Money supply explosion will lead to accelerating
inflation
This article was originally posted at
GoldMoney
2011-DEC-17
This
is the time of year when City pundits produce their
forecasts for the forthcoming year. Historically there
has been little point to this exercise. Instead, here is
the one chart which defines the background to all events
in the coming years. It is the Mises
Institute's True Money Supply (TMS) for the US dollar.
TMS consists of cash, checking accounts and no-notice
deposit accounts, as well as a few other minor cash
balances. It represents the actual cash and electronic
cash in the system that is instantly available for
purchases of goods and services, and the chart goes back
to 1959.
The dotted line is the exponential growth trend, in
other words the maximum rate of growth that can continue
for ever. This trend was valid until mid-2002, since
when TMS has accelerated at a faster rate, telling us
that TMS growth entered a hyperbolic phase when the Fed
eased rates in the wake of the dot-com collapse. Put
another way TMS is already hyperinflationary.
Bear in mind that economists are now telling central
banks to accelerate monetary growth even faster to
offset the tendency for bank credit to contract. They
see no other way to avoid a bank balance sheet implosion
with all the deflationary consequences that implies. So
the prospects for 2012 and thereafter are for TMS to
continue its hyperbolic trend, and incidentally supply
funds for a government deficit completely out of
control. Also bear in mind that when such a trend
becomes established it becomes almost impossible to
stop, since the whole debt-based economy and the banking
system would collapse.
The second chart shows gold’s established hyperbolic
course. This chart was put together by Armand Koolen, a
Dutch physicist, after reading James Turk’s and my
writings on gold and economics. In Koolen’s words, the
hyperbola fits in with the official gold price in the
early 1900s, the revaluation to $35 in 1934, the onset
of the secular bull market in 2001, the bottom in
October 2008 and its approximate track since then.
His discovery is interesting. Singularity for this
curve, or the point where the gold price goes to
theoretical infinity, is in February 2014, only 26
months away. Unless this long-term trend is somehow
broken, gold is also telling us the dollar is heading
for hyperinflation.
It would be a mistake to vest magical powers in such an
extraordinary discovery, but given TMS itself is showing
signs of going hyperbolic we must sit up and take
notice. And we know how difficult it is to stop printing
money at an accelerating rate: after all, the ECB’s
reluctance to do so is threatening to collapse the
eurozone. Will the Fed pull the trigger on the US
economy or chicken out? The answer is clear.
So in 2012 we can expect a further escalation of
money-printing. This being so, it will be followed by
unexpected and accelerating price inflation. Nominal
interest rates will then rise at the market’s behest,
bringing a sovereign debt crisis for the dollar with it
as the cost of borrowing for the government escalates.
And the world is on a dollar standard, which is why the
chart of TMS tells us all we need to know about 2012.
