Money Supply Growth: A Thesis With A Fatal Flaw – RIA – Real Investment Advice

Report on Macroeconomic Indicators and Their Implications for Sustainable Development

An analysis of recent financial commentary advocating for investment in hard assets like gold, silver, and bitcoin reveals a perspective that overlooks fundamental macroeconomic principles. This report re-examines the arguments concerning money supply, government deficits, and asset valuation through the lens of the United Nations Sustainable Development Goals (SDGs), arguing that a stable and well-understood financial system is critical for achieving global sustainability objectives.

Monetary Policy and Its Role in Sustainable Economic Growth

The narrative that an expanding money supply inherently debases currency and necessitates a flight to hard assets misinterprets the function of money in modern economies. A nuanced understanding is essential for policies that support SDG 8: Decent Work and Economic Growth.

Money Supply as an Indicator of Economic Health

Modern economies utilize an endogenous money system where commercial banks create money through lending in response to economic demand. This process is fundamental to financing the innovation, infrastructure, and industry required for sustainable development.

• Credit Creation Fuels Growth: Money is primarily lent into existence to fund business expansion, investment, and hiring, which are core components of SDG 8 and SDG 9 (Industry, Innovation, and Infrastructure).
• Alignment with Economic Output: Historically, the growth of the M2 money supply has been closely correlated with GDP growth. This alignment indicates a healthy expansion of economic activity rather than currency debasement. A divergence where money creation consistently outpaces economic growth would be a concern, but current data does not support this scenario.

The U.S. Dollar and Global Financial Stability

The stability of the global financial system, a prerequisite for SDG 17 (Partnerships for the Goals), relies heavily on the role of the U.S. dollar as the world’s primary reserve currency. Evidence of its continued dominance includes:

• Its use in 88% of global foreign exchange transactions.
• Its composition of 58% of international exchange reserves.
• Its role in settling 54% of global trade.

This widespread use ensures liquidity and stability, facilitating the international cooperation and financial flows necessary to fund sustainable development projects worldwide.

Fiscal Policy, Deficits, and Socio-Economic Objectives

Government deficits are often portrayed as inherently negative. However, from a sectoral balances perspective, they are integral to supporting private sector financial health and can be a powerful tool for achieving social and economic sustainability goals, particularly SDG 10 (Reduced Inequalities).

Government Deficits as Private Sector Surpluses

An accounting identity dictates that a government’s deficit corresponds to a surplus in the private sector. Fiscal spending, therefore, directly increases the net financial assets of households and businesses. This mechanism is critical for:

• Economic Stabilization: During economic downturns, deficit spending provides essential liquidity to the private sector, stabilizing household balance sheets and preventing deeper recessions. This supports progress toward SDG 1 (No Poverty).
• Funding Social Goals: Government spending funded by deficits can be directed toward social programs, healthcare, education, and infrastructure, directly contributing to a reduction in inequality (SDG 10) and the promotion of well-being (SDG 3).

The Role of U.S. Treasuries in the Global System

U.S. Treasuries, the financial instruments created through deficit spending, are the world’s premier safe asset. Strong global demand for Treasuries from central banks, pension funds, and institutional investors underpins the global financial architecture. This demand enables the U.S. to run deficits that not only stabilize its own economy but also provide the global system with a safe asset, reinforcing the partnerships outlined in SDG 17.

Asset Allocation for Sustainable Long-Term Value

The argument for shifting capital to hard assets is often predicated on fears of currency collapse. However, this view neglects the primary drivers of asset prices and diverts capital from productive investments that are essential for sustainable development.

Evaluating Gold in a Global Economic Context

The valuation of gold is intrinsically linked to the U.S. dollar and real interest rates. A strengthening dollar or rising real rates increases the opportunity cost of holding a non-yielding asset like gold, often leading to price declines. Investment decisions based on a simplistic “deficits are inflationary” thesis ignore these critical macroeconomic relationships and may expose portfolios to significant risk.

A Framework for Sustainable Investment

A focus on economic fundamentals aligns with a sustainable investment approach. Rather than reacting to fear-based narratives, capital should be allocated toward productive assets that support long-term, inclusive growth.

1. Align Investment with Economic Growth (SDG 8): Monitor monetary indicators in conjunction with GDP to assess the health of the economy, favoring investments in sectors that drive sustainable growth.
2. Analyze Fiscal Policy’s Impact (SDG 10): Understand that fiscal policy can be a tool for social good. Assess whether government debt supports long-term productive capacity and social equity.
3. Consider Global Financial Dynamics (SDG 17): Factor in the strength of the U.S. dollar and real interest rate cycles when evaluating global asset classes, including precious metals.
4. Prioritize Productive Assets: Balance portfolios with exposure to assets that generate economic value and contribute to solving global challenges, such as those outlined in the SDGs, rather than relying solely on non-productive safe havens.
5. Promote Disciplined, Fundamentals-Based Strategy: Adopt a disciplined investment approach based on economic cycles, diversification, and real rates to achieve long-term wealth preservation and contribute to a stable economic environment conducive to sustainable development.

Analysis of the Article in Relation to Sustainable Development Goals (SDGs)

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article’s in-depth discussion of economic growth, macroeconomic stability, and the global financial system connects it to several Sustainable Development Goals. The primary SDGs addressed are:

• SDG 8: Decent Work and Economic Growth: The core of the article is an analysis of the drivers of economic growth (GDP), the role of money supply (M2), and the importance of a stable economic environment for prosperity. It directly engages with the principles of sustaining economic growth.
• SDG 16: Peace, Justice and Strong Institutions: The article implicitly highlights the importance of strong institutions by referencing the “rule of law” and stable financial systems (like the Federal Reserve and deep capital markets) as foundational pillars supporting the U.S. dollar’s global role. The global demand for U.S. Treasuries is presented as evidence of trust in these institutions.
• SDG 17: Partnerships for the Goals: The article extensively discusses the interconnectedness of the global financial system, focusing on the U.S. dollar’s role in international trade and as a reserve currency. This relates to the goal of fostering a stable and coherent global macroeconomic environment.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s content, the following specific SDG targets can be identified:

1. Target 8.1: Sustain per capita economic growth in accordance with national circumstances.
   • Explanation: The entire article is a debate on the nature of economic growth. It argues that “money supply growth is primarily a reflection of economic growth” and analyzes the relationship between M2 and Gross Domestic Product (GDP). The conclusion advises investors to “Track economic growth and money supply together,” directly addressing the measurement and understanding of sustained economic growth.
2. Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.
   • Explanation: The article explains the mechanics of the modern financial system, stating that “banks create money in response to economic activity” and “loans create deposits.” This discussion on the role of commercial banks and the Federal Reserve in managing money supply and extending credit speaks directly to the capacity and function of domestic financial institutions.
3. Target 16.6: Develop effective, accountable and transparent institutions at all levels.
   • Explanation: The article attributes the strength of the U.S. dollar not just to economic factors but also to institutional stability. It notes that the dollar is “supported by demand for Treasuries, deep capital markets, and the rule of law.” This implies that effective and trusted institutions are crucial for economic and financial stability.
4. Target 17.10: Promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system.
   • Explanation: The article quantifies the U.S. dollar’s central role in the current global trading and financial system, stating it is “used in 88% of global foreign exchange transactions… and 54% of global trade.” This highlights the mechanics of the existing multilateral system, which is a key focus of this target.
5. Target 17.13: Enhance global macroeconomic stability, including through policy coordination and policy coherence.
   • Explanation: The article is a detailed analysis of macroeconomic stability. It discusses key policy tools and indicators like interest rates, government deficits, and money supply. By arguing that “deficits often stabilize the economy during recessions” and analyzing the global demand for U.S. assets, the article directly addresses the factors that contribute to or detract from global macroeconomic stability.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

Yes, the article explicitly mentions and implies several indicators that can be used to measure progress towards the identified targets.

• Annual growth rate of real GDP: This is a primary indicator for Target 8.1. The article repeatedly references GDP and displays charts comparing its growth to the M2 money supply.
• M2 Money Supply and M2 as a percentage of GDP: While not official SDG indicators, the article presents these as crucial metrics for understanding economic activity and the effectiveness of financial institutions (Target 8.10). The text states, “A better way to assess this is by comparing M2 to GDP.”
• Inflation and Real Interest Rates: These are key indicators for measuring macroeconomic stability (Target 17.13). The article advises investors to “Monitor real interest rates” as they influence asset prices and reflect the health of the economy.
• Government Deficit and Debt Levels: The article discusses deficits as a tool for economic stabilization, directly relating to macroeconomic policy and stability (Target 17.13). It advises investors to “Assess debt sustainability” by tracking if debt is growing faster than the economy.
• Share of U.S. Dollar in Global Transactions: The article provides specific data points that serve as indicators for Target 17.10. It mentions the dollar is used in “88% of global foreign exchange transactions” and “58% of international exchange reserves,” measuring its role in the global financial system.
• Demand for U.S. Treasuries: The article implies that the high global demand for U.S. Treasuries is an indicator of trust in U.S. institutions (Target 16.6). It notes that “Treasury demand remains robust” and that they are “among the most demanded safe assets in the world.”

4. Table of SDGs, Targets, and Indicators

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