Money Supply Booming, Seeds of the Next Greater Recession
BMGBullion.com
MARCH 25, 2012
The money supply, as measured by the broad TMS2 metric (True Money Supply), posted a 14.6% year-over-year increase in February, making this the 39th consecutive month of double-digit year-over-year rates of monetary inflation. All told, TMS2 is up a huge 50% over those 39 months. But isn’t this monetary grease what the economy needs to heal and grow?
No. All this monetary largesse will do is guarantee the next Great Recession. All monetary booms founded on the creation of central bank money and bank-issued on-demand deposit liabilities in excess of bank reserves always end in economic busts, roughly equal in size and intensity to the preceding monetary boom. By distorting interest rates and price signals, and as a consequence creating malinvestments that must eventually be liquidated, monetary booms always end in economic busts.
Far from being a good thing, a booming monetary inflation cycle is frightening, and this one is far from over.
With excess reserves of nearly $1.6 trillion (courtesy of Fed credit and asset purchase programs) private banks—with improved liquidity and capital ratios, a Fed still cleansing bank balance sheets of MBS and Agency debt and, of course, near-zero rate funding costs—seem more willing lately to create on-demand deposit money out of thin air by making loans and buying assets.
Assuming conservative reserve ratios of 10% on on-demand deposit liabilities, starting from a money supply base of $8.4 trillion as measured by TMS2, that suggests a tripling of the money supply.
And if private banks can’t muster enough monetary largesse to juice the US economy, there will always be another asset purchase program or other creative monetary tool lying in the wings ready to give private banks a hand in supposedly spurring economic growth.
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