How to estimate the rate of expansion of money supply

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cmdhhendren's picture
cmdhhendren
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How to estimate the rate of expansion of money supply

 Is there a straightforward way to estimate our current percent rate of expansion of money supply?  Theoretically, if the money supply doubles, the value of silver and gold and commodities should sooner or later double.  But how can we get a sense of these fundamentals from readily available sources?  How do we factor in treasuries printed for European banks, etcetera?

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docmims
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M1, M2, and M3 are money

M1, M2, and M3 are money supply numbers that include various forms of debt released by the federal reserve.  The flaw in your argument for gold is that even though M3 has expanded by 1.4 trillion over the past couple years.  The banks really haven't loaned it out (the theoretical multiplier is 10 trillion in loans for every 1 trillion in deposits.) 

The banks are basicly borrowing the money at 0.1% and carrying the loan by redepositing it as "excess reserves" back at the Federal Reserve, and getting an easy risk free 2% return..

These excess reserves have ballooned by 1.2 trillion over the past 2 years.  Therefore you can see the money has not reached the economy.

If the banks ever do start loaning out this money then you can hold on to your pants on that inflationary ride.

Hope this helps.

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dmger14
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Right, the key to the

Right, the key to the correlation with money supply and commodities is where the money goes.  We hear how the government wants those banks to lend the money to prop up the economy, and rumors that the fed could cut the rate it pays on those reserves to force banks to lend.  So evidently, the government and fed want inflation.  But that would lead to an increase in interest rates to compensate investors for the inflation premium, and commensurate difficulty in servicing our national debt.  Then, housing prices would fall more, further impairing bank balance sheets and making the fed's MBS even more toxic.  Funny you never hear about the "exit strategy" anymore.  I used to get into "disagreements" with my former boss over this.  He said the fed could soak up all the excess liquidity by "selling something."  Who would want treasuries or MBS in a rising inflation environment?

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JAG
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cmdhhendren
cmdhhendren wrote:

Theoretically, if the money supply doubles, the value of silver and gold and commodities should sooner or later double. 

That's the theory allright, but in reality it's just Wall Street marketing. As you can see from the charts below, the monetary base grew for years while the price of gold stagnated:

Best,

Jeff

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dmger14
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...also, people say that

...also, people say that gold and silver aren' t investments, but ways to preserve purchasing power.  Yet I've heard that in periods of inflation, they have gone up way higher than the rate of inflation, such that you would only have needed roughly 15% of your money in gold and silver to fully protect your portfolio from inflation.   Clearly, you do more than preserve your wealth if PMs explode in an inflationary environment.  You can earn quite a bit of purchasing power as well...

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docmims
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Mish has a very good article

Mish has a very good article on this point and the economics around it here:

http://globaleconomicanalysis.blogspot.com/

 

Basicly although the money has been manufactured: ie typed into the computers: banks have to have customers who the banks feel are credit worthy that are willing to borrow the money.  Otherwise it is just parked at the fed as excess reserves.

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ao
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exit strategy
dmger14 wrote:

He said the fed could soak up all the excess liquidity by "selling something."  Who would want treasuries or MBS in a rising inflation environment?

You (we) won't want them but you'll (we'll) be buying them when the feds mandate that you hold these assets in your retirement account(s) in the future ... for your benefit and safety, of course. 

The rule of thumb is that the masses always provide the exit strategy for the elites.

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