Speculative manias are in the air, as evidenced by the recent price surges for bitcoin, a digital asset with a fundamental value of zero, and GameStop, a declining retailer. Along with the other economic trendsa strong recovery, surging commodity prices and an uptick in inflationthose asset bubbles have a clear cause: the massive expansion of money and credit.
Yet Americas fiscal and monetary masters are turning a blind eye. They are focused solely on mending the labor market. With the fervor of messiahs, Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen tell us the only way to save the labor market and reach full employment is to continue to pour fiscal and monetary fuel on the fire. But their prescriptions and prophecies, modeled on the playbook of the 2008 financial crisis, are not valid today.
After that crisis, the Fed began quantitative easing, which massively expanded its balance sheet. At the same time, commercial banks were busy shrinking their loan books and writing off losses from mortgage debt and securities, which meant the Feds injections did little more than offset the contraction of commercial bank balance sheets. As a result, money growth from 2010-19, as measured by the Feds broadest money measure, M2, averaged only 5.8% a year.