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September 29, 2022

Inflation has been summed up as “too much money chasing too few goods.”

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Some contend that the recent uptick in price inflation is the result of an expansion of the money supply, and they date the start of that expansion back to the Spring of 2020.

That’s when the Federal Reserve began pumping trillions of newly-minted Fed dollars into the economy. The Fed’s money printing continued into 2022. Our current inflation, it would then seem, might just be due to “too much money.”

If you recall, the reason for the Fed’s massive money-printing was the government’s response to the coronavirus pandemic. The trillions in new money were for the government shutdowns of the economy.

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Keep in mind that it was the states that shut down the economy, not the federal government.

No government can deny people their ability to make a living without giving them the means to survive. Unlike the federal government, the states don’t have a central bank that can create money. But with the $2.2 trillion Cares Act, Congress rode to the rescue and accommodated the states with the money to pay for their shutdowns.

So, the states shut down their economies, Congress backstopped the states, and the Fed provided the money.

But what if the Fed had resisted, and said to Congress: Go ahead with your bailouts of the states if you must, but do it without our help. We’re not gonna buy any more bonds. The Fed’s job is to protect the value of the (once) almighty U.S. dollar.

Given that, if Congress were still intent on providing the money so the states could keep their economies shut down, then they would have had to borrow it. The funds would have had to come from selling new U.S. Treasury bonds for pre-existing money, rather than from the Fed’s creation of new money to purchase pre-existing U.S. Treasuries in the aftermarket.

Had the Fed resisted and refused to yet again create money for Congress, the money supply wouldn’t have expanded. But if Congress had continued with their pandemic spending programs by borrowing, then the federal deficit would have risen. Deficit spending is said to be inflationary, but it wouldn’t have been as bad as having the Fed print the money.