Saturday, December 13, 2008
Checking in on the AMB
Once again, let's take a look at the AMB. I have given two images, the long range and an expanded view of the last few years: The first thing to notice is that we are now in one of those grey-bar areas, which means we are in recession, which I predicted the last time I wrote on this subject. The NBER finally gave the official word a few weeks ago that we've actually been in recession since the 4th quarter of 2007. Of course, we Austrians already knew that. The second thing to notice is that the insane jump in the money supply has stopped, and in fact fell ever-so-slightly these last few weeks. That tremendous jump is the result of the TARP program (notice that the size of the jump is about $700 billion). This is very good news. The massive asset grab by the FED has ended. If the FED ever sells these assets, the value will fall; but of course, if the FED starts buying Treasuries, as Bernanke has threatened, it'll shoot even higher, and you can bet that mass inflation is in the pipeline. I'm hoping that the FED doesn't do this, it sells the TARP assets off over the next few years, and the AMB falls back to roughly mid-2008 levels. But I suspect that this won't happen. Its a pipedream. So why aren't we seeing mass inflation now? Here's another graph: This is the MULT, which is basically a graph of the multiplier effect the fractional reserve banking system has on the AMB as it circulates through the economy. It is the ratio of the AMB to M1, which is one of the several measures of money. It only includes actual currency and demand deposits (checking account balances). This is a graph of M1: We can see that it has not risen nearly as much as the AMB. The money being created by the FED is not making its way into the circulating money supply very efficiently, and is therefore not being multiplied by the fractional reserve banking system, thank God. It is mostly staying within the vaults of the FED. So, once again we have: expanding money supply (monetary inflation), with falling prices (supposed "price deflation") as a result of the recession. We'll see how long it lasts.