Money Supply Strongly Suggests Higher Inflation Ahead

Money Supply Strongly Suggests Higher Inflation AheadAsk even an amateur economist, and they will tell you this: an increasing money supply eventually leads to inflation. It’s a simple concept; the more paper money there is in the system, the less it’s worth and the less it buys.

And this is exactly what is happening in the U.S. economy. The money supply is growing at a fast rate when compared to historical averages.

Consider the chart below of the M1 money supply (coins, currency, and demand deposits, such as checking accounts) in the U.S. economy. Pay close attention to the circled area.

M1 Money Supply Chart

Chart courtesy of

Between January 2008 and September of 2014 (almost six years), the M1 money supply in the U.S. economy has doubled. But according to the official statistics, since 2008, prices have only increased 11% in the U.S. economy. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 30, 2014.)

In the nine-year period from 1975 to 1984, the M1 money supply also doubled. But in that period, inflation in the U.S. economy increased by 93%. (Source: Bureau of Labor Statistics web site, last accessed October 30, 2014.)

And in the eight-year period from 1985 to 1993, the M1 money supply doubled again. Inflation increased 34% during that period. (Source: Ibid.)

With this said, any of the popular Internet financial sites and the mainstream gurus will have you convinced there’s no inflation in the U.S. economy. The official numbers back up their opinions. Especially now, with the Federal Reserve ending quantitative easing, all the talk is that inflation isn’t a problem anymore. In fact, some say we are headed for a period of deflation.

Dear reader, I’m convinced the unprecedented rise in money supply will eventually show up in the inflation numbers. It just takes some time.

We heard the economists tell us everything was fine with the housing market in 2006. They were wrong. We heard the stock market analysts tell us the stocks were going higher in 2007, but the market collapsed. We were told it would be a mild recession back in 2008, but we had the worst recession since the Great Depression.

With regards to inflation, I believe the economists and analysts will be wrong again for the simple reason that in American history, whenever the money supply has increased, inflation has followed.