Who Stopped the Printing Press?

Between August 11, 2008 and the end of 2011, the U.S. monetary base almost tripled with a Bernanke-Fed injection of $1.7 trillion dollars.

Most of the dollars created in the stimulus programs (QE 1 & 2) after 2008 did not make it into circulation to be spent by small businesses (the largest job creators) or consumers (the driver of the US economy). They’re either parked at the Federal Reserve or the world’s central banks as foreign reserves (many countries hold US dollars in their foreign reserve accounts, China has trillions of US dollars, most of these dollars will never make it into circulation).

Currently, the monetary base is not expanding and money is not circulating – the velocity of M2 money supply in the United States is at a record low. This is fueling deflationary fears. Add in the multiple fears of a China slowdown, the EU imploding and the US slipping back into recession, we can see why commodity prices are falling.

Lately, gold is not responding to the U.S. dollar’s strength or weakness as much as it responds to the increase in the US monetary base and the decline in the velocity of money.

  • Are the Federal Reserve and the world’s central banks done with increasing the global monetary base?
  • Have they given up in their attempts to revive credit and fuel another economic “spend your way to riches” prosperity bubble?
  • Is austerity here to stay?
The velocity of money in the United States (how often does money change hands) is at record lows.

Consider This

  • Governing parties are suffering major losses in election after election as anti-austerity parties make gains.
  • Unless continuously “fed” with new credit the global financial system will implode, when confronted with this possibility governments always respond in the same way – by printing more money.
  • The world’s governments have unlimited printing presses.
  • France has elected a socialist leader who will likely demand an end to austerity.
  • The European Central Bank has accepted that growth should take precedence over balanced budgets.
  • German Chancellor Angela Merkel’s CDU party won only 31% of the vote in Scheleswig-Holstein, the party’s worst showing in 50 years. Merkel’s hard line austerity programs, so unpopular in the rest of Europe, are increasingly being viewed with skepticism at home in Germany.
  • Greek voters just delivered a resounding anti-austerity election verdict – more than 50 per cent of them cast votes for parties opposing public spending cuts. If there’s another election in Greece this summer there is a high probability of Greece defaulting and exiting the Euro.
  • Federal Reserve chairman Bernanke has made it clear he’ll step in with more easing if necessary.

Assessment

Someone hit the pause button on the global printing press to take stock, fix methods and do a review of the success achieved to date. Global markets are in a free fall and investors are running for cover. How long before the printing press resumes?

By Rick Mills

Richard Mills, author and host of Ahead of the Herd, is an active investor and commentator in the junior resource sector. Rick’s work covers the spectrum of company analysis and macroeconomics.

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