Rocky Vega

Is annualized M1 money supply growing at three times the rate the Federal Reserve is reporting?  This is a critical question recently explored by Zero Hedge, which believes the actual growth rate of US dollars “is approaching hyperinflationary levels.”

According to Zero Hedge:

“For historical reasons unimportant to the point of this analysis, the Federal Reserve in the past has only created cash currency.  However, the unprecedented changes it has engineered over the past two years have resulted in a vast amount of deposit currency being created by the Fed.  Instead of purchasing paper from the banking system solely with cash currency – its traditional form of payment to ‘monetize’ assets by turning them into currency – the Federal Reserve since the start of the financial crisis has increasingly relied upon deposit currency to purchase paper.

“Regardless how the Federal Reserve pays for the paper it purchases – cash currency or deposit currency – it is creating dollar currency and perforce expanding the money supply.  But the traditional definition of M1 does not accurately capture this process when the Fed uses deposit currency to pay for its purchase.  In fact, it is totally excluded.  Because the Federal Reserve did not create deposit currency in the past, none of the Ms take it into account.

“Consequently, the traditional definitions of the Ms are outdated because they do not capture the total quantity of dollars in circulation.  Because M1 is underreported, so too is M2.

Unprecedented Deposit Currency Creation by the Fed

“There has been an unprecedented amount of deposit currency created by the Fed over the past two years.  The following chart illustrates this point.  It shows the quantity of demand and checkable deposits, i.e., the amount of deposit currency, at the Federal Reserve since December 2002.

“From December 2002 until the collapse of Lehman Brothers in September 2008, the quantity of deposit currency created by the Fed averaged $11.8 billion, an amount that is relatively insignificant compared to total M1.  Presently, it stands at a record high of $1,246.2 billion, which of course is highly significant.

“More to the point, none of this deposit currency is captured in the traditional definition of the Ms.  The quantity of dollar currency is therefore significantly underreported…”

The full description of how the deposit currency creation process may be hiding hyperinflation is available from Zero Hedge. Visit its coverage of the underreported US dollar money supply, including a second chart, for all the details.


Rocky Vega,
The Daily Reckoning

Rocky Vega

Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let?s Go Publications, Harvard Student Agencies, and The Harvard Advocate.

  • Charles Anderson

    If we enter into hyperinflation will the government modify mortgage loan balances to track inflation in order to protect the banking system, not to mention Fannie & Freddie? The government has already stepped in and modified mortgage loans in favor of families (lower rates, forgiveness of principle, change to fixed rate, etc) “for the good of the country.” So the precedent is already there. They might protect the banks next time through mortgage loan balances being tracked to inflation.
    Also, what about long term liabilities like social security and medicare that are indexed to inflation? On one hand if the social programs aren’t indexed properly such as this “hidden inflation” suggests, or in the case of hyperinflation, the elderly will revolt. On the other hand if they are indexed to hyperinflation, if hyperinflation does happen, then the country will be in a similar debt trap as before, but everyone US citizen will have their wealth destroyed. Foreign governments and companies would buy up everything and anything for rock bottom prices due to their currencies being worth so much when exchanged for dollars.
    If this nightmare occurs and the dollar does lose its value, then it’s also possible that the whole western world engages in money creation to eliminate their debt, but then we would end up obliterating the global economic structure and trade = great depression.
    Is this financial / economic nightmare even close to being over?
    I foresee China coming across the Bering Strait with 100,000,000 people into Canada and the western US. An equitable trade for their worthless dollar holdings?

  • JR

    The current administration has already added over 1 trillion in new money into circulation. This is roughly equal to the total amount of money in circulation. History tells us that new money added to circulation doesn’t always manifest its inflationary effects overnight, so we may have another year or so, but it could happen sooner – a TRILLION is a lot of money. How can we not have hyperinflation??

    Once high rates of inflation are apparent, foreign governments will see the value of their US bonds falling and will probably begin dumping their holdings of dollars, thus accelerating hyperinflation. Once the cost of everything is skyrocketing, the government will not be able to collect taxes fast enough, and it will have to resort to printing even more money (as happened in Germany about 100 years ago when 99% of their government spending was with printed money and only 1% from tax receipts) further speeding up the hyperinflationary death spiral.

    What seems to matter as far as initiating hyperinflation appears to be when government deficit spending via printing money increases to about 1/3rd of revenue. When a country crosses this line, hyperinflation starts sometime in the future, but nobody really knows how long in the future. The USA just crossed this line for the 1st time.

    Inflation, or in a severe case, hyperinflation, is a local event; it does not affect currencies in foreign countries, and may even help their stock markets via shifting purchasing power to unaffected countries. It will be very bad for anyone who is not prepared.

  • Me

    The idea behind this article is illogical. Regardless of whether any monetary creation has been “hidden”, it would be impossible to hide hyperinflation. Prices have only increased 3% y/y.

    Wake me up when we have a real crisis and not just a manufactured one.

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