What are the consequences of the Federal Reserve’s policy to expand the M1 money supply? The following chart from the St. Louis Federal Reserve shows how fast the money supply has exploded under the Obama administration:
Art Laffer wrote an article for the Wall Street Journal on June 11th, 2009 which outlined some of the consequences of the Federal Reserve’s policy to increase the money supply. Two years later and we see that his analysis was correct for his short time frame predictions:
The expansion of money, given an increase in the monetary base, is inevitable, and will ultimately result in higher inflation and interest rates. In shorter time frames, the expansion of money can also result in higher stock prices, a weaker currency, and increases in commodity prices such as oil and gold.
January 2009 to present price increases:
Stock Market 8500 => 12,400
USD vs.Swiss Franc 1.0727 CHF => 0.922051 CHF (USD down 14%)
Oil $45.87 => $108 (per barrel)
Gold $800=>$1435 $1453.70
What is the M1 Money Supply?
M1 includes funds that are readily accessible for spending:
(1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions
(2) traveler’s checks of nonbank issuers
(3) demand deposits
(4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts.
Seasonally adjusted M1 is calculated by summing currency, traveler’s checks, demand deposits, and OCDs, each seasonally adjusted separately.
So where are we headed according to one of North Carolina’s rising Democrat stars: Erskinse Bowles.
httpv://www.youtube.com/watch?v=bjAg8Sx1fi4
“I’m really concerned,” Bowles told the committee last month. “I think we face the most predictable economic crisis in history. A lot of us sitting in this room didn’t see this last crisis as it came upon us. But this one is really easy to see. The fiscal path we are on today is simply not sustainable.
“This debt and these deficits that we are incurring on an annual basis are like a cancer and they are truly going to destroy this country from within unless we have the common sense to do something about it,” said Bowles.
“I used to say that I got into this thing for my grandchildren,” Bowles said. “I have eight grandchildren under five years old. I’ll have one more in a week. And my life is wonderful and it is wild. But this problem is going to happen long before my grandchildren grow up.
“This problem is going to happen, like the former chairman of the Fed said, or the Moody’s said, this is a problem we’re going to have to face up,” he said. “It may be two years, you know, maybe a little less, maybe a little more. But if our bankers over there in Asia begin to believe that we’re not going to be solid on our debt, that we’re not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt.
“What happens to interest rates?” asked Bowles. “And what happens to the U.S. economy? The markets will absolutely devastate us if we don’t step up to this problem. The problem is real, the solutions are painful, and we have to act.”
I would not recommend that you wait for the government to act as Mr. Bowles suggests. Ask yourself why the government is printing money and then protect your assets before the dollar evaporates.
See these related articles on the consequences of interest rate increase coming in the near future:
Get Ready to Pay for the Federal Reserve’s Mistakes
David DeGerolamo
