Welcome to Money for the Rest of Us. This is a personal finance show on Money. How it works, how to invest it, and how to live without worrying about it.

I'm your host David Stein, today as Episode 367. It's titled, What Investment Strategies Do Best During High Inflation Periods?

Last week, I attended a family gathering for the U.S. holiday of Thanksgiving. I spoke to family members to see how they were doing.

I was particularly interested in those that worked in industry to see what their recent experience has been due to the supply chain challenges that we've seen.

One family member manages a chemical plant. He mentioned how difficult it has been just to get containers to ship out the chemicals that they produce.

And there's really some randomness to when things show up. They've had a significant jump in orders as their customers are worried about getting enough supply so they order more, demand has boomed, and that has led to some definite challenges.

I spoke to another family member who brokers trucks, customers call to find transportation for different shipments around the U.S.

He says it's been crazy. Just the challenges both to get trucks and the demand. We are in a high inflation period.

Inflation, bottomed out in May 2020, if we're measuring the year-over-year increase in the consumer price index, in May 2020 it was 1.7%.

The most recent release in the U.S., the consumer price index, this measure of inflation rose 6.2% year-over-year.

Germany, year-over-year consumer inflation, is over 5%. It's over 4% in the U.K.

Two months before we hit the bottom of inflation, back in March 2020, I released episode 292, will infinite money save the economy.

I said that inflation comes when there's a huge increase in the money supply. Usually that increase comes through bank lending, but it can also come from the Federal Reserve creating money and it flowing out into the economy, particularly if it goes directly to consumers.

I continued if you get all this money and there are capacity constraints because there's not enough goods and services being produced, but people are still willing to spend the money,

then that could lead to not enough materials and inputs, so prices go up. Businesses start raising their prices, and those that are employed start demanding higher wages, so you get into an inflationary mindset, particularly if there's a supply shock because there's not enough being produced.

That was one scenario I outlined, a classic case of inflation and that is what has happened. Now I also said we could get a demand shock where people aren't able to go out and buy things, or they don't want to buy things and want to hoard their money, so businesses start dropping their prices to encourage buying.

We didn't know which it would be, but the amount of money creation has been absolutely astounding. The US budget deficit for the fiscal year ending September 2021 was $2.8 trillion.

That was the second highest budget deficit on record. The highest was the year prior, 2020, $3.1 trillion.

The 2021 deficit represents 12.4% of GDP or the US's economic output of goods and services. The 2020 deficit was 15% of GDP.

Typically, the US Treasury would issue Treasury bonds for that $6 trillion of deficits for fiscal 2020 and 2021, but because the Federal Reserve was running a massive asset purchase program, also known as quantitative easing, the Federal Reserve bought almost $5 trillion of US Treasury bonds, which means much of that deficit spending led to money creation.

And we see that in the M2 money supply, this monetary aggregate increased from September 2019 through September 2021 by about $6 trillion.

That's more money flowing into the economy that has increased the inflationary pressures.

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