The mother of all charts is below. This is the Federal Reserve’s balance sheet history straight from their website:
Hence global inflation. Not all of course, as central banks around the world have been doing the same. New money goes in and the price of things goes up. If there is less stuff now, then the price will go up even more. Without new money, however, prices cannot rise across the board, inflation is always about the money supply.
That’s why the Fed is reining them in. When the money supply falls, asset prices fall.
Now there is a modifying factor. If you pump new money into an economy and that money drives up the prices of illiquid assets, then the inflationary effects will be in those illiquid assets and the new money will be locked there and only flow into the “real economy”. Let’s say you pump money in and make it easy to get nabbed by people buying houses or stocks, but make it hard to be nabbed by people buying groceries. Well, then house and stock prices will go up, but groceries won’t be affected as much. The lucky (rich) people with stocks and houses will get a lot richer and the people who have to buy groceries will be left behind a bit, but at least there won’t be runaway inflation outside of stocks and houses. Woe to an economy that gives money to people to buy groceries because then Junge expects everyone to have a bout of inflation.
Any bells ringing?
So in order to get prices under control you have to pull money out of the system because when there is too much in the wrong places it starts rushing around and increasing the price of everything.
There’s too much money in the system and that money is parked and it’s parked at the Federal Reserve where banks that can’t use a lot of this new money have somehow returned it to the Federal Reserve to take care of. This is the reverse repo that got out of hand with all the new money that was whipped up to bridge the pandemic.
Here is a diagram of it:
Notice how it fits the character of the Fed balance sheet. This money is a bulwark for the banks when things get tough because they can pull this money out and put it back into play in the real economy, but normally it would fall to 2014-2018 levels if there were even roughly the right level of money In the system. The Fed will feel there is plenty of room for tightening while those balances are high because when banks need liquidity, it’s there.
Here lies the great reputation. If the banks told the Fed, no, we won’t lend to anyone but you, and turn the real economy into a credit desert while they pool money in the Federal Reserve, then there’s no hope of a “soft landing.” ” If money stays in the system as it is, then inflation should take its course and the new money supply would adjust to new price levels, which wouldn’t be so bad, but the problem is that government budget deficits then require further increases in the money supply to create further inflation, which could only be combated with further interest rate hikes, leading to a vicious cycle of high inflation and stagnation. This is how it happened in the 1970s…
But that’s all “what ifs”.
The actual map is the progress of these two charts. If these balances fall without much drama then all is going well, but if the tightening starts to seriously disrupt the economy without these levels dropping materially, it’s a signal to hunker down.
The institutions assume that inflation is about to fall sharply and that a new QE will then start again. I say ‘Good luck with that.’ However, these charts provide the necessary guidance to assess the likely outcome in advance.
To me, there has to be a surrender to define the new beginning we are entering, and that hasn’t happened yet.
Once again, these charts will provide a solid indication of what’s coming up next.