limit money supply growth going forward and look to higher interest rates. Pain is on it’s way.