This Trend Will Likely Soon Rock the U.S. Financial System

Why monetary inflation has been shrinking

By Elliott Wave International

Nearly everyone who buys groceries, fills their car tank with gas, pays rent, buys car insurance and so on is talking about the high cost of living. And it’s true that consumer price inflation is higher today than before the pandemic – although, it’s nowhere near as high as it was two years ago, when the annual inflation rate spiked to a 40-year peak of 9.1%.

Since then, the pace of inflation has slowed way down. In fact, the latest reading of the Consumer Price Index, or CPI, came in at 3%, close to the Federal Reserve’s “ideal” target of 2% a year.

But that’s price inflation. There is another measure of inflation that has to do with money supply. It’s the so-called monetary inflation, or the supply of printed money. It has also declined over the past two years and is likely set to decrease even more. And while it sounds like a good trend, it’s actually the opposite.

Here’s insight from our just-published July Elliott Wave Theorist:

Monetary inflation … is unlikely to continue. Why? because since early 2022 the Fed’s clear aim has been to reduce the size of its balance sheet. Over the past two years, the value of the Fed’s assets, representing “printed” money, has gone from $8.94 trillion to $7.22 trillion, a decline of nearly 20 percent.

The July Elliott Wave Theorist continues:

This shrinkage of base money, moreover, has taken place even as total debt has expanded. This situation cannot maintain. The dichotomy will soon rock the financial system. It’s just a matter of when.

Indeed, U.S. household debt – which is part of that “total debt” The Theorist is referring to -- grew by $800 million from 2022 to 2023, including a 16.6% growth in credit card debt, according to Marketwatch.

The financial website had this headline on June 20:

Americans Are Carrying Record Household Debt into 2024

Interestingly, Washington D.C. has the highest per capita credit card debt in the country.

And speaking of the nation’s capital, out of control spending has led to a national debt of nearly $35 trillion.

As CBS News noted earlier this year (March 1):

U.S. interest payments on its debt are set to exceed defense spending.

The Congressional Budget Office projects the annual interest on the debt will hit $1.4 trillion by 2033.

And this does not even consider the huge amount of debt at the state and local levels – as well as the debt of corporations.

U.S. household debt is growing and will only get bigger. In turn, so will the scale of the news coverage about "the importance of the household debt to economic activity." Regardless of where in the world you live or invest, staying ahead of the trends in the U.S. stock market and economy is worth your while. Elliott Wave International has a free must-read issue on U.S stocks that I suggest you check out, on www.elliottwave.com.

This article was syndicated by Elliott Wave International and was originally published under the headline This Trend Will Likely Soon Rock the U.S. Financial System. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.