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Source link: http://archive.mises.org/10211/how-much-money-inflation/

How Much Money Inflation?

July 1, 2009 by

The Federal Reserve is lying about the nation’s money supply (M1). The current figure for money supply is being given as $1.6 trillion. The actual number is $2.34 trillion. The reported number is equivalent to an increase of 16% over the past year. The actual number is equivalent to an increase of 70% over the past year. This compares with the nation’s high money-supply increase of 16.9% in 1986. FULL ARTICLE


Mike D. July 1, 2009 at 10:03 am

Not to be a party pooper, but I really can’t stand charts that purport to indicate a degree of change over time, but do not set the X-axis to 0. The numbers are daunting enough without skewing them like this, and mises.org is better than this sort of thing.

Andy Stedman July 1, 2009 at 10:07 am

Mike — I was about to make the same comment. And, the second chart is in $million, and clearly labeled as such, but the first chart is inexplicably in $1000s.

Sean July 1, 2009 at 10:38 am

Mike and/or Andy,

Could you explain to the non-experts, such as myself, why your points are important?

Curt Howland July 1, 2009 at 10:41 am


If I start a chart at 5, I can “show” a change from 6 to 8 as a tripling of the height of the line/bar.

It’s a common tactic by people who want to make changes look more extreme than they are.

I doubt there’s a deliberate effort to obfuscate in this case, but the objection is valid. Keeping a standard base, just like a constant scale, is just nicer.

Jardinero1 July 1, 2009 at 11:01 am

To complete the picture; one should compare changes in the money supply to changes in the value of credit assets, i.e. bonds, and changes in the velocity of money. When you make that comparison there is actually a massive net decrease in money, as of late.

Sean July 1, 2009 at 11:16 am

Curt, thanks.

Nick Bradley July 1, 2009 at 11:34 am

Why do people continue to focus on only part of the money supply? The rate of “debt unwinding” — destruction of credit — is higher than the rate of monetary expansion by the fed. That’s why the market has priced long-term debt instruments like the 10 and 30 year treasuries at such a low yield.

Global bond traders are not stupid. If inflation or hyperinflation were right around the corner (within 10 years), or if global bond traders thought it was even a risk, yield would be far, far higher.

The Fed is, essentially, papering over massive credit destruction with new dollars. They did the same thing during the Great Depression — inflation did not ensue. The Bank of Japan tried the same thing — no inflation.

According to Mish, total private sector credit contracted a whopping $1.85 trillion over the past year. Based on that number, the amount of credit contraction is twice as large as Katz’s estimate of money supply growth!


MC May 28, 2011 at 5:30 pm

Nick – there may have been “credit contraction” – however, this contraction has not shown up in either MB or M1. If there was true credit/money contraction, shouldn’t both M1 and MB be lower? Instead, MB is four times higher than it was in 2006/7 and M1 is double what it was in 2006/7, if using the 2.4 trillion figure for M1 in this article.

To the author: thank you for this article it helps illuminate some of the obfuscation by the Fed.

One question I have is whether anyone has determined some sort of relationship between either MB or M1 and gold.

billwald July 1, 2009 at 11:44 am

>First, the Federal Reserve prints up paper money.

The essay is essentially crazy. Less than 2% of the US money in circulation is paper and half of THAT is outside the country. The only people who would miss cash money are dope sellers, tax cheats, congress bribers . . . .

geoih July 1, 2009 at 12:05 pm

Quote from Nick Bradley: “Global bond traders are not stupid. If inflation or hyperinflation were right around the corner (within 10 years), or if global bond traders thought it was even a risk, yield would be far, far higher.”

Really? That’s why they all predicted the many financial turmoils that have occurred in the last 100 years. Yeah, global traders are all truly brilliant and we should trust them.

Mashuri July 1, 2009 at 1:19 pm


Shouldn’t TMS have dropped then?

Nick Bradley July 1, 2009 at 1:34 pm


All I’m saying is that the yield on treasuries has been priced to incorporate the inflationary expectations of bond traders. The current yield on treasuries tells me that bond market participants do not anticipate inflation.

MC May 28, 2011 at 5:31 pm

Nick that is brilliant logic – it would have served you well if you bought dot com stocks in 1999.

Nick Bradley July 1, 2009 at 1:48 pm


No. TMS does not include marked to market values of bank credit.

BioTube July 1, 2009 at 1:50 pm

Mr. billwald, there’s nothing I can’t stand more than anticash idiots. Electronic money is far too easy to inflate – at least paper’s got some sort of limit.

Alex Liberov July 1, 2009 at 2:55 pm

I’m not an economist, so please explain to me where I’m wrong or send me a link where I could read more about it.
1. The Inflation depends not on total amount of money, but rather on amount of money in circulation. If bank borrows money from Fed, but doesn’t lend it and if business borrows money, but doesn’t spend it, that idle money does not affect inflation.
2. Is there a place that monitors total business expenditures and total employee compensation broken by sectors? Until we see an unusual increase in spending in some or all economic sectors it would be early to talk about inflation.
3. I understand that if the money is ready to spend, just waiting for the right time, can Fed somehow withdraw the extra money when economic conditions improve?

Thanks in advance.

Nick Bradley July 1, 2009 at 3:12 pm


1. Yes — the money has to be loaned into circulation in order to effect inflation.

2. I think the CPI captures some of that data.

3. From my understanding, the Fed can increase the rate they charge to withdraw money from the banks.

RichF July 1, 2009 at 3:48 pm

Well, let’s be rigorous in our definition of inflation. It’s an increase in the money supply. It doesn’t depend on what happens to that money. Price increases are only a symptom of inflation.

Beta Hater July 1, 2009 at 3:52 pm

Nick Bradley,

Yields fall when the FED buys treasuries. Furthermore, yields are depressed if speculators expect the FED to continue purchasing treasuries in the future. The current treasury bubble is driven by short term speculators. Do you really believe anyone is purchasing bonds with the intention of clipping coupons for the next ten years?

Your historical arguments are meaningless. We did not have a fiat money system during the Great Depression. We were not the largest debtor nation in the world. During the 1990′s, Japan had a high savings rate and they were not a debtor nation.

Excess Reserves have increased by 1,400% over the last year. This means demand deposits can increase by 1,400%. Explain to me how the FED can pull these reserves out of the system without making a huge mess?

Jonathan Finegold Catalán July 1, 2009 at 3:53 pm

To those complaining about the graphs, the real important information is not effected by where the X-axis is placed. The important information is the quantity of the increase in money, which is perfectly portrayed by these graphs.

If a person is fooled because they don’t know how to read graphs, then that’s another matter entirely.

Lee July 1, 2009 at 4:25 pm


I take you’re genuinely interested in treasuries *shudder*… It’s a dark world my friend. (this is a bit of a read, so you might want to get a cup of tea or coffee)

You see treasuries are like any other commodity, it’s current value doesn’t necessarily represent its future value. If commodity values are going down, then a reasonable person would switch their position from the commodity to cash. (The old buy low, sell high stratagem)

In comes the U.S. treasury. Ideally, when the government borrows, it would like to borrow at 0% interest, or even better, get paid to borrow -% interest (btw, this actually happens). But if they can’t sell debt at 0% they gradually start increasing rates, 1%, 2%, 3% ect… until they find enough buyers, or until they reach a interest rate that is unreasonable.

Now, if you knew that you could buy one of these things and sell it for more you probably would (speculation). Or, maybe you bought one of these things because the dollar is worth more vs. a commodity than it used to be (hedging). Or maybe you’re China, and buying these things because it’s a better alternative than other options right now (self preservation). All of these things kind of coalesced and drove interest rates down. Combined with decreased demand for other goods, and an increased demand for the dollar, the U.S. has been able to sell debt cheaply.

And now back to your original contention. If people knew that these things were poison, then why take it? Why wouldn’t interest rates go up even more than they are right now?

Because at this very moment, the dollar is the only choice a lot people have. It sucks, but what are you gonna do, right? It’s the global reserve currency and practically guaranteed to not totally evaporate so long as it remains the global reserve currency. In essence, this is all short term activity. Already, according to the WSJ, the U.S. is having to increase interest rates.

But no one wants to hold onto physical cash and just sit on it (it doesn’t make any money), consequently people buy treasuries and sell them when the opportunity presents itself. Treasuries produce interest, and can increase in (cash)value. It’s perfectly legal to resell treasuries, and a great many people do.

Interest rates are down because there are buyers for the here-and-now (esp. China), but as soon something better comes up you’ll see the U.S. treasuries market tank, and interest rates WILL skyrocket. Big time. Marc Faber says this will be the short of the century. When this happens exactly is uncertain; it’s hard to pinpoint.

So, yes, interest rates are low right now, but the same people that are buying huge swathes of U.S. will be the same people selling huge swathes of U.S. debt when the time comes. The U.S. is printing money 24/7, and due to the current global economic downturn they’re getting away with it without having to increase interest rates by very much.

However, when the U.S. can’t afford to borrow anymore, and the world switches in part or as a whole to another reserve currency, the U.S. will have no other choice than to default on its debt, or increase the money supply. According to this mises.org article, the U.S. has taken the domestic monetary suicide path, and the author is providing evidence via graphs to prove it.

As a side note, this reply is a bit of a mash up of the following articles:





Shay July 1, 2009 at 5:05 pm

Mike D. wrote, “I really can’t stand charts that purport to indicate a degree of change over time, but do not set the X-axis to 0.”

Neither can I, but if you read the article you’ll find that it was showing that the monetary base was increased past the money supply. Unnecessarily forcing a zero axis would have doubled the size of the graphs, or shrunk the useful portion of each by half. Admittedly, a single graph with both plots would have been best.

pb July 1, 2009 at 5:39 pm

The graphs were perfectly appropriate. When one uses a bar graph, the x-axis should be set to zero because the length of the bars invites comparison. When one uses a line graph, it is not necessary to set the x-axis to zero because what is being shown is the trend. In the case of these line graphs setting the x-axis to zero would merely have had a lot of blank space below the relevant lines and needlessly taken up a great deal of room.

Nick Bradley July 1, 2009 at 5:44 pm

Beta Hater,

The 10-year bottomed out in December at 2.04% — BEFORE the Fed announced their plan to buy $300B in treasuries. When they announced their plan, treasuries dropped from 3% to 2.5% — then rose back up. The Fed has not acted on their pledge to buy $300B in Treasuries and probably won’t. That’s a clear act of monetizing the debt and the last thing they want to do is cause systemic collapse.

Treasury yields reflect supply and demand pressures as well as inflationary expectations – -the TIPS spread is one of the more reliable measures of inflationary expectations out there.

Speculators? Please. Foreigners are continuing to buy up treasuries at a frenzied pace and I don’t see it slowing down.

And we most cetrainly DID have a fiat monetary regime during the 1930s — it would be absurd to say otherwise.

Nick Bradley July 1, 2009 at 6:07 pm


Thanks for your insights. You are correct in that the poor global investment environment is contributing to the strength of the US treasury.

But buyers aren’t going to take on that kind of risk (of a treasury bubble collapsing) for such a low return. As a result, buyers have either priced upcoming inflation at a low enough level that their real return is acceptable, or they see the risk of the dollar losing its position as the reserve currency as very low — or both.

Brian Macker July 1, 2009 at 6:55 pm


Mish is only partially correct. I posted a comment on his blog that was utterly devastating of his claims. He moderated it out of existence before anyone could see it. It was in response to his criticism of Gary North’s article. It had two main points: 1) Mish’s belief that gold should go up during a deflationary credit crisis is ridiculous because the metal has been demonetized “de jure”. We aren’t on a gold standard.

It’s clear that gold is going up because of a belief that the current deleveraging will force political action to inflate. Which will result in future inflation. If we do get deflation as Mish says then this speculative increase will collapse.

Mish claims that gold goes up during credit crisises because of security. In fact, when the crisis was hot and heavy back in fall of 2008 and people were scrambling for liquidity gold moved in exactly the opposite direction from what Mish claims should happen.

2) He made an incredible blunder with these claims in the article:
“Thus, if banks had to pay interest on reserves, rather than causing mass inflation, the Fed would cause mass panic.

Indeed, the likely result would be banks scrambling for dollars to repay the Fed as opposed to a mad dash to lend dollars.”

The blunder is his belief that bank reserves held at the fed are money owed to the Fed by the banks. That’s got things completely in reverse.

Mish’s behavior with regard to my comment puts him in the same company as Brad Delong as to his allowing honest and open debate on his blog. That is, he suppresses critical comments that have bite and lets through weaker arguments he can deal with to make himself look good.

Sure we are in a period of deleverage but government will be sure to pump money in order to prevent price deflation (and to reward friends). This situation is in no way similar to Japan on many other factors.

BTW, Mish’s chart on what is associated with deflation/inflation is totally bogus also.

Beta Hater July 1, 2009 at 7:23 pm

Nick Bradley,

What in the world makes you think that foreigners are going to continue purchasing our debt at a “frenzied pace”?

China was a net seller of U.S. Government debt in April. On top of that, they have been swapping out long term treasuries for short term notes (this is not a vote of confidence). Chinese officials have openly expressed concern about the strength of the U.S. Dollar. Russian President Medvedev announced plans to discuss the creation of an alternative to the U.S. dollar with Brazil, India, and China.

You need to relearn your history. The U.S. was on a gold standard during the 1930′s, Inflation was limited by the international specie flow price mechanism. Your historical arguments are meaningless.

You dodged my primary question: Explain to me how the FED can pull the staggering amount of new reserves out of the system without causing serious problems?

newson July 1, 2009 at 8:04 pm

to nick bradley:
steve saville does a good job in pointing out where mish goes wrong:


newson July 1, 2009 at 8:16 pm

steve saville deserves a plug for being one of the few investment-writers with a thorough understanding of austrian theory. his free stuff is archived here:

Jordi July 2, 2009 at 3:19 am

It seems that the link http://www.thegoldbug.net has permanent errors …

Brian Macker July 2, 2009 at 7:28 am


Thanks, I didn’t know about that guy, Steve Saville. In fact, I wasn’t following links to him in the past because I had misread them as Steve Sailor.

He’s certainly has a clearer understanding of Austrian theory than Mish. I do like the graphs Mish posts but sometimes he gives them the wrong spin.

Alex July 2, 2009 at 11:09 am

I’m surprised that no one has commented on so-called “retail deposit sweeping,” which serves to lower measured M1. I read that the banks have been engaged in this activity since 1994.

I have no idea why this sweeping activity is allowed, however, Katz’s arithmetic is a big problem. He makes two serious errors. Katz states that the St. Louis Fed told him that almost half the transaction balances (actual M1) are excluded from measured M1 by retail deposit sweeping. This figure was also reported by the St. Louis Fed in 2003. Since the current measured M1 is $1.6 trillion, the correct estimate for the actual M1 would be double this figure or $3.2 trillion (not the $2.34 trillion Katz estimates). Also, the estimated figure for the actual M1 a year ago would be double the then reported figure of $1.38 trillion (which figure I read off Katz graph)-in other words, $2.76 trillion. As a consequence, the estimated increase in the actual (unswept) M1 over the past year would be from $2.76 trillion to $3.2 trillion, an increase of 16%, as the Fed reports.

Gerry Flaychy July 6, 2009 at 9:35 am

To Alex.

The 1,6 include the currency part of M1 in addition to the deposit part. So it is correct to double only the 740, and then add it to the total 1,6.

In the may to may calculation, Katz forgot to double the deposit part wich is about 600, for a new total of 1,97 instead of 1,37. The increase for the year is thus of the order of 18% instead of 16% and 70% !



ralph August 31, 2009 at 2:23 pm

Regardless of the details of Mish’s interpretation of deflation and inflation. The fact remains. Mish was screaming “deflation”, “collapse” just like the NYT in December of 2008. On the other hand Mr.Katz was pounding the table to his subscribers to buy the equity markets, and Gold. The s&p 500 at the time was just above 800, and Gold was $790. Listening to Mish is a complete waste of time. Listening to Mr.Katz will make you a buck. Katz’s interpretation of the commodity pendulum based on Austrian business cycle theory and the Kennedy tax cut is excellent and useful. Mish’s commentary is useless drivel.

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