‘Inflation’ Review: The Price of Cheap Money
It’s remarkable, isn’t it, how often the most obvious answers are the ones that get overlooked in complex economic debates? For months now, we’ve been hearing a cacophony of explanations for the persistent inflation that’s been gnawing at purchasing power across the globe. Everything from supply chain snarls and geopolitical tensions to corporate greed and post-pandemic demand surges has been trotted out as the primary culprit. And while many of these factors certainly have a role to play, they often obscure the single most potent, undeniable driver: the sheer volume of cheap money pumped into the system.
For a seasoned observer of markets, it’s like watching a magic trick where the audience is fixated on the magician's right hand while the left is doing all the real work. The "trick" here is the convenient sidestepping of monetary policy's profound impact. We’ve seen central banks, particularly the Federal Reserve, embark on unprecedented quantitative easing (QE) programs over the past decade, and especially since the 2020 pandemic. Trillions of dollars were created, not just to stabilize markets, but to actively stimulate demand by making credit incredibly cheap and abundant.
Let's not forget the sheer scale. Consider the M2 money supply, which includes cash, checking deposits, and easily convertible near money. Before the 2008 financial crisis, it hovered around $7.5 trillion. By early 2020, it had climbed to around $15.4 trillion. Then, in a truly historic surge, it ballooned to over $21.7 trillion by early 2022. That's a 40% increase in just two years. For anyone who's spent time studying economic history, this kind of expansion is, almost invariably, a precursor to inflation. It's the classic too much money chasing too few goods scenario, even if the "too few goods" part is exacerbated by supply shocks.
The argument often goes that this liquidity was necessary to prevent a deeper recession or deflationary spiral. And perhaps it was in the immediate crisis. But the long-term consequences are now undeniable. When the cost of borrowing is near zero, and capital is readily available, it encourages speculation, malinvestment, and a general disregard for financial discipline. Businesses and consumers alike become accustomed to an environment where money feels limitless. This doesn't just inflate asset prices; it eventually spills over into consumer goods and services as heightened demand meets existing, or even struggling, supply.
From a business perspective, the implications are profound. Companies that relied on cheap debt to fuel expansion are now facing a reckoning as interest rates rise. Those that had pricing power, perhaps due to strong brands or essential services, were able to pass on rising costs, contributing to the inflationary spiral. But for many others, it’s been a brutal squeeze on margins. We’re seeing a clear divide between businesses with robust balance sheets and efficient operations, and those that merely surfed the wave of easy money. This isn’t just about the cost of materials; it’s about the underlying cost of capital and the distorted demand signals that pervasive liquidity created.
Moreover, the prolonged period of low rates disincentivized saving and encouraged borrowing, shifting wealth dynamics and contributing to the very wealth inequality that many policymakers claim to be fighting. When money is free, it disproportionately benefits those who have access to it and can deploy it into productive assets or speculative ventures, while savers find their returns eroded by inflation. It's a subtle but powerful transfer of wealth from the prudent to the indebted, and from labor to capital.
So, what’s the takeaway for businesses and investors? First, recognize the underlying monetary reality. While headlines might focus on oil prices or chip shortages, understand that these are often symptoms or accelerants, not the fundamental cause of sustained, broad-based inflation. Secondly, prioritize efficiency and real value creation over growth fueled purely by cheap leverage. Companies with strong free cash flow and the ability to generate returns without relying on perpetual monetary stimulus will be the ones that thrive in this new environment. Finally, prepare for a period where central banks are forced to clean up the mess, which means higher interest rates and potentially slower economic growth as the system adjusts to a more realistic cost of capital.
The truth is, ignoring the price of money as a primary driver of inflation is akin to ignoring gravity when discussing falling objects. It's a fundamental economic law that, when violated, comes with a predictable, if delayed, consequence. The current inflation isn't just a blip; it's the inevitable bill coming due for years of exceptionally cheap money. And acknowledging that is the first step toward understanding, and ultimately navigating, the economic landscape ahead.
