STANFORD, California: Inflation continues to surge. From its inflection point in February 2021 to last month, the US consumer price index has grown 6 per cent – an 8 per cent annualised rate.

The underlying cause is no mystery. Starting in March 2020, the US government created about US$3 trillion of new bank reserves (an equivalent to cash) and sent checks to people and businesses.

The Treasury then borrowed another US$2 trillion or so and sent even more checks.

The total stimulus comes to about 25 per cent of GDP, and to around 30 per cent of the original federal debt.

While much of the money went to help people and businesses severely hurt by the pandemic, much of it was also sent regardless of need, intended as stimulus (or “accommodation”) to stoke demand.

The goal was to induce people to spend, and that is what they are now doing.


Milton Friedman once said that if you want inflation, you can just drop money from helicopters. That is basically what the US government has done.

But this US inflation is ultimately fiscal, not monetary.

People do not have an excess of money relative to bonds; rather, people have extra savings and extra apparent wealth to spend.

Had the US government borrowed the entire US$5 trillion to write the same checks, US citizens likely would have the same inflation.

Other purported factors – including “supply shocks,” “bottlenecks,” “demand shifts,” and corporate “greed” – are not relevant to the overall price level. The ports would not be clogged if people were not trying to buy lots of goods.

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