The Federal Reserve has more than tripled the US monetary base since 2008, leading to widespread fears (shared by this writer) that severe inflation (possibly even hyperinflation) is a distinct possibility. However, in John Mauldin's latest 'Outside The Box' newsletter (link is to an Adobe Acrobat document in .PDF format), he provides a different perspective from Hoisington Investment Management. The latter company believes that the monetary base must be distinguished from the money supply. Here's an excerpt from their report.
“The Federal Reserve is printing money”. No statement could be less truthful. The Federal Reserve (Fed) is not, and has not been, “printing money” as defined as an acceleration in M2 or money supply. Just check the facts. For the first quarter of 2013 the Fed purchased $277.5 billion in securities (net) as their security portfolio expanded from $2.660 trillion to $2.937 trillion. A review of post-war economic history would lead to a logical assumption that the money supply (M2) would respond upward to this massive infusion of reserves into the banking system. The reality is just the opposite. The last week of December, 2012 showed M2 at $10.505 trillion, but at the end of March, 2013 it totaled only $10.450 trillion which was an unexpected decline of $55 billion. Printing money? No.
This broad misconception of the Fed’s ability to print money has been widely embraced since the Fed began its massive balance sheet expansion near the end of 2008. It was then that the Fed expanded the monetary base from $840 billion to $1.7 trillion in a matter of months. Further, from the initiation of this misguided program to the end of March 2013, the Fed has expanded the monetary base from $840 billion to $2.93 trillion. The money supply indeed went up (35%) but not in proportion to the increase in the monetary base (249%). Presently, the year-over-year expansion of M2 is only 6.8%, which is nearly identical to its year-over-year growth rate in March of 2008 before the Fed decided to “help out the economy”. In other words, there is no evidence that the massive security purchases by the Fed have resulted in a sustained acceleration in monetary growth; nor is there evidence that economic conditions have improved.
. . .
Our present economic situation is nearly unparalleled in American history. An examination of the real economic growth rate of each decade in the United States from 1790 to 2012 [see chart below] reveals the unprecedented sluggishness of our present economic environment. The 1.8% average rise in the thirteen years of this century is less than half of the 3.8% growth rate since 1790. The only decade that witnessed worse economic conditions was, of course, the 1930s.
Debt Constrains Growth
Bad things happen when government debt exceeds 100% of GDP. Four studies published in just the past three years document this conclusion. These studies are highly relevant since OECD figures indicate that gross government debt exceeds 100% in the U.S., Europe, Japan as well as in other OECD member countries.
. . .
When private debt to GDP rises above 160% to 175% of GDP, growth is also stunted. This argument is also operative since private debt to GDP in the U.S. was 260% of GDP as of the fourth quarter of 2012. The point on private debt is a serious matter since it strikes at one of the core purposes of central banking – to promote private credit growth. But this is only valid for normal considerations and not when private debt is excessively high. When private debt is excessive, efforts to promote more private debt are counterproductive, thus the Fed is destabilizing rather than facilitating economic growth.
There's more at the link. The bold underlined text of the last sentence is my emphasis. The whole article makes very interesting (albeit economically technical) reading, and is highly recommended.
Trouble is, there are two points that Hoisington and other commenters are not making:
- The Fed's pumping up of the monetary base is reducing the value of the US dollar on international markets, as can be readily seen by a comparison of exchange rates over the period in question. As its value decreases, creditor nations are less willing to trust the dollar to maintain an acceptable value over the longer term. If the international market for Treasuries blows up or collapses, the Fed will have to purchase all of them as the buyer of last resort. It's already perilously close to that position. This amounts to one organ of the state writing a check to another organ, which then deposits it with the first organ. Such incestuous fiscal finaglery (is there such a word?) is nothing more than a sham, a fake and a public lie.
- At present, much of the increase in monetary base has not filtered through into general circulation. (To see where it's gone, look no further than the stock market - its recovery and recent rise are almost exclusively the fruit of the Fed's 'quantitative easing'.) However, there's no guarantee that the stock market will remain at its present irrational heights. Economic warning signs are everywhere, as we've discussed here on many previous occasions. If there's a collapse in investor confidence, all that money will flood out of the stock market, and back into circulation - and what that will do to inflation is anyone's guess.
I'm not convinced that a deflationary trend is imminent. I tend to agree with analysts such as Prof. Laurence Kotlikoff and John Williams, whose grim warnings we discussed in February. I see nothing in the Hoisington report to persuade me that their forecasts are in error - only additional material that might expose yet more problems to take into consideration.
We can argue about whether the forthcoming fiscal and economic calamity will involve inflation or deflation, currency collapse, or whatever; but whatever it may involve, I have no doubt that it's coming.