Comment: It isn't just the money supply; it is also the rate of increase

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It isn't just the money supply; it is also the rate of increase

and the rate at which it is spent.

Here are some charts for reference.

http://www.nowandfutures.com/key_stats.html

The rate of increase in the money supply has been higher than at some points in the past, but not high enough to offset the slowdown in the movement (velocity) of money.

QE increases bank reserves, not money supply directly. More reserves allow Commercial banks to create more checking account balances out of thin air to loan out if they can find qualified buyers, but just increasing reserves (or the monetary base) is not itself an increase in money supply. Credit tightening is driven by fear, and this inhibits money supply growth, irrespective of now huge reserve levels.

When bank loans are repaid, the money supply goes down, just the opposite of when the loans are initially made. So reducing debt (de-leveraging) is a deflationary force contracting the money supply. What has been happening is that government debt has been increasing so that pushes up money supply as they borrow newly created checking account balances, but much debt repayment from the private sector is occurring.

It is interesting that just today Obama and his pals have suggested minting a $1 trillion platinum coin and depositing it with the Federal Reserve Bank, thus creating a simultaneous $1 trillion bank account for them out of thin air. If they really do this, it will bypass their need to borrow money. Indeed, they could deposit many of these and pay off the federal debt. But this would eliminate the drag of debt repayment and open the door for a hyperinflation feedback cycle to be unleashed.

In the debate over hyperinflation and deflation, I have always argued that debt and higher prices are the anchors that make deflation much more likely as debt and higher prices overwhelm the economy, but this suggestion by Obama would be a game changer and we could quickly resemble Wiemar Germany and Zimbabwe.

I think the failure of the current debt based monetary system is just the proximate cause of the current economic malaise. This monetary system essentially pledges future economic growth to the banks who have a monopoly on creating money and loaning it into circulation, indenturing the public to them. The public must create wealth to live and repay the debt and interest. If wealth creation is suppressed then the debts cannot be serviced and the system crumbles.

So what is preventing increased wealth creation (economic growth)? Most importantly, it is the compound increase in the amount of energy that must be expended to acquire more energy to fuel the economy. This is a result of the "low hanging fruit principle" where the easiest, most profitable deposits are exploited first, leaving the difficult, least profitable deposits for later, only late is now. For example, in 1930 it took the equivalent of 1 barrel of oil to get back 100. Today it takes the equivalent of 11 barrels of oil to get back 100. This is a growth rate in cost of 3% or a doubling of cost every 23 years. Each year on average, more energy must be expended to get those 100 barrels of oil; in 23 more years it will take 22 barrels to get back 100, and in 46 years it will take 44 barrels.

Some research has shown that when it takes 11 or more barrels of oil to get back 100, economic output is constrained to the bare essentials. As a society, we can not any longer afford luxuries, advanced health care, and higher education; there simply isn't enough energy available to fuel an economy that includes these things, and since food and shelter are more important, individuals choose the most basic necessities of life first. If government interferes and requires the economy produce higher education and advanced healthcare, then something more essential must be given up. This is why higher education and advanced health care are hot button issues today, and why there is demand that the rich be taxed into poverty to force them to give up luxuries. This will not end well as the economy contracts repeatedly for want of sufficient energy to fuel it. Economic decline at the rate of 5% will cut economic output in half in 14 years, rinse and repeat. This is the future of the real economy, irrespective of whether the federal government eventually engineers a hyperinflation or the natural reactionary force of debt and high prices bring us deflation. Government efforts to change the future will only make it worse.

"Bend over and grab your ankles" should be etched in stone at the entrance to every government building and every government office.