Monday, February 02, 2009

The increase in the money supply

Though I've supported Ron Paul for years, I never took the time to understand monetary policy until he ran for President... and he kept mentioning it during the debates.

So I've started learning about the different measures of the money supply, such as the M1, M2 & M3. And there's a lot to learn, but I think it's worth it.

Anyway, several times on this blog I've referenced this November 2008 CNBC article that explains how money grows on trees. Specifically, it details the increase in America's money supply during 2008 - an $8 trillion increase that makes the $700 billion bailout look like peanuts.

But now I stumbled across another article that really caught my attention. It gives a view of the growing US money supply and what it means to the world (AsiaNews, by Maurizio d'Orlando):

A first parameter of instability is the gross US foreign debt, which rose from US$ 6,946 trillion as of 31 December 2003 to US$ 13.427 trillion as of 31 December 2007. This is internationally circulated currency. As of the end of last year it was almost equal to 100 per cent of the US GDP. Even though it doubled in a just a few short years, the US economy is not big enough to continue to provide sovereign debt (as monetary reserve currency) in accordance with the growth needs of the world economy....

And if I understand this correctly, my question is - what happens if/when people lose confidence in the US dollar? My guess is those dollars begin flowing back to the US... increasing the domestic money supply, but not the amount of goods.

So we end up with that much more money chasing after the same amount of goods. Repeat after me: I-N-F-L-A-T-I-O-N.

The article continues:

If the these figures published by Bloomberg are correct—US$ 7.74 trillion in rescue packages—we arrive at about US$ 23.3 trillion of public debt for a ratio of 169 per cent of GDP. In just a short period of time the public debt of the United States almost doubled or tripled.

Maybe it really doesn't make a difference if President Obama prints another $2 trillion.* The horse may already be out of the barn.

Tim White

* His stimulus package is priced at $850 billion, but I've also read reports that he intends to increase Bush's billionaire bankers' bailout by another $1 trillion.

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