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Today we got news
that the U.S. monetary base consisting of bank reserves and currency in
circulation has skyrocketed to $1.15 trillion from $850 billion a mere 6
weeks ago, which is an increase of 35%, or 300% annualized. Meanwhile, the
Adjusted Monetary Base tracked by the St. Louis Fed (which calculates the
monetary base using bi-weekly averages) clocked in at $1.19 trillion. Here is
how it looks on a chart:
The Fed has added as
much to the monetary base in 6 weeks as it has added in any prior 10 year period
going back to the early 1980s. Indeed, the rate of increase appears to be
about $100 billion every two weeks and yet the logjam in the credit markets
still has not been cleared.
So, is this the
fabled helicopter drop? Yessirreee! There is, however, a slight matter that
deserves some mention. The money dropped from the helicopter has not reached
the ground yet. In other words, most of this money is still being held by the
banks in the form of Reserve Balances. Put another way, it has not yet
started to work its way down through the fractional-reserve lending process
to the credit-strapped private sector.
The reason these
funds are being held and not loaned out by the banks is simple. The Fed is
actually paying banks to hold the funds in reserves. Indeed, the Fed has just
today increasing the rate it is paying by 40 basis points. Some
of you may know that the Fed was originally going to start paying banks for excess
Reserve Balances starting in 2011 but the recent emergency bailout
legislation moved that date up so that Reserve Balances would start to earn
interest immediately. The Fed’s intent is to try to keep the massive
increases in Reserve Balances close to the heart so that these funds serve
mainly to shore up the banks’ balance sheets but don’t create a
tsunami of “unnecessary liquidity” in the money supply. Remember
what I said earlier about jumping out of a burning building. In helicopter
lingo, the $300 billion has been dropped but it is fluttering in midair due
to an updraft created by the rotor.
I suspect, however,
that the Fed will have to dispense with its “gradualism” before
too long and fly the helicopter to open airspace in order to avoid a crash.
Even if the Fed has no intention of moving clear, the longer the money stays
out there fluttering in midair, the more difficult it will be to keep it
aloft. Moreover, once the dropped money has cleared the updraft from the
helicopter’s rotor, it can no longer be reclaimed by the Fed without
consequences, especially while the global economy remains on an unsure
footing. Thus I suspect most of the dropped money will eventually flutter to
the ground.
What I think we
should watch for in particular is an increase in M1, which includes
circulating currency (Federal Reserve Notes) and demand deposits. The latest
data only goes up to October 13, but that data actually shows weekly average
M1 shrinking by as much as $100 billion since the end of September. If and when
we see M1 reverse sharply upwards, we could start to suspect that the first
batches of the monetary drop are starting to reach the ground and that a
“hyperinflationary event” will not be very far behind. How long
could this take? I give it 6 to 18 months although others say it could be
literally weeks from now. Jim Sinclair claims something big will happen in 13
to 88 days, which is the timeframe between the U.S. elections and the
inauguration of the next President.
Tom Szabo
Silveraxis.com
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