Tag: money supply

“By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and the economies of many other nations as well.

 – Federal Reserve Governor, Ben Bernanke, 2004

  Ben Bernanke, Nobel Prize winner Milton Friedman, and most other economists out there agree that the reason the Great Depression was so deep and destructive was that the Federal Reserve failed to keep the money supply from shrinking. I’m a little more skeptical, but I agree that it would be impossible for an economy to grow without a growing supply of money in a debt-based monetary system.

  That’s why this news article should be extremely distressing.

 The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

  “It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

 As our political and financial leaders are using every tool at their disposal to jump-start the economy, there are fewer and fewer dollars in circulation. That’s not a prescription for a growing economy. It’s a prescription for economic disaster.

   Today the Federal Reserve began raising interest rates. Quantitative easing efforts (read: monetization) are also coming to an end.

  The central banks are worried about inflation due to the massive money printing of the past two years. Should they be worried? Probably not.

 David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline,” he said.

  Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature,” he said.

 Bank lending is the money multiplier in a fractional-reserve banking system, and banks aren’t lending.

  All those trillions of dollars bailing out Wall Street was meant to fix the credit markets, which means to get the banks lending again. This effort was a complete and total failure…unless you count banker bonuses.