Rewarding Non-Productive Activities with New Money Leads to Price Inflation

Rewarding Non-Productive Activities with New Money Leads to Price Inflation

The punchline is that a significant percentage of new money creation over the past year was allocated to non-productive use cases. “Helicopter” money to individuals and non-performing firms are two examples. When capital is deployed for non-productive use (acquiring cryptocurrencies for example), that capital invariably bids up prices causing asset price inflation. Conversely, recipients that are able to deploy capital in a productive manner (small software development firm for example), create value through production of goods and services (Software products in this case), which does not lead to asset price inflation. Below we have included two charts published by the Federal Government which illustrate our point and speak to the asset price inflation or “bubbles” we have voiced our concern about over the past 14 months.

The first chart (figure 1.),Federal government current transfer payments: Government social benefits to persons” illustrates the enormous sums of money the U.S. Federal Government paid out to individuals in exchange for precisely zero productivity. The twin peaks represent the COVID-related handouts made by the Trump and Biden administrations. It is hardly a surprise that equities, crypto and other assets were bid up in the ensuing months.

Figure 1. Click to expand or download.

The second chart (figure 2.),Commercial and Industrial Loans, All Commercial Banks” is typically how one would want new money / credit allocated – that is to say allocate new money / credit to businesses that can invest the capital to increase productivity. Unfortunately, the spike illustrated in this chart (May 2020), represents the money that was allocated to banks who then were asked to make loans to businesses that had been negatively impacted by COVID. Many of these businesses (restaurants for example), unfortunately did not have a productive use for this capital as their businesses were shut down by State Governors. Perhaps these business owners put some of this new capital in the stock market, or crypto (speculative use cases), or purchased a used car (since the car is a used vehicle it does not get reflected in GDP). Thus, given figures 1 and 2 it is not surprising that we have asset price inflation.

Figure 2. Click to expand or download.

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