Money Supply

Developing China’s M2 money supply has been rising by a large 20% and Russia’s by a very large 30%. Even developed countries such as Switzerland have seen money supply growth of 25%. Japan’s M2 is gradually moving higher after the ‘Lost Decade’ and after recent events exacerbating an already fragile situation. Global money supply growth is increasing by 8%-9% per annum. Meanwhile annual gold production is less than 1.5% per annum. We looked at money supply growth and charts regarding global money supply, debt levels etc in a comprehensive article in early August (‘Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not’ - http://www.goldcore.com/goldcore_blog/gold-bubble-14-charts-facts-and-da... ) when gold was trading at $1,670/oz or much the same price level as today. The charts and conclusions remain apposite. In order to fight economic problems brought about due to too much debt, debt based paper and electronic currency has been created at historically high levels. There is no sign of this abating any time soon given the scale of the global financial and economic crisis.

By now everyone has read Ambrose Evans-Pritchard's article discussing the historic plunge in the M3, which speculates that due to the failure of attempts so far to reflate the economy, Obama is likely considering a renewed stimulus. To validate his point, Evans-Pritchard quotes Tim Congdon of International Monetary Research": "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly. Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantitative easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty." SocGen's Albert Edwards chimes in with an observation from a slightly different angle, namely that the collapse of global FX reserves, whose explosion until 2007 "fuelled both global GDP growth and the credit bubble," which are simply indicative of global imbalances and are a very useful measure of total liquidity, are now plunging. This merely reinforces the deflationary pressures of the plunge in money supply, and forces the Fed into a corner from which there is no escape except by activating another multi-trillion QE program. Yet away from the US, Edwards argues that the huge imbalances within the Eurozone will serve as the seeds of its own destruction.

As the financial crisis has unfolded over the last two years, the Federal Reserve has been responding in a variety of unprecedented ways. Therefore, it is logical to assume that these never-before-used actions have altered long-established ways of viewing things. One area that has been impacted is the US dollar money supply.