Money Supply Growth Outpacing Real GDP

Sometimes it feels difficult to get one’s bearings.

Markets are near all-time highs, yet extremely volatile. America is the ‘hottest economy in the world’ attracting trillions of dollars in capital, yet inflation is up… and seemingly almost every week some major corporation announces mass layoffs.

Very little makes sense these days. So today I wanted to take a big picture view of what’s happening in the US economy… and more critically, where it may be headed.

1. It’s all about the US federal budget deficit

It’s not exactly controversial anymore to say that federal spending is completely out of control. Fiscal Year 2025 (which ended on September 30 of this year) posted another $1.8 trillion deficit, and interest on the national debt exceeded all military spending.

This becomes worse each year and will soon reach a point where it is unfixable. The government has to borrow money just to pay interest on the money it has already borrowed… which means that the annual interest bill– already more than 20% of tax revenue– will continue to increase.

2. The budget deficit has to be financed, one way or another

When the US government spends more than it collects in tax revenue, it makes up the difference by selling more debt, i.e. Treasury securities. Very broadly, you could group the investors who buy the US government’s debt into two groups: foreign investors and domestic investors.

3. Foreigners are abandoning US debt faster than anyone cares to admit.

But for the past few years, foreigners (including foreign governments, central banks, large corporations, commercial banks, and even individual foreign investors) have been net SELLERS of US Treasury securities.

It’s not hard to understand why; the entire world has witnessed utter chaos and insanity, from a guy who shook hands with thin air, to the disastrous withdrawal from Afghanistan, to TWO attempted assassinations of a Presidential candidate, to “Liberation Day”, to the government shutdown, and more.

Plus, all along the way the national debt reached an eye-popping $38 trillion. Foreigners are no longer looking at US government bonds as a “risk free” or “safe haven” asset. Instead, it just looks better to avoid.

4. Domestic investors don’t have enough savings to finance the deficit

Each year, between businesses and consumers across the US economy, a total of roughly $1-2 trillion in “net savings” is generated. This is essentially the combination of all business and corporate profits, plus the net total of whatever households have left over after paying all bills and expenses.

This year net domestic savings in the US economy is on track to be less than $1 trillion. But the budget deficit is roughly $2 trillion. This means there’s simply not enough savings in the United States to finance the annual deficit.

5. So, the Fed steps in and fills the gap

Since foreigners aren’t buying, and the domestic economy doesn’t generate enough savings, the only option left to finance the budget deficit is for the Federal Reserve and the banking system to create the money.

That’s why, over the past decade, US money supply has grown by 6.8% annually, while the real economy has only grown at 2.3%– a difference of 4.5% annually.

In short, this means that the growth in money supply is significantly greater than growth in the production of goods and services.

A 4.5% difference isn’t very much if it were just a single year. But if you compound that 4.5% difference over 10-15 years, it means that the amount of money in the system has become substantially greater than the amount of goods and services in the economy.

So there’s a LOT more money chasing around less ‘stuff’. The net result is inflation.

6. Bad policy makes it worse

Between 2020 and 2024, the U.S. went from being a net energy exporter to importing the equivalent of 2 million barrels per day. That wasn’t a weird coincidence—it was the deliberate result of idiotic Biden-era policies. Refinery shutdowns, blocked leases, and a full-scale war on domestic energy.

This is a big deal; energy, on average, comprises roughly 50% of the cost of producing nearly everything– food, automobiles, clothes, equipment, microchips, etc. So higher energy prices ripple through the entire economy as higher inflation.

It’s the same story with healthcare. Obamacare is the poster-child for horrible policy—it was supposed to make it “affordable”. Since then, costs have doubled.

Bad policy makes our lives more expensive.

7. Then it all impacts the labor market

When prices rise, households cut back. That’s exactly what’s happening now. Big consumer-facing businesses—Walmart, Procter & Gamble, even Amazon—start slashing costs, which usually means jobs.

Layoffs are rising. The labor market is weakening. And technology only makes it easier to let go of workers. Now we’re stuck with high inflation and a weak job market—otherwise known as stagflation.

8. Again, it starts and ends with the deficit.

The government spends too much, borrows too much, and prints too much. Inflation follows. That hits consumers. Businesses respond by cutting back. The economy slows. And the cycle repeats.

Can America break out of this cycle? Absolutely.

The tools already exist– or are on the way: advanced automation, small modular nuclear reactors, and next-gen natural gas tech that could make energy cheap and boost productivity across the board.

And I think we’ll get there eventually.

But in the meantime, there could easily be a bumpy, stagflationary road ahead over the next couple of years. The budget deficits are still massive, and I don’t see a shred of political will in Congress to rein in the spending.

In today’s podcast, we talk about all of this in more depth—what it means, where it’s going, and what you can do about it.

Because the key is not to wait for Washington to fix it… but to have a Plan B while they keep making it worse.

You can listen here.

https://www.youtube.com/watch?v=0hFYqS9QtG0

And you can access the podcast transcript here.