March 1, 2012 Update of the Adjusted Monetary Base

I believe it is necessary to review the adjusted monetary base on occasion.  The money supply is a major factor in determining what happens in the economy and, therefore, your investments.  While it shouldn't be this way, that is the reality that we live in.

The money supply measure that the Federal Reserve controls is the adjusted monetary base.  You can view the latest short-term chart here:

You can also view a longer-term picture here:

You can see the large spike that took place in the fall of 2008.

Since QE2 ended last June, the monetary base has been pretty flat.  The Fed has not been doing much for the last 8 months.  However, in the last few weeks, you can see on the short-term chart that it has gone up and has even surpassed the mark from last June/ July.

We will have to see if this trend holds.  The Fed has not announced any official QE3 (yet).

Another interesting chart to look at is the excess reserves held by commercial banks.  The chart is here:

It has basically copied the monetary base since late 2008.  So while the Fed has more than tripled the money supply, most of this new money has gone into excess reserves with the banks.  This has kept the federal funds rate near zero because banks have no need to borrow overnight money.  Since the excess reserves are so high, most banks do not fall below the minimum reserve requirement that would require them to borrow.

The huge excess reserves has also helped keep a lid on price inflation.

The most important thing to remember is that all of this monetary inflation is not without a big price.  While we haven't seen huge price inflation to this point, it doesn't mean that there isn't severe damage being done.  All of that monetary inflation causes more misallocations.  Resources are not being put to their best use because of the distortion.  This is hurting savings and investment and it is the main reason for the struggling economy.

Until the Fed stops the monetary inflation and allows a severe correction to occur, the economy will continue to be damaged and will continue to struggle.  My best guess is that the Fed will not stop the monetary inflation until we see higher price inflation.