The skyrocketing government spending and debts that are aimed to boost economic activities are now seen as a fuel to the next economic collapse.
Ron Paul, a former twelve-term congressman from Texas and a #1 New York Times bestselling author stated that the Federal Reserve has been managing the economy through “monetary manipulation,” causing malinvestment, and the over-accumulation of debt. Ron Paul stated that before the pandemic hits, a financial bubble already exists and the action of the government constantly creating new money is blowing the bubble bigger.
Below shows the M2 money supply in the US. M2 measure includes cash, checking deposits, savings deposits, and money market securities. Because of its wide definition, economists and investors tend to watch changes to the M2 supply as an indicator of the total money supply and future inflation.
It can be seen that there is an obvious spike of money supply in the year 2020 due to the Covid-19 pandemic. Generally, a large increase in money supply is aimed to encourage economic activities and we would normally see an inflation that follows. However, inflation isn't happening because the pandemic has caused everything to be closed down, unemployment rate remains high and people who got the money aren’t actually spending it. They either kept it in the bank or put the money in the stock market causing unrealistic growth of stock prices. The graph below shows the personal saving rate and it can be seen that in the year 2020, the personal saving rate has skyrocketed.
This can also be further explained through the velocity of money. The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.
Although the government is constantly filling up the people’s pockets with new money, it can be seen from the graph above, that the velocity of money is still falling. People aren’t spending the money given and this can be a dangerous sign for the future economy. What happens once the pandemic is over, and things start to go up and running? Demand will come surging back, people will start utilizing the money accumulated in their pockets and the weak level of production will not be able to meet demand. The stimulus effect will come flooding the economy at once. This will ultimately lead to an uncontrollable increase of the high inflation rate.
Besides, Ron Paul also stated that the government is deliberately increasing inflation rate to shrink the mountain of government debt by devaluing the currency. The Fed has recently stated that they would like to keep the inflation rate at an average of 2% instead of just 2% each year, which means that they are allowing the inflation rate to move higher than 2%. Raising the inflation rate target will substantially increase the rate at which the debt effectively vanishes.
This also means that people who kept their money in the bank are being indirectly taxed by the government at 2% each year to pay off their debts. Therefore, in order to not get ‘taxed’ by the government, people should keep their money in other forms of assets with value that is positively correlated with the inflation rate. A scarce resource like vacant land can be seen as a great way to secure wealth as the value of the land is positively correlated with the inflation rate. As the inflation rate increases, the value of land will increase and on top of that, the surging demands will also further drive up the price of land.
Attached below is the link to the full interview with Ron Paul: