I have to do my regular update on the adjusted monetary base. This is what is directly controlled by the Federal Reserve (the Fed). Just as the Fed promised, it has been increasing at approximately $85 billion per month.
I have been saying that the monetary base has more than quadrupled since 2008, when it stood at just over $800 billion. Soon enough, I will have to say that it has quintupled. By the time Janet Yellen takes over at the end of January, the Fed’s balance sheet will show almost $4 trillion.
Of course, as I have discussed before, much of this new money has gone into excess reserves held by the commercial banks. This has kept most of the new money from multiplying through fractional reserve lending. This has helped keep consumer price inflation down.
The higher demand for money has also played a key role in keeping prices relatively stable. There is still a lot of fear out there and Obamacare is not helping the situation. People are concerned about their jobs. They are concerned about paying down their debt and keeping it manageable. Other than buying stocks and, to a lesser extent, houses, there is not much euphoria out there. A lot of people are trying not to overextend themselves.
The high demand for money can change quickly though. If people have a perception that they will lose significant value due to inflation, then they will be more likely to spend their money before prices rise higher. This can create an effect of raising prices even further. It is a trend that is tough to break until the Fed gets serious about tightening its monetary policy.
I don’t know whether the Fed will start to “taper” soon. But even if it does, it will still be creating unprecedented amounts of new money. If the Fed cuts back to $60 billion per month instead of $85 billion per month, that is still $60 billion per month in monetary inflation. It is still damaging the economy by misallocating resources.
I don’t know exactly how all of this will end, but it isn’t going to be pretty. I can’t predict what Bernanke and Yellen and company are going to do. I don’t even know if they know what they are going to do. The Fed has really created a mess.
They are faced with a recession now or a recession later. If they try to hold off on the recession, they will do this with more monetary inflation, which will only do more damage to the economy. Be prepared for some interesting times ahead.