The end of easy money

Cheap, easy money has greased the US economy for decades. Now it’s running dry.

Man with a till full of dollars
(Image credit: © Joe Raedle/Getty Images)

Times they are a-changin’, and the key difference between the present and the 40 years between 1980 and 2020 is money-printing. In the US’s fake money system, new wealth is not earned, it’s created by lending. The Fed lends to member banks. The banks lend to hedge funds, smaller banks, corporations, whoever wants the money. The money supply gets bigger, but so does the debt.

The big borrowers are on Wall Street, financial players who use the cheap money to speculate. As long as the volume of money – the liquidity – was increasing, it was reasonable to expect asset prices to go up. And they did. The Dow, for example, rose from under 1,000 in 1980 to over 36,000 today.

Consumers borrowed too – for houses, cars, and purchases on credit cards. And the federal government was the biggest borrower of all – adding more than $27trn to its debt so far this century. All of this borrowing and spending increased the money in circulation that was chiefly chasing assets. It meant higher asset prices. And higher asset prices made the elite richer.

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Then, in July 2020, the debt binge came to a screeching halt. Interest rates and inflation went up. Borrowing went down. And with it, the money supply shrank. “The US money supply fell 3.3% over the last year, a record eleventh consecutive month with a year-on-year decline,” says market strategist Charlie Bilello on BilelloBlog. “The US money supply has fallen 2% over the last two years, the largest two-year decline on record.”

Money is what makes the financial world go ’round. Note that the money supply was supposed to grow at about the same rate as GDP, in order to keep prices more or less stable. GDP grew around 3% per year since 1971. But the M2 measure of money supply grew by about 5%. And then, in the Trump madness, it rose to 27% as the Fed printed trillions to keep up with Washington’s deficits.

This was the proximate cause of the wave of inflation that struck the US in 2022. Then, too late, the Fed changed course. No more easy money. No more negative rates. The Fed’s key rate rose 500 basis points (5%) – the biggest, fastest turnaround in Fed history. The money supply collapsed. From 27% annual growth under Donald Trump, it is now bouncing off a low of minus 4.5% – an unprecedented decline. House mortgage payments roughly doubled. Interest on credit card accounts rose to 21%. And the Feds now pay more than $1trn a year in interest alone on the federal budget – the largest single item of federal spending apart from social security/Medicare.

What is troubling about this is that the money supply is no longer increasing. So what makes the world go ’round, now? How can the economy go from strength to strength, even as liquidity drives up? Stocks sold off in 2022. But now they are rising again. Bonds suffered the biggest sell-off ever, interest rates are generally falling again.

New York magazine thinks the good times are here again. Since the end of October, the Dow Jones Industrial Average has been on a tear. The bond markets “gave up much of their pessimism” and “went on a frolic of their own”. The thinking seemed to be that the Fed was finally starting to cut interest rates again and it was “better to buy, buy, buy just about everything that could be gotten before it was too late… On Wall Street, it looks as though it’s finally – finally! – time to get greedy again”.

Really? Time to be greedy, with stock prices near record highs? And little new money coming in? Is that the way it works? We don’t think so.

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Bill Bonner is an American author of books and articles on economic and financial subjects. He is the founder of Agora Financial, as well as a co-founder of Bonner & Partners publishing.