U.S. money supply (M1) has been growing at extremely high rates. This started in July 2008 when it was 1,410.5 billion. It’s now 2,330.7 billion. That’s a 65 percent jump in 4 years.
On November 4, 2010, Bernanke wrote:
“Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.
“Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation.”
Obviously, he was lying or mistaken in the immediately preceding statement about “little effect on” money supply, since M1 was already up to 1,767.2 or by 25 percent in 2 years when he wrote as a result of his first set of asset purchases (over one trillion dollars worth)! On that day in November, he announced another $600 billion purchase, and that is what inflated the money supply from the then 1,767 to its current 2,330.7 (extremely close to it). Increases of this size in M1 are extraordinary.
Bernanke knew then and knows full well now that the FED inflates M1. We are 100% sure that he knows because he himself has said so:
“But the U.S. government has a technology, called a printing press (or today, it’s electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is the equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
Now in one part of his statement he qualifies the reference to money supply with the adjective “excessive.” In other words, he’s claiming that a 65 percent increase (or at that date a 25 percent increase) is not excessive, the reason being that it has or had little effect on consumer prices, which he calls “inflation.” Now, actually, inflation is an increase in the money supply brought about by government, so that his use of the term “inflation” to mean consumer price inflation confuses the analysis, confuses the public, and confuses him too.
Bernanke claims that when he sees consumer price inflation occurring, the FED will sell off its securities, reduce M1, and head those price rises off at the pass. How can he assure this with any credibility? When prices start rising sharply across the board, at some unpredictable future time and due to some unpredictable event like a new war, there will be pressure not only NOT to reduce M1 but to increase it. By then the pressure for price increases may be so severe that only a severe recession would stop them, and the FED will be under pressure not to allow that to occur. Furthermore, Bernanke may not even be on the FOMC when price pressures eventually become that noticeable. And, last, if the FED raises interest rates to reverse M1, it will make the government’s deficit much worse due to higher interest costs, so the government will be pressuring the FED not to do this.
Many prices are already up sharply. This already belies his claim that he’ll stop prices from rising.
For the FED to have credibility about reducing M1, the time to do it is immediately, even if by small amounts. Its notion of holding short term rates at near zero until the end of 2014 is really insane. And if the FED goes into QE3, it’s going to reduce its credibility and spur the movement of M1 into real assets. It will cause the price rises it wishes to avoid. It has already fueled these price rises with the massive increase in M1. The Bernanke FED, by increasing M1 so dramatically, has created a situation from which it cannot extricate itself or the U.S. economy except by going against expectations now and reversing course.
7:16 am on July 25, 2012
