Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Making Sense of the Money Supply

Economics / Money Supply Nov 03, 2010 - 06:34 AM GMT

By: Chris_Riley

Economics

Best Financial Markets Analysis ArticleWith the Fed’s rapid expansion of the monetary base in recent years, many commentators have pointed out that this has not led to growth in the money supply and hence the Fed is powerless to deal with “deflationary” forces in the economy.


The first point to note is that rapid expansion in the monetary base has not yet led to runaway monetary growth. The expansion in the monetary base has been used to prevent the money supply from collapsing. This does not preclude the possibility that money supply growth will runaway in the future, particularly if the Fed is left holding assets that it does not, or cannot, liquidate quickly. However, is there any direct link between money supply growth and price inflation?


We see that the relationship between monetary growth and commodity price increases is not particularly strong. For example, there was a big increase in commodity prices in the 1970’s and yet monetary growth was not unusually rapid, whilst the 1980’s and the 1990’s were times of negative commodity price growth, even though monetary growth was substantial through these decades. So what is going on here: what is actually driving commodity prices?

The statistic that should really concern us is monetary growth, not backed by economic growth. As the economy grows through productivity increases; prices should decrease. The only way to prevent this decrease is through monetary growth. Monetary growth in line with economic growth will result in stable prices; monetary growth above economic growth will lead to increases in prices. So we had rapid increases in commodity prices in the 1970’s in spite of tepid monetary growth because productivity was decreasing. We had negative growth in commodity prices in the 1980’s & 1990’s because productivity was increasing, even as the money supply was increasing at a slower rate.

So now we have a clear understanding of the relationship between monetary growth and prices; how do we explain the explosion in commodity prices this decade? Although monetary growth has been in line with previous policy over the last 30 years, we are seeing a decline in productivity in western economies as governments tax and regulate economies more and more. This dynamic is, in itself, able to cause increases in commodity prices. The Fed should have allowed the money supply to collapse in line with productivity in order to stabilise commodity prices. But they expressly avoided this by expanding the monetary base, so commodity prices will continue to rise.

By Chris Riley

For more articles and charts, check-out my new website: www.goldbugz.co.uk

© 2010 Copyright Chris Riley - All Rights Reserved

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Neptune Global Holdings LLC (Neptune). The author has made every effort to ensure accuracy of information provided; however, neither Neptune Global Holdings LLC nor the author can guarantee such accuracy. This article is strictly for informational purposes only and a sampling of diverse editorial opinion.  It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Neptune Global Holdings LLC and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  Neptune does not act as, nor offer the services of, an investment advisor. Individuals should conduct their own due diligence before making any investment choices.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules