Monday, March 2, 2009

As Long as We Are Talking About Out-of-Control Spending . . .

This graph says it all (click to enlarge). It is a graph of the growth in the adjusted Monetary Base as tracked by the Federal Reserve Bank of St. Louis. Essentially, the Monetary Base is a picture of all the different forms of money that are in use at any one time---from currency in circulation to bank deposits and checking accounts. The vertical gray bars in the graph represent periods of recession. 

Never before in the history of tracking the monetary base (since the Fed began operations in 1914), not even during the Great Depression of the 30's (when the Fed actually contracted the money supply), or the inflation caused by World War II, or the inflation caused by the oil embargo in the 1970's, has the number skyrocketed vertically the way it has over just the past few months. The source of this graph is the website of the Federal Reserve Bank of St. Louis; you may read more there about how it is constructed, and you can magnify the graph by focusing on just the more recent periods. (H/T: Todd Zywicki at Volokh Conspiracy.) 

What this reflects is all the junk that the Fed has been buying up from the banks in an effort to improve their balance sheets. This, in other words, is separate from the disastrous budget put forward by the President which I covered in the last post. The Fed has a bottomless checkbook, not subject to the constraints imposed on the President and Congress by the legislated debt "ceiling" (a laughable term, if there ever was one, since it always can be raised higher). It has been using its check-writing ability in a concerted effort to avoid the banks' collapse.

For the time being, it may have done so. But what you are seeing reflected in the graph above is an enormous---and I mean ENORMOUS---source of future inflation, in relation to what has gone before. (Just look at the graph again.) As one person writing about this graph put it: "We've never been here before."

Let me be clear: this is not about Obama. That was the last post. This is about all the chickens coming home to roost that were hatched during the Clinton and Bush administrations. The Fed did not see the impending disaster until it was way too late. This can clearly be seen from the last data points in the graph, which are as follows (see the graph page linked above to download a spreadsheet with the details---numbers are in billions of dollars):

2008-08-01 870.979
2008-09-01 936.138
2008-10-01      1135.820
2008-11-01     1481.943
2008-12-01     1692.511
2009-01-01     1735.316

In other words, the adjusted monetary base doubled in five short months. To put that in perspective, it took fourteen years for it to double from $435 billion in 1994 to $871 billion in 2008.

But the problem is that the budget proposed by Obama last week presents a double-whammy. What the Fed has done to date guarantees there will be massive inflation in the future. If Obama sticks to his budgetary plans, with virtually unchecked federal spending accompanied by further tax increases (especially on carbon-based energy), the result will be a stagnant economy. (More federal spending simply guarantees increased waste and fraud, because those given the money to spend are not held accountable. One example among thousands: all the federal money given over the years to improve flood protection around New Orleans. And printing money to put people to work will not protect them against the inflation resulting from the ballooning of the money supply, as the graph above depicts. It truly is a sucker's game.)

So together, the two of them, President Obama and the Fed, will bring about the worst of all possible worlds---stagflation. That is a word not seen since the Carter years (except for this prescient article by Joseph Stiglitz written 14 months ago). Some readers may remember just how enjoyable those years were.

Is all this the product of ignorance, or is it deliberate? We cannot afford to find out. Either way, the consequences are already known, and completely predictable. By the time we do find out, if we ever do, it will no longer matter. The damage will have been done.

Either you wake up now, or you wake up later. The graph above is not just a picture of our money supply. It's a picture of the back half of an advancing tidal wave, seen from the side. The future lies to the right---ahead of where the wave is now. Pretending it is not there is no strategy for survival.


  1. Is this a visual representation of the effect of the TARP on the money supply -- the Fed giving the banks money in exchange for their junk assets?

  2. Please do a post on your thoughts on the last three words in this post: "strategy for survival".

  3. In a significant part it is TARP, yes, Perpetua---but TARP is by no means the whole story. The FED has the ability on its own, without specific Congressional authorization, to use its money-creating abilities to relieve banks of troubled assets, or to make loans from its discount window, to lower reserve requirements, or to do any of a number of things to keep banks in the system from going under.

    Since all of our money originates with the Fed, what you see in the graph is the money the Fed has added to the system since last August, well before TARP was passed.

    As for a survival strategy, I'd have to register with the SEC were I to offer investment advice from this blog. Just keep in mind that the value of the dollar will decline precipitously in the event of full-blown inflation, so the value of hard assets like gold (whose supply cannot be so easily inflated) will go up. Keeping your dollars in a coffee can or under the mattress is the worst possible way to proceed with inflation. Keeping some form of ready cash available is wise, in case the President or the Fed declares a "bank holiday", as FDR did. But any form of hard money---old silver dollars and quarters (now mostly available, alas, only from coin dealers), for example, is better than paper money. Remember the man with the wheelbarrow, from the last post.