Wednesday, June 02, 2004

Fed has increased money in circulation (M3) by levels usually only used in a dire crisis

In the last month, the Feds have printed an additional $155 billion in new currency (with nothing to back it up - it is just paper). Amazing! It looks like the Feds are doing everything in their power to make the economy look OK for the elections next fall.

This is just my opinion, but it seems to be the height of recklessness to use extreme monetary measures, usually reserved to avoid a financial collapse, etc., just to make the economy look good for the upcoming presidential election.

However, maybe I am being too optimistic: perhaps there is a looming economic collapse and the Fed is acting responsibly, performing a last ditch effort to prevent a historic crash. (Hopefully, this is just politics!)

In any case, this is a little scary. You can search the web for "plot of U.S. money supply" if you would like to see this graphically. In 2000, the M3 was $6500B and now the M3 is pushing $9200B - a huge increase in just a few years. The important point is: this money is just paper. Growth of real value (industrial productivity, supply of precious minerals and oil, etc.) keeps falling further and further behind liquidity (i.e., the money supply).

One problem, and I have a lot of sympathy for our leaders and people at the Fed on this, is that their hands are tied re: being open and honest with the public about our current economic situation. If the public truly understood how fragile our economic situation was, then they would stop spending money except of food and other essentials, and the consumer spending bubble would cease. For several years, there have only been two primary things saving our economy:

  • Foreign central banks, holding themselves so many U.S. dollars, are desperate to maintain the value of their holdings, so they have been doing everything in their power to help prop up the dollar.

  • The U.S. consumer spending bubble.

No comments: