Why We Have High Inflation

One of my favorite economists to read weekly is Brian Wesbury, chief economist for First Trust. Brian reminds us that inflation by definition is too much money chasing too few goods. Brian says the #1 reason why we have high inflation is too much growth in the money supply (M2) which has grown by 41% since February 2020 and we now have $22 trillion in our economy. This is money owned by individuals, companies, and the government. And once this money is created by the Fed and given to consumers and companies it can’t be destroyed or taken away by the government.

Brian says raising interest rates will not bring down inflation like we need instead we need to limit the growth of the money supply by 3 different ways—
· Have the Fed pay a much higher interest rate to banks to keep them from lending and thus increasing money supply. But, paying interest at 3.5% would mean banks would collect $120 billion in interest payments from the Fed and Brian is sure some politicians won’t like this.
· Second. Keep raising capital requirements so that banks have less money to lend. They are already doing this. For example, in July JPMorgan was forced to raise its Tier 1 capital ratio to 12.5% from 11.2%.
· Third, when the Treasury runs a surplus in any given month it could reduce its debt and allow the Fed to let bonds mature.