The U.S. Congressional Budget Office estimates U.S. federal debt will be around $28 trillion by the time voters weigh in on President Trump’s first term in office.
When he was sworn in as president in 2017, the government’s debt was $20 trillion. So he’ll have overseen the addition of about $2 trillion in debt for each year he’s been in office.
Numbers at this scale start to numb the human brain. But for comparison, when Barack Obama entered office way back in 2008, during the global financial crisis, federal debt was nearly $12 trillion. So during his first term, Trump has added about twice the debt of Obama’s first term.
So far, more than $3 trillion of Trump’s debt responsibility is tied to the COVID-19 response. And it’s hard to imagine that any other president would have spent less.
Traditionally, economic models suggest that such an increase in government spending should cause inflation. That’s because of the increased demand for goods and services, which can drive up prices.
However, what many analysts and pundits often forget is there is a delay between when Uncle Sam “spends” new currency into existence and when models predict an increase in consumer prices.
Before we discuss that, though, it’s important to recall that the true measure of inflation in the economy is a net increase in retail money supply. That means the total volume of currency circulating in the economy that people and businesses use every day.
Most modern financial analysts mistakenly define inflation as an increase in prices. That’s actually putting the cart before the horse. Measuring how much prices go up related to an increase in the currency supply is how the government measures inflation, using the Consumer Price Index.
In other words, an increase in retail prices is the net effect of inflation, not the cause. Classically defined, inflation measures an increase in the net currency supply available in the general economy.
That’s effectively why even analysts are asking, “Why aren’t we seeing inflation?” even as we see a massive increase in total currency supply, from both Uncle Sam’s new stimulus spending and the Fed’s currency creation.
Because prices are an effect of inflation, there’s a delay between when the Fed or U.S. government creates new currency (by spending or lending it into existence) and when consumer prices increase.
Currency the Fed’s or Uncle Sam’s largess creates eventually hits the general economy. Since March 2020, total currency the Fed’s created is up 35%. The Fed used most of those dollars to buy bonds, including over $1 trillion in U.S. government bonds.
Uncle Sam, in turn, takes the newly printed currency and spends it… on disaster relief, a new submarine, or respirators manufactured by General Motors. As the government spends the cash with companies, these companies pay their employees, who then spend it.
This spending ability results in increased demand for goods, which drives up consumer prices.
So, for those pundits asking, “Where’s the inflation?” you should now be able to give them an answer. They’ll find it in consumer prices. But not yet… not for another six months or so.