More Money, More Problems

When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid

– Adam Smith, The Wealth of Nations

Inflation, properly defined in its correct economic term, is an increase in the money supply. What we refer to as “inflation” (higher prices) is, in fact, the effect of inflation, it is not inflation itself. Yet, I am not about to fight the winds of change — language evolves and changes all the time so I will use “inflation” in its modern, albeit incorrect, usage. Inflation is on Wall Street’s mind of late not so much because of the higher price of goods and services, but because it will largely determine the Fed’s monetary policy stance going forward.

As one who adheres to what history has proven time and again — that inflation is a monetary phenomenon — it is always disconcerting to hear Federal Reserve officials blame inflation on everything but the dramatic increase in the money supply during QE4. Between February 2020 and April 2022, the money supply grew by 44%, an 18.4% annualized increase. That’s almost three times the average annual increase in the money supply seen during the preceding half century. The old rate of increase helped deliver a 3.9% average annualized CPI rate. Since QE4 kicked off, the rate of increase in CPI has risen to 5.6% annualized. More money, more problems.

The money supply has actually dropped 5.4% since hitting its record high of $22 trillion back in April of 2022. A decline in the money supply hasn’t occurred since the Great Depression, and this is not the way one wishes to bring about an end to any inflationary episode, as with a lower money supply it will become impossible for people to pay back their debts (as there will be nothing available to pay it back with.) The best course is to try, as best as humanly possible, to keep the money supply steady and allow productivity to “grow” the economy up to the newly increased level of the money supply (this is how the Treasury got the nation back onto gold post-Civil War.) In the latest report, the money supply grew at an annualized pace of 0.6%. Over the past decade productivity growth has averaged 1.6% annualized; it would be best to keep money supply growth below that level until the 2% inflation target is attained.

This will be difficult if not impossible to do with a Congress that shows no inclination at all to bring federal deficit spending under control. Deficit spending is highly inflationary. Naturally, to expect them to do so during an election year is wishful thinking, but the ever-growing pile of US Treasury debt is finally, after decades of reckless fiscal behavior, starting to be noticed by investors. The rate of increase to that pile for this decade-to-date has averaged 10% each year (2020 alone saw it rise 19.4% from $23.2 trillion to $27.7 trillion.) Overall since year-end 2019, outstanding Treasury debt has increase 46.6% from $23.2 trillion to $34 trillion.

Even as the economy has grown the federal deficits as a percentage of total GDP (and remember that government spending is counted in that GDP calculation) is far above its trailing 30-year average of 3.7%. In fact, it has not been below that 3.7% average since June of 2018. All of history warns that once a group of politicians have buried their nation under a debt load so large as to be unpayable, inflation is their default choice. So the Federal Reserve is fighting inflation on one hand, while the politicians who control it are pumping out inflation on the other.

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  • The Consumer Financial Protection Bureau took an initial step toward tightening rules for fees charged in the home-buying process
  • A gauge of pending US existing-home sales tumbled to a four-year low in April as higher mortgage rates cast a pall on the spring selling season
  • 30-year fixed mortgage rate for week ending today rose to 7.03% from 6.94%, Freddie Mac data show. 15-year rate avg 6.36%, up from 6.24% a week earlier

Bank Usage of Federal Reserve of Select Lending Facilities (as of May 29, 2024)

Program Current Previous W/W % M/M %
Discount Window $6.6B $6.7B -$0.1B -1.4% -$0.3B -3.2%
Bank Term Funding Program $108.6B $109.1B -$0.5B -0.5% -$16.1B -12.9%
Fed Balance Sheet Assets $7.335T $7.351T -$15.5B -0.2% -$77.9B -1.1%

Source: Federal Reserve H.4.1 (

ICYMI: recent mortgage commentary from our desk

  • Thursday, May 23: Despite Stubborn Inflation, There’s Still Hope for a Rate Cut — the central bank is a political creature, and it must remain very attentive to the wishes of the White House and Congress when it comes to monetary policy
  • Friday, May 24: Mortgage Lenders Still Looking for Profits — the latest release is a far better one than the -$1,972 loss seen in the first quarter of last year, too, but whether you see the glass as half empty or full, the mortgage lending industry is still waiting for a return to profitability
  • Tuesday, May 28: Lots of Treasury Sales on Tap, Volatility Dropping — Tuesday and Wednesday will see a whooping $211 billion of 2-, 5- and 7-year notes out for sale, as well as 2-year floaters. That’s a lot of meatballs, and keep in mind that deficits are highly inflationary
  • Wednesday, May 29: Low FICO Pools Offer Cheap Protection — FICO spec pools are nicely priced at the moment, regardless of which way you foresee rates going over the medium term. While FICO scores do not give nearly the degree of protection offered by loan balance or New York pools, they give enough
  • Thursday, May 30: LTV Can Steer Lenders Wrong — mortgage lenders may be better served by using credit metrics that focus more on the homeowner’s earnings rather than on measures such as loan-to-value ratios

Performance Snapshot (bps)


Index Name Duration Daily MTD YTD 2023 2022 2021
Bloomberg U.S. MBS 6.12 52 167 -244 505 -1181 -104
Bloomberg Corporate IG 6.94 44 145 -153 852 -1576 104
Bloomberg U.S. Treasury 5.95 36 109 -220 405 -1246 -232

Excess Return

Index Name Duration MTD YTD 2023 2022 2021
Bloomberg U.S. MBS 6.12 51 -26 68 -223 -68
Fannie Mae 30-year 6.52 62 -34 63 -222 -53
Fannie Mae 15-year 3.97 17 24 23 -198 20
Ginnie Mae 30-year 5.97 37 -28 83 -205 -144

Christopher Maloney
Vice President | Mortgage Strategist
BOK Financial
1 Landmark Square
9th floor
Stamford, Connecticut 06901
(203) 388-3738 | Office
(917) 921-4339 | Cell | Email

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