Saturday, March 12, 2011

March 10, 2011 Update of the Monetary Base

The latest chart of the adjusted monetary base is showing that the Fed is continuing to create new money at an unbelievable pace.  You can view the latest one-year monetary base chart here:

http://research.stlouisfed.org/publications/usfd/page3.pdf

If you want a broader and much scarier view, you can view it here:

http://research.stlouisfed.org/fred2/series/BASE

When QE2 is done, the monetary base will have more than tripled from 2008.  If this money gets out into the system and is loaned out via fractional reserves, then we will see massive price inflation that has never been seen in modern America.  The 1970's will look very tame.

The Fed says it has an exit plan, but that exit plan would mean a crushing depression.  I think we are years away from that.  We may have another recession (or a continuation of one) before we get to the point of high price inflation.  Normally, upon seeing the adjusted monetary base skyrocket, it would be easy to predict price inflation on the horizon.  This time is different though because banks are taking the money of depositors and keeping it as excess reserves.

You can view the chart of excess reserves here:

http://research.stlouisfed.org/fred2/series/EXCRESNS

The excess reserves have gone up in almost perfect correlation with the monetary base.  This has kept a lid on price inflation.  However, this won't last forever.  Either the Fed will reverse course or this money will eventually get out in the form of new loans.

The Fed continues to walk on a tight rope that is getting narrower and narrower.  On one side is inflation and on the other side is depression.  It will keep shifting from side to side and overcompensating so that it does not fall.  Eventually, when it is faced with hyperinflation and can't hold on any longer, the Fed will choose to fall on the side of depression.  Things will not be pretty until we get through this.

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