The Fed ceased publishing M-3, its broadest money supply measure, in March 2006. The SGS M-3 Continuation estimates current M-3 based on ongoing Fed reporting of M-3’s largest components (M-2, institutional money funds and partial large time deposits) and proprietary modeling of the balance. See the Money Supply Special Report for full definitions.
Inflation, Money Supply, GDP, Unemployment and the Dollar
What do we know about the currency of the United States?
1) All of the debt that the US owes is denominated in the US Dollar. Our nation owes no money denominated in a foreign currency. Therefore, the need to devalue our currency to the level of hyperinflation doesn’t exist – and won’t exist.
2) Investors are running to purchase US Treasury securities. We are typically seeing “bid-to-cover” ratios of 2.5 to 3.5 during Treasury auctions. This means there are 2 ½ to 3 ½ times as many bidders as there are Treasury securities available for purchase.
Treasury yields (interest rates) are dependent on the demand for a particular security. If the demand is very high then interest rates will drop – because the seller does not need to tempt the buyers with as much future interest. If the demand is extremely low then interest rates will rise quickly. This is due to the seller needing to entice the buyers with a higher payout at security maturity.
3) The population of the US is hoarding US dollars right now – as is much of the world. They are being treated as valuable holdings, instead of “hot potatoes”. Merchants are having a difficult time “encouraging” buyers to part with their dollars. Consumers are striving to pay down debt and build a little cash nest-egg if at all possible.
4) The US government has absolutely no power to devalue the US dollar directly. Its only ability is to issue new credit (Treasury securities) that is claims on the future labor of its people.
Our government is currently struggling to spend as much currency (received by selling its debt) as it possibly can, in an effort to mask the deflationary depression that is already upon our nation.
Think about it for a moment. The Federal government has run $1.6 TRILLION budget deficits each of the past two years. Our nation’s annual GDP is stated to be around $14 trillion. This means that our government is falsely propping up the economy by more than 10% each year (approximately 11.4%). This is a level of deflation that compares quite equally with what was seen during the years of the Great Depression – yet the populace doesn’t understand this.
Hyperinflation is not around the corner. Hyperinflation is not even a distant concern. Instead, the masses are being incorrectly led to believe that this is our greatest cause for concern. It makes us hate our Federal government even more – while the FACT that the international banks are the primary culprit goes largely unnoticed.
I have been a registered Republican for most of my adult life, and believe strongly that the sphere of the civil magistrate needs to be squarely centered on the fear of God. We have some good Christian men who are about to be elected on November 2nd. It seems that almost all of them seek to have a balanced budget Constitutional Amendment.
A debt-based economy needs a moderate amount of inflation each year just to survive. What if these well-meaning Republican get their wish and are able to reduce our nation’s budget deficit to zero?
The “everything is slowly getting better” mask will be quickly removed from before our nation’s eyes. We will see the deflationary depression released like a lion from its cage.
Our nation desperately needs to remove itself from debt-based money, and begin having the US Treasury issue our currency. This would be a giant step towards having a biblically-based currency that is centered on completed labor. This is what those seeking to heal our economy should be focused upon.
How Does M1 Relate to Inflation?
by Tim McMahon, Editor
Updated April 9, 2009
According to Austrian Economics an increase in the money supply should result in inflation as the value of each old dollar is "diluted" by the printing of new dollars.
In the chart below, we have the M1 money supply from 1985 through October 2008. It shows the percent change over the previous 12 months.
M1 is the most restrictive, measure of money supply since it only measures the most liquid forms of money; it is limited to currency actually in the hands of the public. This includes checking accounts travelers checks, and other deposits against which checks can be written.
As you can see... from 1985 through 2000 the money supply generally increased somewhere between 5% - 10% a year. But then in 2000 the money supply went crazy shooting up and then crashing down before returning to 10% and then declining.
So during that time what happened to the inflation rate. You would think that if the money supply controlled the inflation rate we should be able to see some sort of relationship.
So in this next chart we see the M1 percent increase combined with the inflation rate.
At first blush it doesn't look like there is any relationship between them at all. M1 money supply is bouncing all over the place while the inflation rate is not quite as volatile but appears totally unrelated.
But then we have to remember that there is a time lag as the increase in the money supply floats around the system. Typically the time lag is considered to be from 12 -18 months. So if we introduce a time lag into the money supply chart this is what we get.
So in this chart we can see that during the 1980's the money supply numbers lined up pretty well although the money supply increase was higher than the reported inflation rate.
In the 1990's we saw inflation to be relatively flat while money supply spiked up above 10% on two different occasions. See circle #1 . So how can this be? Well during the 1990's we had an unusual situation where former closed Communist countries were becoming more open and using very low cost labor to sell goods on the world market. This allowed the United States to print extra money and buy these low cost goods effectively exporting much of its inflation.
But what happened in the massive spike in circle #2. In that case the excess money went into creating the "Dot Com" bubble. So rather than causing consumer prices to increase it caused other assets (stocks) to increase in price instead. The crashing stock market reduced the M1 money supply as people drew down money in their checking accounts as their other assets decreased in value.
The government feverishly tried to reinflate the money supply and the money promptly went into the housing bubble once again rather than driving up consumer prices. As housing prices crashed they pulled other assets down with them, once again sucking up excess liquidity until the consumer inflation rate actually got very close to zero.
Money in the United States changes hands constantly. Each day, millions of U.S. dollars and coins are circulated throughout the economy. Visual Economics has put together a graphic, shown below, which illustrates the amount of money in circulation, broken down by number of bills. While the graphic is from 2008, the percentage of bills is very comparable today.
A more recent number provided by the Federal Reserve Statistical Release at the end of April 2010, shows that total USD currency in circulation was $878.8 billion. Many people believe that it is the Federal Reserve that prints our money, however, in actuality the Bureau of Engraving and Printing (BEP) produces the paper currency, while the U.S. Mint produces the coinage. Further, up to two thirds of U.S. currency in circulation worldwide is held outside of the United States.
If there’s one thing we can be sure of ever since this Great Recession hit four years ago, shortly after we got sated on the Beijing Olympics in late summer 2008, one verity, it is that the money supply has gone up ever since. Way up.
Federal Reserve Chairman Ben Bernanke is known far and wide for having “printed money” like never before—through the various quantitative easings, operation twists, and putting ceilings on interest rates south of 0.5%. You can look it up. All the old “monetary aggregate” statistics the Fed uses to measure the money supply—“M1” and all that—are up three-fold or more since 2008, and interest rates are at all-time lows.
The point these rogue economists are driving at is that (as has long been conceded in economics) simply adding up currency and bank account numbers, as the Fed does as it counts money, will not give you a good picture of people’s liquidity. How much “money” people have is not wholly a function of cash stashed in currency or under an FDIC umbrella at the bank, but rather of how much financial power people are able to leverage at any moment by deploying cash, banked money, bonds, stocks, hard assets, what have you.
In 1980, Barnett wrote an eye-popping article in an academic journal showing that you could discount all non-cash assets according to their propensity to be used as cash and then include them in a new monetary aggregate. This would give you a true picture of the nation’s money supply. Barnett called it a “Divisia” index, after a classical French economist of that name.
Here’s what Divisia measures of money have been doing since 2008: going down. At one point during the Great Recession, as Barnett explains in his book, the year-over-year decline was 10%. There’s a simple lesson here. You’re going to have a recession if people’s ability to manifest money to buy things goes down at a double-digit rate.
All very recondite? Not really. What the likes of Barnett and Hanke have been telling us all these years is rather obvious. If the Fed is going to ram down interest rates, then all our current assets that are earning interest (or that could earn interest) are going to be worth less. If the Fed is going to print money such that the value of a narrow portfolio of hard assets like gold, copper, and oil are going to go up at the expense of all other assets, that greater share of assets can be monetized by their owners for less.
Today, maybe you can get a mortgage loan for less than ever (if you qualify!), but your house, car, deposits, stocks, bonds, you name it are all worth less. Our purchasing power is lower, hence the money supply is lower. Money has been tight all these years since 2008. The Divisia statistics bear it out uncannily.
The moral of the story is one that advocates of supply-side economics (the incomparable John Rutledge most of all) have been intoning since the 1970s. Monetary policy does not exist in a vacuum. It must be coordinated with fiscal and regulatory policy. All three of these blunderbusses have to get out of the way in tandem in order for any one to have positive effect on the economy.
What should have occurred under the current incumbent’s star-crossed presidency is that the government should have committed to less regulation and marginal taxation as the crisis came. This in turn would have raised the market value of all assets, by virtue of not putting encumbrances on them that made them hard to move around in the economy—in other words, to function as money.
Think Dodd-Frank. Without the new banking regulation of 2010, bank assets (especially small-bank assets) could have been put to use however their owners desired. Now they’re stuck doing nothing for the economy while all the new rules are hued to, and we have 1.5% growth to show for it.
Had a walkback of regulation occurred in tandem with tax reform in 2009-11, the Fed would have not been of a mind to plunge interest rates to historic lows and destroy the earning capability of banked money as a consequence. And absent the folly of quantitative easing care of the Fed, gold would not have marched up 3-fold as it did, as everything else sunk in value.
The monetary power of the range of assets that the Fed doesn’t ordinarily count as “money” would have been retained if government cooled it across-the-board as the recession hit. Economic growth would have ensued as the wealth generated in the long prosperous period before 2008 would still have been there to be deployed.
Supply-siders have long known that the Fed alone cannot cure recession. Buying up Treasury bonds en masse is going to be a net negative in the economy, ruining the value of savings and such, especially if done in the context of a greater general commitment on the part of government to displace the real economy. Because all our assets are in some form money, our progressive impoverishment these last years at the hands of government activism means that money has been tight.
In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is changed. A central bank may introduce new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Also, in a broader sense, it could be said that commercial banks introduce new money by multiplying base money created by the central bank through fractional reserve banking; this expands the amount of broad money (i.e. cash plus demand deposits) in the economy.
Central banks monitor the amount of money in the economy by measuring monetary aggregates such as M2. The effect of monetary policy on the money supply is indicated by comparing these measurements on various dates. For example, in the United States, money supply measured as M2 grew from $6407.3bn in January 2005, to $8318.9bn in January 2009.
Within almost all modern nations, special institutions exist (such as the Federal Reserve System in the United States, the European Central Bank (ECB), and the People's Bank of China) which have the task of executing the monetary policy and often acting independently of the executive. In general, these institutions are called central banks and often have other responsibilities such as supervising the smooth operation of the financial system. There are several monetary policy tools available to a central bank to expand the money supply of a country: decreasing interest rates by fiat; increasing the monetary base; and decreasing reserve requirements. All have the effect of expanding the money supply.
The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various financial assets, such as treasury bills, government bonds, or foreign currencies. Purchases of these assets result in currency entering market circulation (while sales of these assets remove money from circulation).
Usually, the short term goal of open market operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency, the price of gold, or indices such asConsumer Price Index. For example, in the case of the USA the Federal Reserve targets the federal funds rate, the rate at which member banks lend to one another overnight. The other primary means of conducting monetary policy include: (i) Discount window lending (as lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) "Open mouth operations" (talking monetary policy with the market). The conduct and effects of monetary policy and the regulation of the banking system are of central concern to monetary economics.
In modern economies, relatively little of the supply of broad money is in physical currency. For example, in December 2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money. The manufacturing of new physical money is usually the responsibility of the central bank, or sometimes, the government's treasury.
Contrary to popular belief, money creation in a modern economy does not directly involve the manufacturing of new physical money, such aspaper currency or metal coins. Instead, when the central bank expands the money supply through open market operations (e.g. by purchasing government bonds), it credits the accounts that commercial banks hold at the central bank (termed high powered money). Commercial banks may draw on these accounts to withdraw physical money from the central bank. Commercial banks may also return soiled or spoiled currency to the central bank in exchange for new currency.
The most common mechanism used to measure this increase in the money supply is typically called the money multiplier. It calculates themaximum amount of money that an initial deposit can be expanded to with a given reserve ratio – such a factor is called a multiplier. As a formula, if the reserve ratio is R, then the money multiplier m is thereciprocal, and is the maximum amount of money commercial banks can legally create for a given quantity of reserves.
In the re-lending model, this is alternatively calculated as a geometric series under repeated lending of a geometrically decreasing quantity of money: reserves lead loans. In endogenous money models, loans lead reserves, and it is not interpreted as a geometric series. In practice, because banks often have access to lines of credit, and the money market, and can use day time loans from central banks, there is often no requirement for a pre-existing deposit for the bank to create a loan and have it paid to another bank.
The money multiplier is of fundamental importance in monetary policy: if banks lend out close to the maximum allowed, then the broad money supply is approximately central bank money times the multiplier, and central banks may finely control broad money supply by controlling central bank money, the money multiplier linking these quantities; this was the case in the United States from 1959 through September 2008.
If, conversely, banks accumulate excess reserves, as occurred in such financial crises as the Great Depression and the Financial crisis of 2007–2010 – in the United States since October 2008, then this equality breaks down, and central bank money creation may not result in commercial bank money creation, instead remaining as unlent (excess) reserves. However, the central bank may shrink commercial bank money by shrinking central bank money, since reserves are required – thus fractional-reserve money creation is likened to a string, since the central bank can always pull money out by restricting central bank money, hence reserves, but cannot always push money out by expanding central bank money, since this may result in excess reserves, a situation referred to as "pushing on a string".
Did Hell freeze over and I missed it??
Seth B. Carpenter and Selva Demiralp, recently posted a discussion paper on the Federal Reserve Board’s website, titled Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?
The authors note that bank reserves increased dramatically since the start of the financial crisis. Reserves are up a staggering 2,173% from $47.3bn on September 10, 2008, just before the financial crisis began, to $1.1tn now. Yet M2 is up only 11.4% since September 10, 2008, and bank loans are down $140.2bn. The textbook money multiplier model predicts that money growth and bank lending should have soared along with reserves, stimulating economic activity and boosting inflation. The Fed study concluded that “if the level of reserves is expected to have an impact on the economy, it seems unlikely that a standard multiplier story will explain the effect.”
That not only repudiates the textbook money multiplier model but also raises lots of questions about the goal of the Fed’s quantitative easing policies.
The Carpenter/Demiralp study quotes former Fed Vice Chairman Donald Kohn saying the following about the money multiplier in a March 24, 2010 speech (here):
“The huge quantity of bank reserves that were created has been seen largely as a byproduct of the purchases that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation. . . . We will need to watch and study this channel carefully.”
Here are more shocking revelations from the study under review: “In the absence of a multiplier, open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level. Put differently, if the quantity of reserves is relevant for the transmission of monetary policy, a different mechanism must be found.
Banks are never reserve constrained. They are always capital constrained. Reserves are used for only two purposes – to settle payments in the overnight market and to meet the Fed’s reserve ratios. Aside from this, reserves have very little impact on the day to day lending operations of banks in the USA.
The sad thing here is that there are people in the Fed who KNOW this. They understand it. Yet, here we are implementing policy that many of them know will never work. It’s unbelievable. In other words, QE will fail and the Fed will continue to push on a string. The Fed is impotent. I think they’re just jawboning at this point.
Over the years many have been quick to cite the monetary base as the direct transmission mechanism that would lead to the great hyperinflation. We all know the story – the Fed’s balance sheet explodes, the monetary base shoots higher and money starts flowing out of bank vaults like a volcanic overflow. But regular readers are all too aware that the monetary base has no correlation with the broader money supply. The reasoning is simple – the money multiplier is a myth. So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves. It doesn’t result in more apple sales (loans). Banks are never reserve constrained. The explosion in reserves and continuing decline in loans makes this crystal clear. The Fed can continue to stuff banks with reserves and unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant.
So yes, the US government is running a massive $1.5T deficit, however, by any metric of money supply we can see that this is barely offsetting the continued de-leveraging that is occurring across the US economy. We are certain to see higher rates of inflation in 2011 (especially if oil prices surge higher), however, it is not an accurate portrayal of reality to conclude that the USA is “printing money” uncontrollably and flooding the world with dollars that will lead to hyperinflation. That is simply not the case and the data speaks for itself. At best, we are barely printing enough to offset the destruction of de-leveraging….