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Guest Post: U.S. Dollar Money Supply Is Underreported

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Tue, 03/02/2010 - 13:23 | 251139 Hondo
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And the money (credit) the CDS market creates??

Tue, 03/02/2010 - 13:39 | 251164 mblackman
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Like CPI, GDP and a host of other government agency generated numbers (the Fed is a govt agency no matter what politicians may say), money supply statistics have been so heavily manipulated (or removed in the case of M3) as to make them virtually worthless for any practical application. I have found adjusted monetary base to provide the best picture of what is going but am waiting for the Fed to bastardize that number to also render it virtually useless....

Looking at the bigger picture, in the history of every fiat paper currency in history without exception, the end has always been the same. Populations lulled into a false sense of security by the politicians, are left with a worthless currency then must quickly learn to fend for themselves in the inevitable economic upheaval. 

Tue, 03/02/2010 - 15:19 | 251319 the grateful un...
the grateful unemployed's picture


the adj monetary base number is off the chart as well, 2200 or so B.

Tue, 03/02/2010 - 17:58 | 251573 Anonymous
Anonymous's picture

MB you CAN track M3, which is THE most relevant money flow statistic at Shadowstats, and is far more relevant than the M0, M1, M2 and even the adjusted monetary base. Plus Williams’ M3 is not being manipulated by the Fed and Treasury. A real plus.

The author is correct in pointing out that true inflation occurs from the increased money supply via fractional reserve banking. There are valid questions as to the actual velocity of money to Main St. For a period we will most likely see deflation but there is likely one final destination: inflation.

Also, the author, while making excellent educational points blurred inflation with hyperinflation. I spoke to this last week but feel it really needs repeating along with those who feel we are ONLY in for deflation long term.

Hyperinflation is not a bad case of inflation; it is a currency collapse (see: Weimar & Zimbabwe). Hyperinflation is also a psychological phenomenon. Massive credit de-leveraging is a derivation of hyperinflation and almost always follows major banking and financial crises (See: Rogoff and Reinhart’s book: This Time is Different).

Most critically, hyperinflation is a loss of confidence in the currency itself. Be clear, inflation, and its Hulk-sized hellish offspring, hyperinflation, are totally different – the two often are commingled as the same.

Finally, read: Shadowstats' John Williams: Prepare For The Hyperinflationary Great Depression regarding how
hyperinflation starts. It should provide a far better treatise on hyperinflation than I have provided. Warning: Have a stiff drink on hand.

Tue, 03/02/2010 - 13:40 | 251165 GlassHammer
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So its not the unstable Euro?


Tue, 03/02/2010 - 13:41 | 251170 SDRII
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Tue, 03/02/2010 - 13:49 | 251183 Ripped Chunk
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Can't be those "direct bids" at T auctions?  It can't be.

Tue, 03/02/2010 - 19:44 | 251706 johngaltfla
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That smells more like the Pirates of the Caribbean doing their laundry work, IMHO.

Tue, 03/02/2010 - 14:18 | 251220 chumbawamba
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I am Chumbawamba.

Tue, 03/02/2010 - 16:11 | 251412 Anonymous
Anonymous's picture

Can we trust any numbers the government puts out anymore?
This was a great post. It explains a lot.

Tue, 03/02/2010 - 18:02 | 251578 aaronvelasquez
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Welcome back.

Tue, 03/02/2010 - 18:04 | 251581 Celsius
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I am not Chumbawamba.

Tue, 03/02/2010 - 14:30 | 251230 Ludic Fallacy
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Let's see.  Articles showing distortions and ponzis in the gold market, massive fraud at the Federal Reserve and distortions of the money supply.  It would be hilarious if it wasn't so sad.


I must say, though, that I must take any website's (schlepping gold reports - and with that I mean the linked site, not ZH) white papers on US monetary supply with a grain of salt, or at the very least, their conclusions.  We are in a deflationary debt cycle right now, and the only way to "combat" the destructive nature of this (if you consider the destruction a bad thing, I don't) is massive inflationary tactics.  Obviously monetary supply is outrageous right now, and obviously a central banker would do so.  Hell, Bernanke even said that he would fight the Great Depression by dropping cash from helicopters.


It seems "apparent" to me that rampant inflationary tactics are being done to stave off the Greatest Depression.  Whether or not the central bankers can reign (double entendre) in all that cash once (if) things normalize is the big question. 

Tue, 03/02/2010 - 15:03 | 251297 pidge
pidge's picture

 Whether or not the central bankers can reign (double entendre) in all that cash once (if) things normalize is the big question. 

right.  isn't that where they always go wrong?  It's impossible to know exactly when the rubber meets the road and traction is gained, but the gas peddle is floored so the car takes off at full speed.  aka:  hyperinflation.  Isn't a severe deflationary period always the predecessor in hyperinflation?

Tue, 03/02/2010 - 15:04 | 251299 faustian bargain
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Nice name.

Tue, 03/02/2010 - 15:42 | 251361 SV
SV's picture

"So, a Ludic Fallacy and a Faustian Bargain are at a bar..."

Sound like a start to a good chuckle!

Tue, 03/02/2010 - 22:52 | 251850 baronvonbull
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Otherwise known as "Just another day at the Fed" ;)

Wed, 03/03/2010 - 12:29 | 252377 trav7777
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It's worse than that.

What has happened is that debt as an institution has reached its ceiling.  It cannot grow anymore.

It took several centuries, but it happened coincident with the peak in the energy supply curve.

Everyone in the room realizes that there is NO WAY IN HELL these debts can be paid off by tomorrow's production.

That's why every government now looks like end-stage Bamboo Lounge

Tue, 03/02/2010 - 14:35 | 251245 Anonymous
Anonymous's picture

So where exactly are these "deposit currency" numbers coming from?

Tue, 03/02/2010 - 14:47 | 251262 Anonymous
Anonymous's picture

From my understanding, the author is simply looking at reserves that banks have in their accounts with the federal reserve. This money is not in circulation meaning it as useful as cash buried in a cave. It has no impact on the economy. Assuming my understanding is correct, then adding these amounts to M1 is not appropriate and misleading.

There are other explanations for the cost of oil and commodities. Notice how the price of oil was rising BEFORE these excess banking reserves took off. Simple supply/demand is sufficient to account for the price. Commodity prices are also a function of supply and demand. In recent years, demand is coming from China and emerging markets. China apparently likes to build empty cities to boost it's GDP numbers.

Tue, 03/02/2010 - 16:05 | 251394 faustian bargain
faustian bargain's picture

This money is not in circulation meaning it as useful as cash buried in a cave. It has no impact on the economy.

I don't think that's an accurate thing to say...just the fact that the money is in existence has an impact on the economy. Doesn't matter where it is, it only matters that there is an unpredictable potential for it to be used.

Tue, 03/02/2010 - 23:38 | 251903 TheGoodDoctor
TheGoodDoctor's picture

You know I just keep thinking the PPT is just handing money over to the banks through HFT. And I wonder how much is really being sent out via unemployment. Do these have any impact on the M3 and money reaching the public?

Tue, 03/02/2010 - 16:17 | 251421 Anonymous
Anonymous's picture

You are correct. The logic in this article is flawed. The money on deposit with the Fed will only affect the economy if it is spent into the economy, which will be reflected in M1. Adding this number to M1 is complete nonsense, and negates the whole point of having an aggregate like M1.

Tue, 03/02/2010 - 14:51 | 251274 Shameful
Shameful's picture

Ughhh just what daddy likes more bad news. What concerns me more is since there is no audit or over site of the Fed we simply have to believe they are telling the truth. But I assure you they are not. After all think if you were Fed Chairman or had a stake in the Fed, would you accurately report or would you kick a little something into your own account? After all it's not like you will be caught. If the rest of the currencies weren't also trying to kill themselves the dollar would be in very very bad shape.

Which brings me to an interesting point. People talk about a weak currency as good because it makes it easier to export. Weak currency really means lower wages, so why don't we just allow the market to set wages in real terms? I mean aside from the financial powers get a huge benifit out of getting loads of freshly created electron based cash. Or is it that people cannot stand the idea of taking a nominal pay cut but will line right up for a real pay cut?

Tue, 03/02/2010 - 15:34 | 251347 Anonymous
Anonymous's picture

Actually the answer to that is no. the problem with deflation (aka paycuts) is that our debts are not deflated at the same time. Since we are the most heavily indebted nation in the history of the earth, deflation would be disastrous. People would walk away from their debts (which some are already doing) rather than tough it out. Likewise for the government, it makes more sense to inflate their way out of debt rather than deflate their way into default. It also makes more sense for the creditors, since at least they get a fraction of their capital back, as opposed to none if debtors default oen mass...

Tue, 03/02/2010 - 16:21 | 251428 Shameful
Shameful's picture

Your right it makes the debt unsustainable. But inflating the debt away is still a default and if you must inflate or default then it's just two flavors of default. One way is an honest default that leaves the country intact though with difficulty attracting capital, but free of interest payments. The other is a nightmare ride through hell that changes the very nature of a country. I know which one I would pick. Deflation is seen as an evil, but when you have an inflationary boom you must have a deflationary bust. when you try to paper over it you end up with a cure that is worse then the disease.

Think Monty Python "10 patients missing presumed cured" with the "explosive" treatment.

Tue, 03/02/2010 - 15:13 | 251312 Ludic Fallacy
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Pidge, I must say you make a good point when it relates to famous German history.  I'm not sure in the case of Latin American / Eastern European hyperinflation though.  I'd like to see the numbers, but I just don't know where to look.


All of this economic, top-down management makes me incredibly nervous.  I like defaulting to smart people who have come before us, and Hayek's speech at the Nobel Prize ceremony really does it for me.

Tue, 03/02/2010 - 15:31 | 251340 Anonymous
Anonymous's picture

I recommend economicpolicyjournal.com. Here's a good link that puts perspective on monetary supply vs. monetary base.

Latest report from the Fed indicates that M2 actually is declining. http://www.federalreserve.gov/releases/h6/Current/

Tue, 03/02/2010 - 15:33 | 251344 Anonymous
Anonymous's picture

Wow. No idea who this guy is but several issues with the article.

1. Cash is not printed by the Fed but by the Treasury.

2. Discussing how money is created from thin air and not including an explanation of the fractional reserve banking system is incomplete at best.

3. You say "Because the Federal Reserve did not create deposit currency in the past, none of the Ms take it into account." Of course it takes it into account. You even say it earlier in your article. "Dollars in checking accounts are considered to be the most liquid because they are available on demand. Therefore, they are part of M1 because they are the most likely deposit currency to be used to make a payment in commerce." You think billions of dollars of FOMC transactions are going under someone's mattress? They are going into checking accounts.

Poorly written article.

Tue, 03/02/2010 - 16:19 | 251426 Anonymous
Anonymous's picture

I don't think it's incorporated in the M's, and probably rightfully so. The deposit money in question is deposit money of banks held at the Fed and therefore not in circulation. It's basically the same I guess as cash held by banks in the vault, which is also not counted in the M's, since it's not in circulation. However, if the money multiplier recovers, this money has to be withdraw by the Fed, otherwise it will have a big inflationary impact.

Tue, 03/02/2010 - 17:49 | 251558 Anonymous
Anonymous's picture

He's a wingnut who runs a buy gold immediately website.

Tue, 03/02/2010 - 19:08 | 251666 goldfreak
goldfreak's picture

It doesn't matter who physically prints it, the dollar is a Federal Resrve Note printed at its request

Tue, 03/02/2010 - 15:49 | 251373 the grateful un...
the grateful unemployed's picture

look at the feds adjusted monetary base and you see the same thing. of further interest is looking at the pre crisis charts, where the rate of growth is absolutely dwarfed by the current volume, you can see that between 2003 around the time of the market bottom the figure was about 750B, and that it rose modestly over five years to almost 900B, but YTD it has risen from 1600B to 2200, since July 2008 from around 800B. That's a triple. Is the crash warning??

Tue, 03/02/2010 - 16:03 | 251393 Anonymous
Anonymous's picture

I dont see hyperinflation coming. The banks arent lending so there isnt more money in the average Joe's pocket. This depression will resemble the one from the 30's.

Carry trade speculation and some PPT action in equities are the sole driver of these unrealistic commodity and equity prices imo.

Tue, 03/02/2010 - 16:50 | 251479 carbonmutant
carbonmutant's picture

Anybody see this post on Nathan's Economic Edge? Scary Charts...

Economic Reality Check…

...latest updates from the St. Louis Fed…

Many people get all wrapped around the axle about debt to GDP statistics. This is a complete Red Herring as comparing our Federal Government’s debt to the productivity of the nation is exactly the same as comparing your personal debt to the productivity of your neighborhood. They are unrelated.

What is completely related and totally relevant is DEBT to INCOME. In fact, in regards to debt, income is the only thing that really matters. Our Nation’s Income is crashing as shown in this chart expressed in year over year (yoy) change in Billions of dollars:



Tue, 03/02/2010 - 16:58 | 251490 Anonymous
Anonymous's picture

From a hyperinflationary standpoint what difference does it make if the Fed gives banks 1000-trillion dollars? If that money isn't getting into the hands of the people who spend it on stuff then there can be no hyperinflation. When the government starts sending us all $1,000,000 stimulus checks in the mail... well then you will get hyperinflation.

Tue, 03/02/2010 - 17:05 | 251499 Anonymous
Anonymous's picture

There clearly is a lack of understanding the mechanics of what is going on here.
first; one needs to read george washington's post about the amount of depostis at the big banks. these banks (the bailed out asses) aren't lendin, but starving the country of "credit". the rason for this is as follows. when they decide to give credit they realize the fed will tighten policy (inflation, unemployment). therefore the tradig operations (the center of current bank profits) doesn't get cheap leverage funding. This is strategy to maximize cheap funding by starving the economy of funds. This is the deflation you see.But since the fed does not monitor certain assets (fuel, housing, food, stocks) for inflation purposes you shunt the cheap federal funds to theses areas in build up an "unnoticed" asset bubble. We use "core" data. Does anyone wonder why certain areas get to be bubbles and not others. Wall street nominates the regional fed, they give input and decide where to measure inflation. this allows the data to be fudged and that's why you put you money.

The fed can do what ever it wants, but with out the "cooperation" of the sociopathic bankers it aint going to work. The problem is most of ypu don't think like sociopths and therefore can't understand what is going on.

Lets be clear, if the fed looked at food fuel housing consts we would already be tightening. We are in stagflation, which is exactly what the bankers want. decreasing wages, high unemployement leads to decreases labor costs, inflationary removal of debts, continued cheap funding from the fed, and massive bonuses.

You have to start to realize this is a designed policy that does exaclty what it is supposed to do. transfer the max money form the tax payer to the bankers. These programs were never supposed to work. I can show you evidence of a year ago of me saying exaclty this would happen. Surprise, surprise. All of the programs so far have been scams. they don't get adopted without approval of the banksters, which means they have already figured a way around them before they are adopted. Then the plan is sold to the public like something out of 1984. pure propaganda that ha no basis in reality. folks, the appointments of Geitner, summers, the marginalization of Volker and the reappointment of Bernanke are proof enough that the stuff was designed to fail from the onset. By fail I mean not be good for the economy, but in no way fail the banksters. it has done everything they could dream of, and we still aren't rioting while we are being looted. please !!

Tue, 03/02/2010 - 23:00 | 251859 Ned Zeppelin
Ned Zeppelin's picture

The deposit funds that the Fed has created are re-deposited back with the Fed to earn "free interst." The amounts are so huge (at $1.2 trillion) that over a course of years, even black holes left by the destruction of wealth in the Great Credit Crash of 2008 will be filled, at least nominally by freshly printed dollars, thus repairing the bank's balance sheets.  And in the meantime, a portion of the cheap money can be used to fund the prop desk operations to earn even more money.

But this money is in no way a source of future inflation - it has to be loaned out! And that folks ain't happening for as far as the eye can see. 

Tue, 03/02/2010 - 17:12 | 251510 Ludic Fallacy
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I think it's unfair to attempt to predict, although it's predictable that we do, future hyperinflation, stagflation, or deflation.  The fact is, the (global and US) economy is far too complicated for us to predict how individuals react to macroeconomic variables.  While many can say hyperinflation, stagflation, or deflation are possible, could it be something else, something far worse than we could ever conceive.  What if people decided paper money, as created by our Federal Government and World Central Banks/Treasuries, was worthless and decide to dump the whole system for a pre-industrial barter system?  Unlikely, but it would change the world.  We who live in the financial world would cease to have importance in such a system.  We would be irrelevant with our current skillset. 

Tue, 03/02/2010 - 17:36 | 251541 Anonymous
Anonymous's picture

"We who live in the financial world would cease to have importance in such a system. We would be irrelevant with our current skillset."

Stop now before you get MsCreant aroused.

Tue, 03/02/2010 - 17:39 | 251547 glenlloyd
glenlloyd's picture

With all the other Govt shitnanigans this should surprise no one.

Tue, 03/02/2010 - 17:51 | 251563 faustian bargain
faustian bargain's picture

Here's an interview of the guy who wrote 'The Creature From Jekyll Island'. He breaks down the Fed's money-creating mechanism pretty well for simpletons like myself.


Tue, 03/02/2010 - 18:33 | 251626 hooligan2009
hooligan2009's picture

couple of points. one, dollars are created out of thin air by the Fed, which cost only the paper they are printed on (and the ink). If this was good policy, Japan would have somewhat less than a Govt Debt to GDP of 250%, and more importantly, we could set any level of growth or employment we chose, simply by telling the Fed to use its brains to set such growth and employment. This is patently false and is tantamount to communism via a centrally planned economy. Communism failed, not because, esoterically, it was not fair, but because people lied when they failed to meet goals set by the state. We are caught in the same vice. Debt is exploding at the fiscal level, the Fed is just a paper supplier, performing no social function whatsoever and we have found our companies lying about just about everything, supported by a whole host of regulators and accountants. This article skirts around the topic and the posts flesh it out a bit. But I have heard no-one even begin to broach the fact that there are more dollar deposits outside the US then inside. This became the case in the early 90's (no comment on corruption being exported to corruptible foreginers) and is still the case today even with the Fed trying to build a circle line of dollars going round the equator at ever increasing speeds with no-one able to pick any dollars off. Other central banks have even bigger printing presses, and aorund 3/4 of the worlds currency is either dollars or pegged to the dollar or defined by the dollar. The US economy is less than 1/3 of the world economy by now, so i guesstimate that there is around more than twice as many dollars supplied outside the US compared to inside.

Tue, 03/02/2010 - 23:05 | 251863 Ned Zeppelin
Ned Zeppelin's picture

Interesting point and one which illustrates the strength of being a reserve currency - economies outside the issuing economies decide to use the currency for money provide an additional booster to the fiat's value, even as the issuing country takes steps that arguably debase the currency - one side increases "inherent value", the other forces it down, and  -voila- a sort of currency equilibrium results that benefits intra-issuer users as well as extraterritorial users. Fascinating.

Tue, 03/02/2010 - 18:43 | 251639 Anonymous
Anonymous's picture

So, a question for ZH'ers...

Why do you think this expansion of the money supply has not resulted in hyperinflation as of yet?

Because without it, we'd be seeing dramatic deflation?

Because the banks were never supposed to restore lending with all that money we gave them, that was just what those assholes in the White House said?



Tue, 03/02/2010 - 19:49 | 251709 johngaltfla
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The money has been used to write off losses for prior ABS/MBS blow ups. They have been hoarding cash knowing damned well that the banks are unable to absorb the hits projected for the future thus why they are counting on a long term perpetual easing cycle until the bad assets are totally monetized or absorbed by the public sector (us). If the banks had to actually mark the value of the crap they are holding at 90-93% of par on their books and put it at current market value, well over 60% of our banking system goes 'poof' overnight.


Hell, there wouldn't be a bank left in Florida.

Thus why the problem for old Benron and the boys; if they quit QE in March, once the remaining cash filters into the banking system from last year's experiment and the liquidity is withdrawn, odds are we will experience a severe deflation (monetary contraction at a -7% or greater level) which will absolutely decimate the economy for two more years or a decade plus. We either delever or monetize; care to guess which path the politicians choose and force Benron to take?

Tue, 03/02/2010 - 20:48 | 251739 the grateful un...
the grateful unemployed's picture

Re: Bob Prechter, printing hard cash is the slowest way to induce inflation in the system. Which brings up the question, if you're trying to reflate the economy why choose the least effective path. However if you look at the adjusted monetary base during the 2008 crisis you see essentially a moonshot. The accelerating rate of money entering the system is more worrisome than the raw numbers.

Tue, 03/02/2010 - 23:07 | 251869 Ned Zeppelin
Ned Zeppelin's picture

. . can only enter the system via the bank reserves if the funds are lent out. Or if assets increase on the 10x money creation system. . . still right now, lending has all but halted, ergo:


Tue, 03/02/2010 - 19:01 | 251657 hooligan2009
hooligan2009's picture

money supply only matters in a closed economy, where it is spent/consumed/invested. The US is open, a better solution would have been to force all companies/employers to put their prices up and pay everyone a lot more money. another stupid idea, but just as valid as printing cash to hide losses. fact is the money tied up in non-performing loans is already no different from the creation of pretty paper. both worth double O triple O fuck all blank. the money has to be employed to make a return. when money cant be employed to make a return (ie reflect profits earned or wealth created) then it is useless. swapping one useless for another is just as useless. pretending that assets exist that produce income or wealth is corruption. free markets without intervention sort this out. regulators and the fed act as communist agents by not letting this sorting out process occur, hence you have boom (lots of corruption) and bust (emperors clothes) 

Tue, 03/02/2010 - 19:08 | 251665 Mark Beck
Mark Beck's picture

Interesting, however the premise is the FED is reporting a true representation based on what? Accounting practices (GAAP)? Which ones? How do they price their MBS holdings?

Also, in my opinion, the term liability does not apply to the FED. How much labor was exchanged for buying the MBS buy, only the amount of effort to record it, and much of this was jobbed out. No central banks must be viewed by their actions, plausibility of purpose through the destruction of wealth.

Think of it Trillions of USDs spent to influence real estate asset prices on a de-leveraging asset class. To lose this battle is epic failure. Hence the HAMP extension.

So the notion of applying risk to the FED is unrealistic. There is no price for them to pay, except the one of moral responsibility as Americans.

So the real concern is we do not know the impact of FED actions because they do not report it. Also the statement in the article as per hyperinflation, needs to be clarified.

At this point in time, we have Indeflationold; which is described as a mix of deflationary price pressures and de-leveraging, inflating monetary policy and a need for an asset of real worth, like gold, as a measuring yard stick to compare the fiat currencies against. The trick is to find something of constatnt value to compare against, gold is close, but not perfect. Oil is close but not perfect. So getting too precise is probably not a possibility, unless you have access to a lot of real time information, like the FED, and can produce an custom index. The important point is the economic and investing models rooted in the past, no longer apply to what we have today. I know this is a sweeping statement, but so are the (mis) actions taken by GOV/FED.

As far as FED balance sheet stuff here is a basic one from Khan:


For the latest on the FED balance sheet go to:


Estimated currency in circulation is:

$932,489 Million

It is estimated because they can not track it that close in real time.



Making home affordable:


Well we have the double edged sword of political lunacy manifesting itself in the meddlings of a private market, namely real estate. So the government wants to obligating you to an asset of falling worth. The only way to pull this off, by any plausible recourse for the bank, who understands the price is at a premium, both in terms of real worth and related to mean wages, by the FHA guarenteeing the loan in case of default. What? 

The real story is that, people should not pay for any over priced asset no matter where they get the money, and we see the extent of Governments desperation to prolong the debt de-leveraging cycle.

When you wrap it all together, there is a lot of effort to manipulate real estate prices up. The problem for the Government/FED is who takes the loss (Banks), if it is not refinanced (You).

Now I have to add the common local real estate market disclaimer to my comments with regards to price, but overall prices should continue to drop. I estimate another 20 to 25% from today, depending on actions of the TREAS/FED.

Mark Beck

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