The adjusted monetary base is on fire.  A couple of months ago, I was starting to doubt whether QE2 was actually happening as it wasn’t showing up in the monetary base.  Well, the February 17, 2011 update of the monetary base shows a line straight up since the beginning of the year.  It is obvious now that the Fed is actually doing what it said it would do.  QE2, otherwise known as the Fed buying government bonds, otherwise known as money creation, is happening.

You can view the chart here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

We will closely follow the excess reserves held by commercial banks over the next few months.  We want to see if this increase in the monetary base is at least somewhat sterilized by an increase in excess reserves.  Bernanke claimed that the Fed was not increasing the money supply in circulation.  Either he expects all of this new money to go into excess reserves or he is lying.

If even part of this new money gets into circulation through the banks, then price inflation should be close at hand.  I think prices could explode at any time.  It is hard to say what will lead the way.  Commodities and precious metals could be the leaders.  Stocks might keep doing well, but that is harder to say.  When consumer prices start going up at a good clip, you can count on food prices to rise significantly.

We may be coming up on one of those rare investment opportunities.  Although high inflation won’t really be good for anyone, we can at least try to profit from some of it, or at least protect what we have.  If the excess reserves don’t keep pace with QE2, I think all of our speculative investments belong in hard assets.  The dollar will get crushed and price inflation will take off.  Hard assets like gold, silver, platinum, oil, food, and maybe even real estate will do well.  You can’t make these things on a printing press.