Let’s look at some data related to US equities first. Plotted in Chart 1 are the end-of-year values of directly-held equities held by households at market value as a percent of households’ total assets at market value. At the end of 2025, this percentage was 22.95, a post-World War II record high.
Introducing
Paul L. Kasriel
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Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian. After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department. Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002). Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele). Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.
Publications by Paul L. Kasriel
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- USA| Mar 10 2026
History Rhymes – The Siren Song of Core Inflation
The concept of “core” inflation, that is, a measure of inflation excluding food and energy prices, came into fashion in 1973. In 1972, there was an El Nino weather phenomenon, which decimated the sardine school off the coast of Peru. Sardines were ground into fishmeal, which, in turn, was used as animal feed. The dearth of sardines resulted in an increase in the price of land-animal protein in 1973. Energy prices soared in late 1973 as a result of the OPEC oil embargo in the aftermath of the Yom Kippur War between Israel and its neighbors. (It has been argued that the catalyst for the OPEC oil embargo was the decline in the foreign-exchange value of the US dollar. OPEC nations were being paid in US dollars, which reduced their purchasing power for goods and services sold in other currencies). The chairman of the Federal Reserve at that time was the venerable Arthur Burns – he who must be obeyed. Burns argued that the increases in food and energy prices being experienced in 1973 were not the result of the current stance of monetary policy, but were caused by exogenous factors. Therefore, according to Burns, monetary policy decisions should be based on some concept of the underlying rate of inflation, not price increases resulting from exogenous factors.
Let’s fast forward to today. Energy prices have shot up in the past week or so coinciding with the US and Israel shooting up Iran. Less reported, El Nino is once again plaguing Peru. I have not read that El Nino has adversely affected the sardines, but it is producing severe flooding in Peru, which is playing havoc with Peruvian agriculture. I bet you didn’t know that Peru is a major world exporter of blueberries, grapes, avocados, coffee and asparagus. Neither did I until I started writing this commentary. We do not know how long this military “excursion” into Iran will last and, therefore, how long the resulting increase in energy prices will last and/or how high they will go. But I suspect that we will hear Fed policymakers and financial media talking heads say that Fed policy should be guided by the current and expected behavior of core inflation. That is, the inflation rate excluding the prices of food and energy items because the current increases in food and energy items have not been caused by monetary policy and might be transitory. I’ll bet that at least one Fed policymaker whose term has been extended (and whose initials are SM) will argue that monetary policy should be eased because of the negative effects these food and energy price increases will have on real economic growth.
Let’s look at what happened to core inflation in the early 1970s when food and energy prices flared higher (see Chart 1). In 1972:Q4, year-over-year core Personal Consumption Expenditures (PCE) inflation was 3.05%, food inflation 5.14% and energy inflation was 3.10%. By 1974:Q4, year-over-year core PCE inflation was 9.84%, food inflation was 14.10% and energy inflation was 25.80%. So, during this period, not only did food and energy price inflation soar, so, too, did core inflation.
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With the passage of the One Big Beautiful Bill Act (OBBBA) of 2025, already high US federal budget deficits will rise even higher than projected by the Congressional Budget Office (CBO) at the beginning of the year. One element contributing to the rise in the deficits will be interest on the public debt. With the Treasury’s policy of shortening the maturity of the public debt and the politicization of the Fed, I fear that the US government will effectively default on its debt via inflation.
Plotted in the chart below are fiscal year (FY) ratios of federal net interest payments on the public debt to federal net revenues (blue bars) along with end-of-quarter 3-month Treasury bill rates and 10-year Treasury yields. In FY 2025, the ratio of net interest on the public debt to federal net revenues was 5.4, the lowest in the post-WWII era and the lowest since FY 1991, when interest rates were almost twice the level they are now. You can think of the ratio of net interest to net revenues as similar to a corporation’s interest coverage. The CBO forecasts that with the passage of OBBBA, net interest will increase by $4.7 trillion starting in FY 2026 through FY 2029. Unless there is a Festivus miracle resulting in a commensurate increase in federal net revenues, the federal government’s interest coverage will fall below that of an already low FY 2025’s.
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For all the talk of a weakening labor market, the wage bill for private nonfarm employees (private nonfarm employees times their average weekly earnings) has risen at annualized rates of 5.85% and 5.91% in October and November, respectively, compared to the median increase of 5.75% in the eleven moths of 2025. If these data are valid, it would seem that labor market earnings are growing relatively fast, especially in light of all the talk of a weak labor market. Why would employers be increasing the labor wage bill so rapidly if labor demand were weak? Perhaps because the labor supply is shrinking.
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- USA| Sep 15 2025
Inflation Is Trending Higher and the Fed Is Going to Cut the FF Rate on September 17
Chart 1 shows that no matter how you slice it and dice it, consumer price inflation is trending higher. In the three months ended August 2025, the annualized rate of consumer inflation has ranged from 3.3% (FRB Cleveland 16% Trimmed Mean) to 3.65% (CPI excluding food and energy components). Again, consumer inflation is trending higher.
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- USA| Aug 25 2025
How to Turn a Tariff-Induced One-Time Increase in Inflation into Higher Sustained Inflation
Supreme Court Justice Kavanaugh said during his confirmation hearing that he liked beer. When my confirmation hearing for governor of the Federal Reserve comes up, I am going to tell the Senate Banking Committee that I like coffee. At a minimum, I drink six cups a day. You might say that my demand for coffee is price inelastic, that is, increases or decreases in the price of coffee do not change the quantity of coffee I purchase much. As Chart 1 shows, the wholesale price for coffee has jumped since President Trump announced a 50% tariff on Brazilian coffee. On July 9, 2025, President Trump notified the government of Brazil that he intended to place a 50% tariff on US imports of Brazilian-produced goods. Then on July 30, President Trump imposed the 50% tariff, excluding orange juice and commercial aircraft. (I guess the US airlines and orange juice sellers have strong lobbies). From July 9 through August 22, the wholesale price of Brazilian coffee has increased 77 cents or 26%. The wholesale price of Columbian coffee, a substitute for Brazilian coffee, has also increased 26% in the same time period.
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- USA| Jul 28 2025
Fed Operations Should Be Investigated
Federal Reserve monetary policy has enormous effects on the behavior of the business cycle. These business-cycle effects, in turn, affect the political environment. For example, the surge in consumer price inflation in 2021-22 appeared to be an important factor in the 2024 presidential election. In previous commentaries, I have argued that Fed monetary policy in 2020-21 exacerbated the inflationary environment in 2021-23. In my July 8, 2025 commentary “Fed Operating Behavior – Don’t Let the Perfect Be the Enemy of the Good”, I argued that the Fed should act so as to have the sum of the monetary base plus loans and securities on the books of depository institutions (thin-air credit) grow at a constant annual rate of 5 percent. Would the business cycle be eliminated under these circumstances? No. Would the amplitude of business cycles be damped? Yes. Could the Fed legitimately be criticized for political bias if it maintained thin-air credit growth at 5% per annum, regardless of what political party held the presidency? No. Would the Fed lose its mystique? Yes.
Let’s take a trip down memory lane to see how Fed monetary policy has exacerbated the business cycle. The Fed opened its doors for business in 1914, the same year that World War I started. Although the US did not enter WWI until April 1917, we were supplying war materiel and foodstuffs to the Allies prior to our entry. Plotted in Chart 1 are the year-over-year percent changes in the annual average M2 money supply (annual data for thin-air credit did not become available until 1946) and the annual average CPI. Growth in the M2 money supply accelerated to 8.5% in 1915 from 3.4% in 1914. In the six years ended 1920, M2 grew at a compound annual rate of 11.9%. And you know what else grew rapidly in these six years? The CPI. In the six years ended 1920, the CPI grew at a compound annual rate of 12.2%. So, right out of the box, the Fed was aiding and abetting consumer price inflation.
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The Federal Reserve currently is involved in one of its periodic navel-gazing exercises to try to improve its monetary-policy procedures. Most likely this introspection will involve issues such as identifying the level of the “neutral” federal funds interest rate, the lags between a change in the federal funds rate and the cumulative effect on the inflation rate and the unemployment rate, how to move the federal funds rate in periods of heightened uncertainty and how to more effectively communicate with the public on monetary-policy issues. But, it is doubtful that the Fed will contemplate abandoning the federal funds rate as its primary policy tool. In what follows, I am going to propose that a lot of the Fed’s monetary-policy conundrums could be solved by targeting a monetary quantity, rather than an interest rate. The monetary quantity I would propose the Fed target and hit is the sum of the monetary base (which is the sum of cash reserves of depository institutions plus currency in circulation) plus the loans and securities held by depository institutions (commercial banks, savings and loans and credit unions). I have called this monetary quantity thin-air credit because it is credit that is created, figuratively, out of thin-air. In what follows, I will present a theoretical argument for proposing thin-air credit as the Fed’s operating tool as well as empirical evidence for supporting thin-air credit. I will argue that targeting and hitting a steady rate of growth in thin-air credit in periods of exogenous shocks to the economy, such as pandemics, tariffs, etc., will prevent the Fed from making policy moves that will exacerbate the effects of these exogenous shocks on the economy. The proposal that the Fed target a monetary quantity rather than an interest rate was popularized by Professor Milton Friedman. The only difference between my proposal and Friedman’s is that the monetary quantity I prefer is thin-air credit rather than some money supply definition.
What does it mean that the sum of the monetary base and the loans and securities of depository institutions are created “out of thin air”? When the Fed purchases securities in the open market, from where do the funds come that the sellers of these securities to the Fed receive? They come from bookkeeping entries on the Fed’s balance sheet. On the asset side of the Fed’s balance sheet, “securities held” increase by the amount of securities purchased by the Fed in the open market. On the liabilities side of the Fed’s balance sheet, “deposits of depository institutions” increase by the same amount. These deposits of depository institutions are also referred to as reserves held by depository institutions at the Fed. These reserves were created by nothing other than Fed balance-sheet entries. On the balance sheet of the depository-institution system, the asset item “reserves held at the Fed” increase by the amount of the securities purchased by the Fed and the liabilities item “deposits” increase by the same amount. Again, nothing but bookkeeping entries. The sellers of the securities to the Fed now have deposits that they can use to purchase goods, services and/or assets. Moreover, the depository-institution system has additional funds that can be used to make additional loans and/or purchase additional securities. The recipients of these additional loans issued by depository institutions are able to purchase goods, services and/or assets. Because depository institutions desire to hold only a proportion of their assets as reserves, the depository-institution system is able to increase its holdings of loans and securities by some multiple in excess of the reserves created by the Fed. This enables the recipients of funds from increased depository institutions loans and securities to purchase goods, services and/or assets without any other entity needing to reduce its current purchases of goods, services and/or assets. It is as though the Federal Reserve and the depository-institution system are legal counterfeiters. They can create additional credit, not with a literal printing press, but by bookkeeping entries. The Fed and the depository-institution system are able to create credit, figuratively, out of thin air.
Now, let’s rewind the tape. Instead of the Fed purchasing securities in the open market, assume that the purchaser of securities was some entity other than the Fed or the depository institution system. From where did this entity get the funds to purchase the securities? This entity might reduce its current spending on goods, services and/or assets by the amount of its purchase of these securities. This is often referred to as an increase in saving. In this case, the seller of securities can purchase goods, services and/or assets. But the buyer of these securities is reducing its purchases of goods, services and/or other assets. In this case, the purchaser of securities is transferring purchasing power to the seller of securities. Under these circumstances no net increase in the purchases of goods, services and/or assets occurs. In contrast, the sale of securities to the Fed set in motion a series of bookkeeping entries that did result in a net increase in the purchases of goods, services and/or assets. To a borrower, it makes no difference whether the lender is the Fed or a depository institution. But to the borrowers’ effect on the aggregate economy, it makes all the difference in the world whether or not the lender was the Fed and/or the depository institution system.
The Fed’s so-called dual mandate is to promote low unemployment and low inflation. Real GDP growth is related to the unemployment rate. All else the same, if real economic growth is close to its potential, which is a function of available productive resources and the productivity of those resources, a low unemployment rate would likely result. In the past 70 years, the compound rate of growth in real GDP has been 3.03%. In the past 70 years, the compound rate of growth in the Congressional Budget Office’s estimate of real potential GDP has been 2.99%. So, let’s say that growth in real GDP of 3% would come close to generating an acceptably low unemployment rate. For reasons unknown to me, the conventional wisdom is that the consumer inflation rate ought to be around 2% annualized. In the past 70 years, the compound annualized rate of growth in both the GDP and Personal Consumption chain prices indices has been 3.2% on a rounded basis. What I am suggesting is that if the Fed could conduct policy such that the growth rate in nominal GDP were around 5% (3% real and 2% GDP price inflation), the Fed would come close to meeting its dual mandate of low unemployment and low inflation.
If only there were some monetary quantity whose behavior would be relatively highly correlated with the behavior of nominal GDP. Oh wait, there is. It is the sum of the monetary base plus depository institutions’ holdings of loans and securities, i.e., thin-air credit. Plotted in Chart 1 are the year-over-year percent changes in annual averages of nominal thin-air credit (blue bars) and nominal GDP (red line) starting in 1955 and ending in 2019. That “r = 0.65” in the upper left-hand corner of the chart is the correlation coefficient between the two series. If the two series were perfectly correlated, the absolute value of the correlation coefficient would be 1.0. Because there is an implicit “+” sign in front of the 0.65 correlation coefficient, it means that when thin-air credit growth increases, nominal GDP growth also increases and vice versa. An absolute value of 0.65 for a correlation coefficient is not bad for government work. Why did I truncate the series to 2019 rather than 2024? Because the correlation coefficient is higher for the truncated period. How’s that for honesty? My deceased friend and former colleague, Robert “Bob” Laurent, remarked that I was the most honest economist he had ever encountered. NOT the BEST, but the most honest. The correlation coefficient drops to 0.45 when the years 2020 through 2024 are included. This is because of the record growth and near-record growth in nominal thin-air credit in 2020 and 2021 and the unusual contraction in nominal GDP in 2020. All of this was due to the once-in-a-century (I hope) pandemic and the Fed’s errant response to it.
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Milton Friedman taught us that when it comes to evaluating the stance of monetary policy, look at monetary quantities, not the level of interest rates. A given level of federal funds rate can represent a tight monetary policy if the demand for credit is weak. In this case we would expect to see a relatively low rate of growth in bank credit. Similarly, that same level of the federal funds rate can represent an easy monetary policy if the demand for credit is strong. In this case we would expect to see a relatively high rate of growth in bank credit.
The federal funds rate has been at a level of 4.33% since December 25, 2024. Yet, as can be seen in the chart below, growth in bank credit has increased significantly. In the 13 weeks ended May 21, 2025, the annualized growth in bank credit was 7.9%, the highest since mid-August 2022. Adjusted for consumer inflation, today’s 7.9% growth in bank credit is higher than it was in August 2022.
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- USA| May 05 2025
April Showers for the US Economy?
Looking a bit deeper into early April economic data, I detect some worrisome issues regarding the health of the economy. Let’s start with the April 2025 Nonfarm Employment Survey, specifically, the Manufacturing Index of Aggregate Weekly Hours for the manly guys on the factory floor. (We don’t care about the supervisors and suits in the C-suites because we know that they don’t produce things you can touch and feel.) This index of aggregate weekly hours is a proxy for output in the manufacturing sector. It represents the number of factory-floor workers times the weekly hours they toiled. This index does not take into consideration any changes in the workers’ productivity. As you can see in Chart 1, this index contracted by 5.6% annualized in April. One month does not a trend make, but …
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- USA| Apr 30 2025
Good Bye Mr. CHIPS?
The CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act was signed into federal law on August 9, 2022. The CHIPS Act provides various subsidies for the production of semiconductors in the US. Semiconductors are an integral component in numerous kinds of equipment, including defense equipment. A major impetus for passing the CHIPS Act was national security.
The encouragement of domestic semiconductor production seems to be coming to fruition. In the advance estimate of Q1:2025 real GDP, released on April 30, 2025, the annualized change in the production of real information processing equipment skyrocketed to 69.3%, as shown in Chart 1.
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- USA| Mar 21 2025
Commercial Banks Increased Exposure to the Private Credit Market
Private credit involves nonbank financial institutions direct lending to private firms. It is a rapidly growing sector of the financial markets. According to McKinsey & Company, private credit “totaled nearly $2 trillion by the end of 2023, roughly ten times than it did in 2009”. Private credit increased in popularity following the Great Financial Crisis after which commercial banks came under increased regulation. But US commercial banks have steadily become involved in the private credit market indirectly. Banks have done this by increasing their lending to nonbank financial institutions, the institutions that make the direct loans to businesses.
Chart 1 shows the steady growth in commercial bank lending to nonbank financial institutions starting in 2015 (when the series first became available form the Federal Reserve). In January 2015, commercial bank loans to nonbank financial institutions were 4.2% of commercial banks’ total loans and leases. By February 2025, this percentage had risen to 9.4%.
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