Underreported Money Supply may be Disguising Hyperinflation

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“Consequently, the traditional definitions of the Ms are outdated because they do not capture the total quantity of dollars in circulation.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

The Daily Reckoning