becoming Governor of the Federal Reserve, Ben Bernanke co-authored several
text books familiar to college students studying economics. In one of these
text books, Macroeconomics, the question of
whether government budget deficits can lead to ongoing increases in the money
supply is both asked and answered.
answer is yes.
"The link is the printing of money to finance
government spending when the government cannot (or does not want to)
finance all of its spending by taxes or borrowing from the public. In the
extreme case, imagine a government that wants to spend $10 billion (say, on
submarines) but has no ability to tax or borrow from the public. One option
is for this government to print $10 billion worth of currency and use this
currency to pay for the submarines. The revenue that a government raises by
printing money is called seigniorage."
appears that over the last few months, Mr. Bernanke has been putting these
concepts into practice.
following graph takes weekly data released from the Federal Reserve Bank of St.
Louis for the adjusted monetary base of the United States.
The monetary base consists of all currency in circulation (known as M0) plus
reserve balances with the Federal Reserve banks. These reserve balances (also
known as "vault cash") do not directly enter the general money
supply. Instead, they comprise the reserve requirement of the banks under the
fractional reserve banking system.
is the revenue derived from the face value of a currency net production
costs. Thus if it costs four cents to produce a crisp new dollar bill, then
the net revenue is 96 cents. Larger denominated bills are even more
this source of revenue isn't without consequence. Expansion of the money
supply reduces the value of those notes already in circulation. Initially,
this cost may be well hidden, especially when the country is enjoying a
strengthening economy. But as the currency diminishes in value, larger and
larger amounts are needed to support government expenditures.
present-day hyperinflation of Zimbabwe is the latest example of a currency in the end stages of excessive
Mike Hewitt is the editor of www.DollarDaze.org, a
website pertaining to commentary on the instability of the global fiat
monetary system and investment strategies on mining companies.
Disclaimer: The opinions expressed above are not intended to be taken as
investment advice. It is to be taken as opinion only and I encourage you to
complete your own due diligence when making an investment decision.
© 2007 DollarDaze