Inflation: The myth and the reality

Economics is a strange science. It is loaded with statistics, but for lazy reasons, too many economists tend not to believe their own statistics, and instead lean toward intuition and comfortable adages.

One such adage is: “Inflation is too much money chasing too few goods.”

Here are excerpts from an article embracing that myth:

COVID Stimulus Checks Worsened Inflation
Four economists at the Federal Reserve say America’s high rate of inflation relative to the rest of the world is the result of surging disposable income during the pandemic.
ERIC BOEHM | 4.8.2022

Inflation is running higher in the United States than just about anywhere else right now. Why’s that?

According to a new paper from four economists at the Federal Reserve of San Francisco, it’s because the American government was relatively more generous during the pandemic, borrowing and spending trillions of dollars to not only fund COVID-19 relief efforts but to line the pockets of Americans with direct payments that enlarged the money supply and overheated the economy.

Contrary to popular wisdom, the federal government does not borrow dollars. It creates new dollars, ad hoc, every time it pays a creditor. That is the federal government’s method for creating dollars.

The federal government has the infinite ability to create its own sovereign currency, so it never needs to borrow. (It also doesn’t need to acquire dollars by levying taxes, but that’s another issue.)

That thing falsely labeled “borrowing,” actually should be termed “accepting deposits” into Treasury Security accounts — dollars the federal government never needs or touches — dollars that stay in those T-bill, T-note, and T-bond accounts until maturity, at which time they are returned to depositors.

More to the point is the fact that there is no relationship between inflation and the nation’s money supply.

There is no relationship between inflation (blue line) and the money supply (M2) (gold line)

If an increased money supply caused inflation, one should expect the blue inflation line and the gold money supply line to be relatively parallel. We see nothing of the sort.

Their relationship can better be described as random, not cause/effect..

“Since the first half of 2021, U.S. inflation has increasingly outpaced inflation in other developed countries.

Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic’s economic effect may have contributed to this divergence.”

Blaming “fiscal support measures” merely restates the data-discredited “Too much money” part of the adage.

But, at least, we have an admission from a debt nag that federal deficit spending helps grow the economy, a fact that Mr. Boehm’s Libertarian Party is reluctant to mention.

Governments all over the world spent heavily to combat the pandemic, of course, but few handed out cash directly to citizens as the American government did.

Mr. Boehm implies that government spending is superior to federally-financed, private-sector spending with regard to inflation. This strange idea never is explained.

In both cases, money is added to the economy and circulates through the economy.

The four Federal Reserve researchers track sharp increases in “inflation-adjusted disposable personal income”—in layman’s terms, excess spending cash—reported by American households over the past two years.

“Throughout 2020 and 2021, U.S. households experienced significantly higher increases in their disposable income relative to their OECD peers,” they write.

Data shows that “inflation-adjusted disposable personal income” (aka “Real Disposable Personal Income) has no historical relationship to the rate of inflation.

Looking at data, rather than intuition and adages, we find the Real Disposable Personal Income (red) line is nowhere near parallel to the Inflation (blue) line. Again, the differences between them seem generally random.

About $817 billion in direct payments to American households were delivered in three rounds during the pandemic, according to the COVID Money Tracker run by the Committee for a Responsible Federal Budget (CRFB), a nonprofit that advocates for lower deficits.

The CRFB, which is funded by the rich, always advocates for lower deficits, or more specifically, advocates for less money going to the middle classes and the poor.

The rich, in their ever-present desire to be richer, continually try to widen the Gap between the rich and the rest. (See Gap Psychology).

Had we followed CRFB’s advice, we would be in the midst of a deep recession or a depression.

We’re now reaping what Congress sowed. All that excess cash is chasing the same number of goods.

Wrong. It’s not chasing the same number of goods. COVID dramatically has reduced our ability to manufacture and to ship.

There are major shortages of goods, not because of increased demand but because of reduced creation:

All inflations are caused by shortages, most often, shortages of oil and food.

The price of oil is closely related to the supply of oil, which in turn, has a primary influence on inflation. Note the parallel between oil prices and inflation

And no, increased federal debt has not increased the price of oil:

Oil prices are not historically related to the federal debt.

Food shortages also contribute to inflation:

COVID affected food farming and imports, forcing the availability of food to fall to historic levels, before rebounding. As a result, the price of food rose massively in 2020, and remains high as reserves are rebuilt.

Weirdly, the author of the article seems to imply that giving rescue money to people caused them to eat more food.

In truth, demand is not an issue. The problem is lack of production.

Larry Summers, one of the Obama administration’s top economic advisers, was warning about rising inflation more than a year ago.

Passing another stimulus bill in the spring of 2021, Summers warned in a Washington Post op-ed, “will set off inflationary pressures of a kind we have not seen in a generation.”

Lord, please save us from the always wrong, Larry Summers. He rails against the stimulus bill which helped prevent a recession or a depression.

Almost every recession has resulted from reduced federal deficit growth:

Reductions in federal debt growth lead to inflation
Recessions (vertical gray bars) result from reduced federal deficit spending (blue line), and are cured by increased federal deficit spending.

Other top economists, including a former chairman of the International Monetary Fund, offered similar warnings.

The Biden administration and Democrats in Congress did not listen, and now here we are.

Yes, “here” we are, without a depression, which we would have had were it not for the influx of cash from the federal government.

Putting more money directly in Americans’ pockets and bank accounts caused inflation to get worse than it otherwise would have been.

Wrong. There is no relationship between inflation and that old bugaboo, federal debt:

No historical relationship between inflation and federal debt.

Today’s inflation is the result of COVID-caused shortages of oil, food, computer chips, lumber, shipping, labor, and other commodities.

In fairness, the economists also point out that a less robust response to the pandemic may have caused a different kind of economic pain.

“Without these spending measures,” they write, “the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage.”

Exactly right. We most likely would have slid right into a depression, had we followed the advice of Eric Boehm, the CRFB, Larry Summers, and other deficit nags.

1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.

And finally, Mr. Boehm straddles the fence, which will allow him at some future time to claim credit for his correct prediction, while avoiding the embarrassment of his wrong prediction.

Putting more money directly in Americans’ pockets and bank accounts caused inflation to get worse than it otherwise would have been.

Wrong, again. Increased money supply does not cause inflation, as we have shown.

Now comes the other side of the fence

Any serious attempt to grapple with America’s current bout of inflation must be aware of that possible alternate reality—the grass is not necessarily greener on the other side.

And then back again to the first side of the fence.

But that doesn’t absolve the federal government—from the White House to Congress to the Federal Reserve—of its role in worsening this mess.

The whole world is suffering through a period of high inflation, but American policy makers added a uniquely high amount of fuel to the fire.

So, to summarize Mr. Boehm’s firm position: The federal government both should and should not have pumped money into the economy to fight off a possible COVID recession.

And that’s definite.


  1. Current increases in prices (aka “inflations”) are caused by shortages of key goods and services, most often energy and food.
  2. The shortages all are  COVID-related.
  3. Today’s inflation involves many such shortages including oil, food, computer chips, lumber, shipping, labor, and other commodities.
  4. Historically, there has been no relationship between federal deficit spending and inflation.
  5. Deficit spending can cure inflation if it cures shortages by obtaining and distributing scarce commodities.
  6. The lack of federal deficit spending results in recessions and depressions.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell



The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

  1. Eliminate FICA
  2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
  3. Social Security for all
  4. Free education (including post-grad) for everyone
  5. Salary for attending school
  6. Eliminate federal taxes on business
  7. Increase the standard income tax deduction, annually. 
  8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
  9. Federal ownership of all banks
  10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.


3 thoughts on “Inflation: The myth and the reality

  1. I don’t see an answer to our problems unless and until that old worn out (murderous) scarcity model is supplanted by a realistic concept based upon modern day mass-production abundance. Well of course shortages make people nervous. Survival is always on the line. The rich love that since they’re way ahead of the game and get to tsk-tsk everybody else.
    We need a new model! Imagine if scientists and engineers insisted on getting to the moon in a hot air balloon. That’s today’s economics. Actually, it’s worse; it can’t even to get off the ground ; a good example of the old adage: doing the same thing over and over (assuming scarcity) and expecting miraculous change (social liberation, equality, justice for all).
    March and carry signs all you want. It won’t work, except maybe get tossed a bone.


  2. I think a perfect easy understandable example of Monetary Sovereignty is the United States Government sending money to Ukraine.


    1. Interesting comment.

      The U.S. is Monetarily Sovereign, so it can create dollars at will, and at no cost to taxpayers.

      Ukraine also is Monetarily Sovereign and can create its hryvnia at will, but the problem is acceptance. Under the current circumstances, the number of people willing to accept hryvnias is limited, so U.S. dollars are helpful.

      However, also under the current circumstances, fighter planes and other weapons would be even more helpful. We should give them the weapons and not ask for payment.


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