How Pandemic-Era Money Printing Affects the Economy

🔴 In 2022, the interest rate was 4.5%, compared to 0% at the beginning of 2021. If you had known in 2021 that rates would rise to nearly 5%, would you have beaten the stock market? The answer is: most probably NOT. Why? Because conventional economics taught in business schools says that when interest rates rise, money flows to safer assets like government bonds— known as "flight to safety." Since money has to come from somewhere, it typically comes out of risky assets like the stock market. That means equity prices should fall sharply, with the riskiest assets—like tech stocks—falling the most. So if you had followed that logic, what would your portfolio have looked like? It would have been filled with government bonds, very limited equity exposure (expecting a drop), and almost no allocation to tech stocks. Now, in mid-2025, how would that portfolio have performed? The answer: Extremely Poor. Your so-called risk-free asset (government bonds) would have lost over 25% in mark-to-market terms. Your equity portion would have performed better, but not significantly, since your allocation was too small. So what did the Business School model get wrong? The mistake was focusing on the wrong indicator at the wrong time. When your currency starts to devalue significantly—due to excessive government printing—traditional monetary policy tools like interest rates don’t work. Even if they do work, the impact is small. That’s called fiscal dominance, when fiscal policy overpowers monetary policy. Yes, the Fed raised rates in the most aggressive way in 40 years, but it didn’t stop the flow of money into markets. Since 2020, the U.S. government has injected over $10 trillion into the economy—creating about 33% of the total dollar supply in just 5 years. Interest rates affect the government less because it has the money printer. In simple terms, that's currency debasement. When debasement occurs, scarce assets outperform because they can't be printed like money. That’s why equities and risky assets soared while so-called risk-free assets lost value. If you had simply invested in Meta at the end of 2022, your portfolio would have grown over 700% by now. The story is similar for other large-cap tech stocks. Currency debasement lifted equity markets. This year alone, Venezuela’s stock market returned over 300%—not driven by fundamentals, but by currency debasement. Warren Buffett is a fundamental investor. As everything seems overvalued to him, he sold off and is now sitting on a $330 billion cash pile. But he doesn’t realize that the market is no longer driven by fundamentals—it’s driven by liquidity, printing, and debasement. Fundamentals—markets driven by earnings—were severely damaged in 2008 and effectively died with the 2020 COVID stimulus. This year, Buffett will end his legendary career—and with it, the era of “value investing.” 👇

I spoke multiple times about fiscal spending and how it is the main reason the US economy is not a recession, and why job numbers are holding. While current fiscal spending is not the highest, it remains high, and it is very high when looked at relative to the deficit. When Government spending large amounts of money financed through deficit, this would not be creating real economic growth, but kicking the can forward to future generations. U.S. Fiscal Deficit: How It’s Shaping Economic Momentum in 2024 In 2024, U.S. fiscal policy continues to be a major driver of economic activity, with increased government spending playing a pivotal role in keeping the economy afloat. With a fiscal deficit expected to hit $1.7 trillion this year, the U.S. is not shying away from expanding its balance sheet to stimulate growth. But how exactly is this deficit feeding through the economy, and what role does the multiplier effect play? 1. Gov. Spending and Employment One of the most visible effects of fiscal spending is on public sector employment. The government employed 2.2 million people in 2023, with the recent expansion in government hiring in sectors like infrastructure and healthcare pushing this figure even higher in 2024. For ex., the Bipartisan Infrastructure Law alone is projected to create 800,000 jobs annually, which not only benefits direct employees but also supports related sectors like construction, technology, and education. 2. The Multiplier Effect in Action Fiscal spending creates a ripple effect through the economy, known as the multiplier effect. According to research from the Congressional Budget Office, every dollar of government spending generates approximately $1.50 to $2.00 in additional economic output. This multiplier effect becomes particularly important in periods of economic uncertainty, where consumer spending may be weak, and private sector investment cautious. For instance, with the U.S. GDP growing at 2.1% in the first half of 2024, much of this growth can be attributed to federal spending. Programs like pandemic recovery grants and infrastructure projects are feeding into sectors beyond government—supporting small businesses, increasing demand for materials, and raising household incomes, which in turn boosts consumption. 3. Channels of Fiscal Impact Beyond employment, fiscal measures flow through several critical channels: - Transfer Payments: Social Security (SS), unemployment benefits, and other transfer programs have increased in recent years, with SS benefits rising by 8.7% in 2023. This has helped keep consumer spending steady, especially among older Americans, a demographic that represents around 70% of consumer spending. - Public Investment: The $550 billion in infrastructure investment over five years is laying the groundwork for future productivity gains, particularly in energy and transportation. Such investments are anticipated to have long-term growth impacts by improving efficiency and competitiveness.

Everyone’s cheering record markets and AI breakthroughs. But underneath the noise, something quieter is happening: the dollar is losing its strength. Over the past five years, the US money supply (M2) has expanded about 40%, from $15 trillion to $22 trillion. That didn’t come from growth or innovation. It came from debt. From printing our way through crisis after crisis. The US annually brings in $4.9 trillion in tax revenue, spends $6.8 trillion in expenditures, and has $38 trillion in federal debt. That is like a household earning $50,000 a year, spending $70,000 a year, and carrying $375,000 in credit-card debt. The difference? Washington can print its own money. But that privilege comes with a price: inflation and devaluation. Each dollar buys a little less every year. And when it takes more dollars to buy the same assets, it looks like markets are booming, when in reality, the currency is just weakening. That’s why 80% of the market’s gains in 2025 come from a few AI-driven giants. And why 40% of GDP growth is tied to AI infrastructure spending. This isn’t a broad recovery. It’s a narrow story powered by cheap capital and big narratives. But here’s the perspective that keeps me grounded. Every major shift in economic history (industrial, digital, and now AI) begins with a distortion like this. Money floods into what’s new. Old systems creak under the weight. And those who stay curious, adaptable, and calm end up building the next foundation. So yes, the dollar is weakening. But clarity is strengthening, as people are paying attention again. They’re asking better questions about what’s real, what’s inflated, and where true value lives. That’s the opportunity hiding inside the volatility. We can’t control what Washington prints. But we can control what we build, where we focus, and how we prepare for the reset that follows every expansion. That’s not pessimism. It’s realism with a plan.

I recently released a paper (IMM#43) entitled "Five Lessons from the Covid Inflation." Here is a summary of the contents. The past five years – 2020-24 inclusive – have provided a valuable natural experiment in economics: a roller coaster in both money growth and inflation. Excess broad monetary growth in 2020-22 promoted by central banks deploying their balance sheets – i.e., using QE – was responsible for the inflation of 2021-2024, not the narrative we have been told by central bankers about glitches to supply chains, or oil and food price increases.. However, since early 2022 central banks have abruptly shifted from creating excess money growth to the opposite – too little broad money growth. Rapid contractions in the size of central bank balance sheets have reduced the stock of broad money in the US, UK, the eurozone and elsewhere. Far from threatening a new “high-inflation regime”, current developments – notably recent declines in broad money growth – will, if continued, result in sub-target inflation or even periods of deflation in 2025-26, with lower interest rates. The best way to ensure avoiding this roller coaster in future is to eliminate the wide fluctuations of broad money growth that central banks have inadvertently and unwisely promoted. Monetary policy communication and forecasting could be enhanced in future by focusing on the quantitative dimension of monetary policy, not only on interest rates and credit conditions (or FCIs). Central banks - and the BIS - ignored both the massive over-expansion of money in 2020-22 and the contraction of money in 2022-23. As a result, they failed to forecast either the inflation or its rapid decline. Timely forecasts and warnings came only from those monetary economists who paid attention to the acceleration and deceleration of monetary growth. Emerging markets demonstrate that the monetary lessons of the Covid period apply to both developed economies and emerging economies. Excess money has the same effects in developed economies as in emerging economies, and inflation showed up with very consistent lags (19-23 months). By contrast, those economies like China and India which did not preside over any significant monetary acceleration have not experienced any substantial rise in inflation. This proves that inflation was not something unavoidable, but something created by the flaws in central bank monetary policies. Copies of the paper can be obtained from me.

Publication Update: Fiscal policy design and inflation: the COVID-19 pandemic experience, with Fernanda Nechio and Galina Hale. Out now in the Journal of International Money and Finance. •We study how the design of fiscal support measures helps explain the origins of the post-pandemic inflationary bout. •We explore the heterogeneity of fiscal support measures across 10 large economies and control for the underlying state of the real economy using household sentiment data (from Morning Consult) •We find that five weeks following support announcements, fiscal support measures already had statistically and economically significant, albeit not large, inflationary effects. •The magnitude of the effect was twice as large in an environment of improving consumer sentiment. •The inflationary effect was larger and much more immediate if the support involved cash transfers. https://lnkd.in/eKtxuS_r

In 2010, two dozen economists wrote an open letter to Ben Bernanke saying his plans would spark mass currency debasement and inflation. And then, they were 'embarrassingly' wrong for the next decade. The argument was sound. Their warning rested on the oldest, most reliable law in economics: print money faster than you create goods, and prices rise. It held from the Roman mint to Weimar to Zimbabwe. The Fed's balance sheet went from ~$900 billion to nearly $9 trillion — the largest peacetime money creation in human history — and consumer inflation sat quietly near 2%. So what happened? And what does it tell us about predicting inflation? On the Timeless Investor, we break down the mechanisms for why inflation didn't happen as you'd have expected it. Topics explored: → Seigniorage: the oldest fiscal trick in history, now run at planetary scale → Why the dollar's "exorbitant privilege" let America export its inflation to the rest of the world → The five channels that absorbed the trillions — and why 2020's stimulus checks blew the lid off when QE never did → Why Rome and Weimar collapsed but America (so far) hasn't → What it means for how you should actually position a portfolio And lastly - the one that ought to worry or encourage you. The Cantillon Effect. Consider this. We didn't have price inflation during this period, but we had MASSIVE 'asset based' inflation. Consider the RAPID rise in stock prices, asset prices, and the wild cost for newlyweds trying to buy their first home. The money flowed first and foremost to asset holders, and left everybody else in the dust. As it almost always does. Full essay "The Exorbitant Privilege" here: https://lnkd.in/gg-EEbqs

Recent Fed data shows money supply growth is accelerating, which could have meaningful implications for inflation and rate expectations. M2 grew at a 5.3% annualized rate in Q1 2026, up from 3.7% in Q4 2025. April added another $118 billion, a 0.5% month-over-month increase, bringing the rolling three-month growth rate to roughly 6.9% annualized. If this pace continues through May and June, inflation may prove more persistent than many expect, and current forecasts for year-end inflation and Fed rate cuts could warrant a closer look. Definitely a trend worth watching. Also worth noting that M2 is roughly DOUBLE what it was a decade ago.

7-8-26 Why We Avoided A 2022 Recession But May Not Avoid The Next OneThe yield curve has historically been one of the most reliable recession indicators. When short-term Treasury yields rise above long-term yields, it has almost always signaled that economic conditions are deteriorating and a recession is on the horizon. So, why didn't the widely expected recession arrive after the historic yield curve inversion in 2022? The answer wasn't that the yield curve failed—it was that policymakers temporarily changed the normal economic cycle. During and after the pandemic, the U.S. economy received an unprecedented wave of fiscal and monetary stimulus. Trillions of dollars were injected through direct household stimulus checks, massive government spending, near-zero interest rates, and $120 billion per month in quantitative easing. That flood of liquidity boosted household savings and consumer spending, preventing the sharp decline in demand that typically follows an inverted yield curve. Instead of falling into recession, the economy experienced strong GDP growth fueled by excess cash circulating through the system. The trade-off was a surge in inflation that eventually peaked near 9%. The yield curve wasn't wrong—it was simply overwhelmed by extraordinary policy intervention. Now that excess liquidity has largely been worked off. Consumers no longer have the same stimulus cushion, and economic growth has slowed significantly. With GDP expanding at only around 1%, it would take a much smaller shock to push the economy into negative growth than it would have a few years ago. That doesn't mean a recession is guaranteed. But it does mean the economy has far less room for error than it did during the stimulus-fueled recovery. The lesson for investors is that recession indicators should always be viewed in context. Massive liquidity injections can delay the normal business cycle, but they don't eliminate it. As those temporary supports fade, traditional macro signals become increasingly relevant again, making recession risk more realistic today than it was immediately after the 2022 yield curve inversion. Check out our comprehensive "15 Trading Rules" guide ▶️https://lnkd.in/gfv8_FbV This guide includes practical rules for managing positions, taking profits, controlling risk, and avoiding the emotional mistakes that often hurt returns during major market corrections.

An increase in government expenditures, coupled with stable or declining revenues, can lead to a wider fiscal deficit. If the governing administration is unable to effectively raise funds through the sale of treasury bonds to the public and banks, it may resort to increased direct financing from the central bank. This direct financing results in a higher currency circulation, which equates to increased monetization. Such a significant increase in currency circulation exacerbates the current inflationary environment, having detrimental effects on many other macroeconomic variables. The following graph illustrates the significant change in the trend of currency circulation before and after February 2021.