Rather than making money harder to get, the U.S. government needs to focus on the other side of the demand vs. supply equation.
In prescribing cures for inflation, economists rely on the diagnosis of Nobel laureate Milton Friedman: inflation is always and everywhere a monetary phenomenonâ€”too much money chasing too few goods. But that equation has three variables: too much money (â€œdemandâ€) chasing (the â€œvelocityâ€ of spending) too few goods (â€œsupplyâ€). And â€œorthodoxâ€ economists, from Lawrence Summers to the Federal Reserve, seem to be focusing only on the â€œdemandâ€ variable.
The Fedâ€™s prescription is to suppress demand (borrowing and spending) by raising interest rates. Summers, a former U.S. Treasury Secretary who presided over the massive post-2008 bank bailouts, is proposing to reduce demand by raising taxes or raising unemployment rates, reducing disposable income and thus peopleâ€™s ability to spend. But those rather brutal solutions miss the real problem, just as Summers missed the crisis leading up to the 2008-09 crash. As explained in a November 2021 editorial titled â€œToo Few Goods â€“ The Simple Explanation for Octoberâ€™s Elevated Inflation Rates,â€ we donâ€™t actually have too much consumer money chasing available goods:
M2 money supply surged [in 2020] as the Fed pumped out liquidity to replace businessesâ€™ lost sales and householdsâ€™ lost paychecks. But bank reserves account for nearly half of the cumulative increase since 2020 began, and the vast majority seem to be excess reserves sitting on deposit at Federal Reserve banks and not backing loans.