Posted on 04/06/2011 8:34:11 AM PDT by David DeGerolamo
What are the consequences of the Federal Reserve's policy to expand the M1 money supply? The following chart from the St. Louis Federal Reserve shows how fast the money supply has exploded under the Obama administration:
Art Laffer wrote an article for the Wall Street Journal on June 11th, 2009 which outlined some of the consequences of the Federal Reserve’s policy to increase the money supply. Two years later and we see that his analysis was correct for his short time frame predictions:
The expansion of money, given an increase in the monetary base, is inevitable, and will ultimately result in higher inflation and interest rates. In shorter time frames, the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as oil and gold. January 2009 to present price increases:
Stock Market 8500 => 12,400 USD vs.Swiss Franc 1.0727 CHF => 0.922051 CHF (USD down 14%) Oil $45.87 => $108 (per barrel) Gold $800=>$1435 $1453.70
M1 includes funds that are readily accessible for spending:
(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions (2) traveler's checks of nonbank issuers (3) demand deposits (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.
Seasonally adjusted M1 is calculated by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately. So where are we headed according to one of North Carolina's rising Democrat stars: Erskinse Bowles.
httpv://www.youtube.com/watch?v=bjAg8Sx1fi4
“I'm really concerned,” Bowles told the committee last month. “I think we face the most predictable economic crisis in history. A lot of us sitting in this room didn't see this last crisis as it came upon us. But this one is really easy to see. The fiscal path we are on today is simply not sustainable.
“This debt and these deficits that we are incurring on an annual basis are like a cancer and they are truly going to destroy this country from within unless we have the common sense to do something about it,” said Bowles.
“I used to say that I got into this thing for my grandchildren,” Bowles said. “I have eight grandchildren under five years old. I'll have one more in a week. And my life is wonderful and it is wild. But this problem is going to happen long before my grandchildren grow up.
“This problem is going to happen, like the former chairman of the Fed said, or the Moody's said, this is a problem we're going to have to face up,” he said. “It may be two years, you know, maybe a little less, maybe a little more. But if our bankers over there in Asia begin to believe that we're not going to be solid on our debt, that we're not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt.
“What happens to interest rates?” asked Bowles. “And what happens to the U.S. economy? The markets will absolutely devastate us if we don't step up to this problem. The problem is real, the solutions are painful, and we have to act.” I would not recommend that you wait for the government to act as Mr. Bowles suggests. Ask yourself why the government is printing money and then protect your assets before the dollar evaporates.
See these related articles on the consequences of interest rate increase coming in the near future:
Get Ready to Pay for the Federal Reserve’s Mistakes
I don’t remember reading about the M1 money supply since I borrowed to start my practice in early 1981 at 23.5%.
The experts still seem divided, which I find puzzling.
What does this bozo think quantitative easing is? The Chinese and the rest of the world are not buying our new debt at the "desired" interest rate so the Fed is just printing up money and buying the excess debt to keep interest rates artificially stable. If the Fed stops printing money, the long term interest rates will explode. If it keeps printing money, our currency will collapse. Nice job, Washington... They should change the name of our capitol city to Arnold. Like in BENEDICT ARNOLD...
So much M1 is held by institutions with absolutely no incentive to put it in the hands of the consumer. And, the consumer is hoarding M1 as well.
Everyone wants cash on hand, nobody wants to borrow or lend or spend.
When combined with a near zero velocity of money via credit, deflation still dominates.
I know many of you will protest that inflation is already on the rise...it is. And, it's the temporary result of 0% money in the institutions looking for a return in commodities markets. And, commodities are already priced to the point of reduced consumption in most of the world, soon the US too.
One day soon those institutional holders of commodities will turn around and see there's nothing but a cold wind behind them, not buyers. No buyers on the back-end...and reduced consumption on the front end. And the selling will start under duress.
Then everyone will see just how ugly a deflationary spiral can be.
Wealth destruction must continue to clear the bad debt off the books...and there's 10's of trillions of dollars worth of bad debt out there.
That's a pretty bold and, IMHO, an incorrect statement. Everyone? That's a bit broad. Perhaps there is a bit of money under the mattress going on privately and in the big corporations.
But signs of inflation will be a big motivator to 'buy now' while your money is still worth something and I believe that will be the driving force.
Obviously I'm betting against deflation. If gold starts dropping like a rock then I will concede that you right. At this point I see no such sign.
During the dark ages when I attended university, the M1 meant something to economists. Now, not so much.
If sovereign funds adopt it as their primary reserve along with millions of private individuals and institutions...Gold could keep the majority of it's pricing power while everything else goes into the toilette.
The housing market...real property...continues to decline in price. If that's not deflation at the most fundamental level I don't know of another marker that could represent it.
The housing market...real property...continues to decline in price. If that’s not deflation at the most fundamental level I don’t know of another marker that could represent it.
+++++++++++++++++++++++++++++
Home prices have been increasing for decades driven entirely by the anticipation and reality of inflation (of the money supply). Foolish lending practices in the last few years accelerated this trend which clearly got ahead of itself.
So what we are seeing now is a downward adjustment to the classic money supply driven basis for home prices. Yes, it will overshoot on the downside but will eventually return to the inflation driven model.
Wait for the bottom and start buying real estate. You won’t regret it.
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