A Paralyzing Rise in Money Supply


Adam Hamilton of ZealLLC.com reminds us that “Inflation is purely and exclusively a monetary phenomenon”, which doesn’t mean all that much by itself, but becomes much more horrifying when he adds that Money of Zero Maturity has been zooming. In case you were wondering, Money of Zero Maturity (MZM) is considered to be a reasonable proxy for watching the movement of M3, which is the broadest measure of the money supply, which is important because inflation in the money supply means that inflation in consumer prices is coming.

Now that we have the academic stuff out of the way, the truly horrifying part of it all is when Mr. Hamilton says, “Absolute annual MZM growth peaked at a staggering 16.7% in March 2008”, and that “Bernanke’s Fed has been ramping money-supply growth so fast that actual MZM is starting to look parabolic even on a short-term chart. In just over 2 years under him, MZM has ballooned 25.1% unchecked!”

Apparently, he mistook the look of sheer, paralyzing horror on my face at this revelation of such a massive expansion of the money supply (because it will lead directly to inflation in consumer prices), to be mere confusion on my part. Helpfully, he reiterated for my benefit, “You read that right. There were 16.7% more US dollars available for spending this March than last! Sooner or later all this excess money will eventually bid up prices. Some of this inflation will be perceived as good, primarily the part that flows into stocks. But the part bidding up scarce food and energy is not going to make Americans very happy.”

He goes on to say that these rates of growth in the money supply “defy the imagination. At 12% growth compounded annually, it only takes 6 years for something to double. At 16%, this drops to well under 5 years. If the Fed doesn’t stop this madness, there could be twice as many dollars floating around in 5 or 6 years as there are today. Even with modest economic growth, this means general price levels would probably almost double.”

Prices that are doubled in five years? Yow! “And,” he adds, “this inflation is totally above and beyond all the supply-and-demand-driven global commodities bulls’ increases!”

And it is all because (as I never seem to tire of saying) of the over-creation of money by the Federal Reserve. Martin Hutchinson of The Bear’s Lair figures that I am too narrow and provincial, and writes that apparently I am too stupid to realize that there is monetary insanity everywhere, and that “other countries have also been expanding their money supplies excessively. The European Central bank has allowed euro M3 to expand by 11.1% in the three months to March 2008, following an increase of 11.5% during 2007.”

He goes on, “As in the United States, this increase is much faster than that of nominal GDP, and it had been continuing for several years, with annual growth rates of 7.4% in 2005 and 10.0% in 2006. Of the major emerging markets, China and India have both been operating expansionary monetary policies and now have considerable inflation problems. Vietnam, too, has been surprised in spite of its rapid growth by inflation surging towards 25%.” Yikes!

Even more bad news is that “the Reuters CRB commodity price index is up 24% since September 18 last year”, which means that prices are rising alarmingly, while this is at the same time as incomes are falling, as evidenced by “earnings in the financial sector, representing more than 40% of total US earnings before the crisis hit, have essentially disappeared in the last two quarters.” Yikes!

I know firsthand what it means to have income disappear, mostly as a result of my pathetic “cry for help” of stupidly cashing my paycheck and somehow spending it all on drinking and gambling during one short weekend that is now mostly a big blank in my mind. When I got home and discovered that we had no food or money to buy any, the crap I had to take from my family over the next few months – and occasionally reminisced about to this day – was memorable, to say the least, and so I can only imagine the screaming and yelling and crying when “40% of total US earnings” disappears! Yow!

And I can only imagine the screaming, yelling and crying in the retirement sector, as all retirement funds take huge, huge freaking whacks and people learn, once again for the zillionth time in history, that investing in the stock market over the long-term is, at best, a loser for the majority of investors, and a loser for everybody at the worst, and all because of inflation in the money supply and the inflation in prices, which is the reason for my crying.

Mr. Hutchinson ignores my crying and blubbering about the horror of inflation that is starting to devour us, and callously increases my horror by saying, “In the United States, the producer price index increased 6.9% in the year to March, while that for crude goods increased more than 30%. Like a bowling ball swallowed by a python, that inflation will move through the economic system and eventually be reflected in consumer prices. Indeed, it may already be showing up there; the seasonally unadjusted consumer price index for March was up 0.9% (an annual rate of around 11%) and only a heroic seasonal adjustment of 0.6%, double the next largest seasonal adjustment for any month in the last ten years, brought the figure down to an acceptable 0.3%.”

The biggest “seasonal adjustment” in the last ten years? And the best it can do is bring March’s annualized inflation to almost 4%? We’re freaking doomed!

Except, as I will add for the zillionth time, for the people who buy gold and silver…(hint, hint, hint.)

The Mogambo Guru
for The Daily Reckoning Australia

Mogambo Guru
Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.


  1. Inflation is the friend of the debtor. It is also the tool being used by the Fed to socialise Wall Street’s losses, assist mortgagees and reduce real incomes (though they won’t admit any of this directly).

    If you subtract 1% (optimistically presumed) economic growth from 17% money growth you are left with 16% inflation. Is that correct? Maybe Mogambu is an optimist!

    Coffee Addict
    June 3, 2008
  2. I think a lot of people are underestimating the effects of inflation. Inflation will change the entire economy.

  3. Fantastic

    June 4, 2008
  4. Richard Daughty writes: “inflation in the money supply means that inflation in consumer prices is coming”

    Most folks will tell their false beliefs about inflation like this.

    “Inflation is a net increase in money supply”


    “Inflation is a net increase in money supply and credit. Deflation is the opposite.”


    “Inflation is a rise in all prices.”


    “Inflation is a rise in the General Price Level.”

    Never can men “inflate the money supply” and since there’s no such thing as a monolithic “one-price” consumer price for all goods, it’s impossible for consumer price inflation to be a true concept, a true belief about existence. In short, believing in a Keynsian Price Level is akin to believing in Tooth Faieries and Hobgobblins.

    On Money

    Folks never stop and then start to think about the phrase “money supply.”

    Buyers and sellers act and swap Commodities, one for the other.

    Money is a commodity. It’s the thing you trade for another thing, say oil for money or wheat for money.

    Man must depend on the graces of nature to deliver wheat, even with his science of farming, while he can wily print as much money as he thinks he can scam others with until credit relationships break down.

    Where you find offers of money (supply), you find calls for money (demand). What gets swapped (sold) is money down now for a promise to pay more money through time.

    Said another way, notes and coins that you can spend now get swapped for the right to collect more notes and coins in any future.

    On Inflation

    Inflation is a process used by those who control the economy to increase the Efficiency of Money.

    The goal of inflation is to increase the growth of Commerical Credit for NEW OUTPUT of manufactured, mined and farmed goods. When this happens, we call this growth Economic Expansion.

    Under Central Bank systems, Central Bankers use Inflation to cheapen the price of money hoping to expand Capital Opportunties through cash renting for manufacturing and production (mining, farming) purposes.

    Inflation happens when those in power (Central Bankers) want to increase internal trade (Home Economy) through these: increased number of opened contracts, increased rate of cash payment for transaction settlement.

    A wanted increase in Commercial Credit relative to Money is the wanted EFFECT of inflation.

    Often an increase in now money is an effect of inflation that does not work as wanted.

    On Money and Capital

    When Money Men swap money for right to collect more notes and coins in any future, money buys capital. Capital comes from cash rented (money down now) put to use for manufacturing, mining or farming.

    Capital is not a thing that you have that you invest. There is only money, a commodity, which can be swapped for rights to other commodities — wheat, corn, gold, shirts, pants, brake pads, future money. When men swap now money for rights to future money, we call those rights — CAPITAL.

    The man who buys capital, buys a right to claim either a stream of payment — a bond — or the payoff of a bet — expected dividend. Capital comes from cash rented used for manufacturing, farming or mining.

    The Cash Rentee who sells his rights to future income (Capital) gets cash down now sold to him from the Now Money Seller. Next, the Cash Rentee buys resources — workers and their labor capital, metals, fuel.

    The rate of growth of New Commerical Capital in ratio to the money base (notes and coins) is the True Inflation Rate.

    Should inflation work, more New Issues of Preferred Stock, Commerical Paper and other investment instruments arise to attract Money.

    Should inflation work, more folks gain goods and jobs as manufacturers, farmers, miners hire workers.

    Likewise, Central Bankers use Deflation to raise the price of money in hopes of Recession (Excess Speculative Credit Shrinkage).

    Using deflation, Central Bankers try to stop the growth of credit that gets put to use on ever crazier new product ideas.

    When the growth of credit for bad ideas happens, circumstances become dire. When bad credit collapses, excess money made from credit must go somewhere and it does.

    Those winners holding money from collapsed faulty credit bets bid up prices on existing things, resources which can become future inputs to manufacturing.

    Money is the highest form of Credit and Credit is another word for Debt. Credit and Debt are other names for Capital.

    The man who buys capital puts at risk his cash (now money of notes and coins). The danger the Capital Buyer faces is Total Loss less any insurance (side bet) and Return from Salvage at street prices for assets of the venture.

    In the advent of the demise of a venture, the buyer of capital might get back some cash for assets to be sold under bankruptcy.

    When credit relationships collapse and before the mad dash to bankruptcy, those who were first to get paid hold Actual Money.

    When Big-time Money Holders of US Dollars cannot find new capital to buy, these High Rollers buy Futures Contracts on Resources. They use Actual Money to bid up prices on manufacturing factors, factors from farming and mining (oil, wheat, rice, timber, etc).

    Holders of rights to real stuff (Sellers of Resources) believe they must get paid sooner rather than later. They lack belief in any future with Credit (=Debt = Capital) Relationships.

    Prices rise because of the lack of quality Capital Opportunities — new issues of preferred stock, infrastructure bonds, commercial paper– and because of a lack of quality consumer loan cash rentees.

    Always, someone gets paid with money from credit bets. Contractors and workers who built houses were paid. Lumber yards were paid. All were paid whether the price of houses went up or down, whether houses get sold or not.

    Those who buy Capital from Builders or Bankers might not get paid. Builders could get stuck with houses that they cannot sell. Bankers who buy capital (house loans) from mortgagees (cash rentees) might not get paid.

    Good Commerical Credit built the world folks. When the focus of credit becomes Consumer Credit or Speculative Credit, moneyquakes follow.

    The Many confuse gambling (secondary market speculation that hopes for price appreciation) with investment (cash rented for return; aka capital in primary markets).

    Speculating men corrupt capital. Gambling men pervert capital. Only Investors and Shopkeepers grow wealth and prosperity.

    Smack MacDougal
    June 4, 2008
  5. I’d need to check with you here. Which is not something I usually do!
    I take pleasure in reading a submit that can make people think.

    Also, thanks for permitting me to remark!


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