September 4, 2012
US Monetary Inflation Update
Steve Saville
As at the end of July the year-over-year (YOY) rate of growth in US True Money Supply (TMS) was about 11.7%. This was the 43rd month in a row in which the YOY TMS growth rate was in double digits, thus extending the record-breaking streak. However, if the current trend continues then the long period of double-digit monetary inflation will soon come to an end.
Switching from percentages to dollars, we estimate the increase in US TMS during the 12-month period ending 31st July 2012 to be $912B. How did this monetary addition come about?
The Fed's direct contribution was roughly zero. The contribution of commercial bank loans/leases was $342B, or about 37% of the total. Commercial bank monetisation of securities contributed another $215B, leaving a balance of $355B. We can't prove it, but we suspect that this $355B balance can be explained by the transfer of dollars from Europe to the US as part of a 'flight to safety'.
While the transfer of existing dollars from outside to inside the US adds to US TMS, it doesn't constitute monetary inflation. For a more accurate assessment of the US$ inflation rate we should therefore deduct $355B from the current US TMS total. When we do this we find that the YOY TMS growth rate drops to about 7.2%.
The last two US economic busts (2000-2002 and 2007-2009) didn't begin until well after the YOY TMS growth rate fell below 5%, but there is no way of knowing in advance the level that will usher in the next bust. An argument could be made that due to the Fed's earlier inflation-promoting schemes the US economy is now in such a weakened state that, like a junkie that needs an ever-increasing dosage of a drug, it now requires a higher rate of monetary inflation in order to stave off a short-term crisis. This argument is reasonable, but there is no simple mathematical relationship between monetary inflation and its effects that can be used to reliably predict exactly what and exactly when. This is one of the reasons that monetary inflation remains a popular policy choice.
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