Liberal Free Chat Zone

[EarlyOne]

John Williams: Warning - Monetary Base Spikes to Historic Level
February 25, 2012

“Adding liquidity to the system usually is contrary to the action that would be taken if the Fed were trying to reduce inflation. Indeed, the Fed is not trying to reduce inflation—despite inflation running significantly above its 2.0% inflation target—instead, the U.S. central bank continues its efforts to provide liquidity to a still severely-impaired U.S. banking system.

The extreme growth in the monetary base of recent years has not translated into rapid money supply growth and inflation, yet, because banks have been depositing their funds as excess reserves with the Fed, rather than lending the money into the normal flow of commerce.

Nonetheless, direct monetization by the Fed of significant amounts of U.S. Treasury securities during QE2 did fuel some direct money supply growth. Treasury spending that is funded by the public is a wash in terms of money-supply effect, where the public lends the money to the Treasury, and the Treasury’s payments enabled by the borrowed funds are sent back out to the public.

When the Treasury spending is funded by the Fed’s money creation, however, cash does not come from the public. Treasury payments, enabled by the Fed, flow into private bank accounts with new money being put into the system. The effect would be magnified if banks were then lending the deposited funds in a normal fashion, but that is not the case.

The reduced-impact monetization, however, has been reflected recently in some upturn in the broad money supply. As measured by the SGS-Ongoing M3 Estimate, annual M3 growth rose to 3.9% in January 2012, the strongest annual growth seen in 30 months.”

The seasonally-adjusted St. Louis Fed Adjusted Monetary Base just jumped to an historic high level in the two-week period ended February 22nd, as shown in the (above graph). The movement here largely is under direct control of the Fed’s Federal Open Mark Committee (FOMC) and is suggestive of a deepening systemic solvency crisis.”