The future engine of monetary inflation « TSI Blog

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July 7, 2025

[This blog post is an excerpt from a commentary published about two weeks ago at www.speculative-investor.com]

In the latest Weekly Update we wrote that government actions would maintain sufficient upward pressure on the prices of commodities, goods and services to limit the central bank’s ability to inflate the money supply. What we meant is that for the foreseeable future there would not be the “deflation scares” that periodically led to large-scale money creation (QE) by the central bank during 2008-2021. However, we expect that the money supply will continue to grow.

In the US, prior to 2008 there was plenty of monetary inflation but no QE programs. Prior to 2008 the monetary inflation was driven by the commercial banks, which create new money (bank deposits) when they make loans and purchase securities.

The following monthly chart shows the year-over-year growth rate of US True Money Supply (TMS), with a vertical red line drawn to mark the start of the Fed’s first QE program in September-2008. Clearly, there were many waves of monetary inflation prior to the introduction of QE, all of which were due to deposit creation by commercial banks. We expect that there will be waves of monetary inflation in the future, again due to deposit creation by commercial banks. Commercial banks have the legal ability to create money out of nothing, so naturally that’s what they will do in the future just like they did in the past.

A problem will arise when the economy becomes very weak and commercial banks stop expanding credit due to a contraction in the pool of qualified private borrowers. We suspect that this problem will be mitigated by incentivising or forcing the commercial banks to purchase more government debt, which they would do by creating new money that the government would inject into the economy via its spending. What we don’t expect is large-scale asset monetisation (QE) by the Fed in response to future economic weakness, because “price inflation” statistics won’t provide the necessary cover.

Anyway, the point we wanted to make is that there probably will be ‘ample’ monetary inflation in the future, it’s just that the money creation won’t be driven directly by the Fed. Due to the popular inflation indices spending most of their time well above the Fed’s target, monetary inflation will become the purview of the commercial banks — just like it was prior to 2008.