Sunday, February 28, 2010


The Fed's own monetary statistics reveal a decade of fiat money inflation and Fed irresponsibility.

In ten years M1, the narrower definition of money, expanded by one half.
M2, the broader definition of money, expanded by 80%.

Bank REQUIRED reserves expanded by 70 percent.
TOTAL bank reserves expanded by 2,600 percent.
EXCESS reserves expanded by 18,500 percent!

Banks have an incentive to expand lending to the maximum extent possible. The only institutional restraint upon bank lending is their reserve requirement. If the banks utilized their excess reserves efficiently over time (as they have in every year except the years of the Great Depression of the 1930s), we can calculate the level that M1 and M2 could reach if the January 2010 ratio of reserves to those two money aggregates remained operative:

M1--$31,436 billion (the current level of M1 is $1,676 billion)
M2--$159,729 billion (the current level of M2 is $8,463 billion)

In other words, it is possible for M1 and M2 to expand by a factor of 18 times their current size. This is a prescription for hyperinflation. It is the hubris of the Fed that it can withdraw excess reserves once it sees prices moving higher. This is not correct. If the Fed were to withdraw reserves in sufficient amounts to forestall higher prices, it would have to send the economy into a true depression, allowing banks and their customers to go bankrupt. The only restraint upon the banking system right now is the lack of capital, the paucity of good loans, and the determination of bank regulators to prevent another fiat money induced economic bubble.

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