I found these two charts rather fascinating: The first shows the overall increase in the Monetary base since 1990.

It was expanding for 18 years at a pretty good clip — then it exploded with the financial collapse in 2008. The 2nd chart shows swings in the dollar index since then.

All charts courtesy of The Chart Store

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Category: Currency, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “Monetary Base, Dollar Swings”

  1. socaljoe says:

    The dollar index compares the the US dollar relative to a basket of more or less equally flawed paper currencies. The decline in the real value of the dollar is much worse. I fear that most of the decline is embedded in the system, but latent, and has yet to express itself. A chart of the dollar index shows me whether the US dollar is leading or lagging the race to the bottom.

  2. mddwave says:

    Helicopter Ben is exactly what he did.

  3. holulu says:

    So, it means that SILVER will hit $100 and GOLD will meet $2000 within the next 18-24 month :)

  4. Permabear says:

    My question is what is going to happen when the Fed ends QE2. I have read that they will continue to buy Treasury and othe securities using proceeds from their current holdings. So it’s not like they are stopping their purchases of securities cold turkey. But that monetary base chart may flatline come July as it did to one degree or another at the end of QE1. Remember that after QE1 the stock market corrected about 16 percent, the economy showed signs of wobbling and the Fed was forced to come back in with QE2. My personal prediction all along, strongly against the current consensus, is that we will see QE3 by the end of the year. The economy and stock market are like a drug addict, totally dependent on Fed stimulus. Take away QE and the economy and stock market go into withdrawal. Optimists suggest that the economy is now self sustaining. How self sustaining can an economy be when the Fed is buying about 70 percent of the Treasury bonds being issued?

  5. RW says:

    The $USD is back to where it was three years ago — no news there — and those who seek an absolute standard of value in a world where value is ineluctably relative continue to fret — no news there either — so …?

  6. jankynoname says:

    To get the full picture, you also need to show what has happened to excess reserves in the banks, which has skyrocketed. Almost all of the increase in the monetary base has flowed into excess reserves (around 50% of bank assets versus ~0%-10% historically). The real inflation/devaluation will take place once banks start to lend in significant amounts and draw down these excess reserves to historic norms. Then we’ll see a massive increase in the circulating money supply, and inflation will be unavoidable.

  7. Fred C Dobbs says:

    The charts cover different periods and are misleading. Try comparing ‘like’ periods, with ‘like’ periods.

    ~~~

    BR: They are not supposed to cover the same period — its the run up to the 2008 crisis, and how the dollar has traded since. (Its about context, not symmetry)

  8. bulfinch says:

    But, uh….silver isn’t worth 100 per oz.

    At all.

    Ever.

    For any reason.

  9. KentWillard says:

    Monetary base is not the same as money supply! It may not mean what you think it does.

    Monetary base is currency + bank reserves at the Fed. What has happened is that QE1 and QE2 flooded banks with money, and the banks then deposited the money back at the Fed as excess reserves. The banks didn’t need the deposits because their loan portfolios are shrinking. Importantly for both definition and understanding, bank reserves at the Fed aren’t part of the money supply because they don’t circulate in the economy – they can neither be spent nor lent.

    Look at money supply over the long run. M2 is Friedman’s favorite and isn’t distorted by a change in preference from time to demand deposits during the crisis and subsequent ultra low rates. M2 has been growing at a steady rate for 15 years, even during QE1 and QE2 it has increased at a pretty stable rate. By historical terms M2 isn’t soaring, even though the Fed created $400 billion in the past 5 months. But the increase in the Fed’s credit holdings (which is mostly QE1 & QE2 purchased assets) does match very closely to the increase in excess bank reserves at the Fed.

    This is by design. The Fed started paying interest on excess reserves during the crisis so that interest rates would have a floor and the banks wouldn’t do something crazy with the new money. Excess reserves are a pressure release valve for the Fed. If the Fed wants to, they can now pull back on inflation and money supply by either selling QE1 and QE2 securities back into the market (sucking up cash), or raise the interest rates they pay on bank reserves, or pursue traditional tightening methods. The Fed has more tools than ever to fight inflation.

    Most of the money that the Fed created is back at the Fed within 60 days. Remember that QE1 was the Fed buying $1.1 trillion of MBS, and when it ended mortgage rates were supposed to skyrocket because all the artificial Fed demand had ended? What happened? Mortgage rates actually fell to record lows (partly due to Greece fears, which will really default someday), and this was before QE2 was expected.

    Do analysis for yourself rather than listening to political hype and propaganda. FRED (the Fed’s Internet data tool) is a great place to start. Here are some examples I created today on M2, Fed Credit, and Excess Reserves which show in pictures what I’ve discussed in this long comment:

    http://www.kentwillard.com/5-ducats/2011/04/graphs-on-m2-fed-credit-and-excess-reserves.html

  10. barniebrains says:

    Your posts on the value of the dollar are right on the money. This is where the focus should be right now because we have just broken through an important DXY support level set in 11/2009 of 74. Not sure where this is going but this could get ugly. This is why I still feel precious metals are only beginning their bull run.

    Would be interested to know if you’ve read the Wiedemer brother’s book “Aftershock” which discusses their predictions about the bursting of the public-debt bubble and dollar bubble in the next 2-3 years. Its a fascinating book that talks about our multi-bubble economy (housing, stocks, private-debt, public-debt, dollar bubble, discretionary spending bubble) and how they are all bursting and putting downward pressure on each other. Fascinating stuff: aftershockeconomy.com

  11. Bernie X says:

    M3 is right where it was in Feb 2008, about $13.8 trillion.

    Our money supply has NOT increased in over 3 years.

  12. ruetheday says:

    If you superimposed the second chart onto the time period it comers (1/2008-Present) on the first chart, you would see:

    ….absolutely no relationship whatsoever between the monetary base and the value of the dollar.

    Sorry, but the earlier poster was absolutely correctly, the two different time horizons on the charts is very misleading.

  13. dead hobo says:

    holulu Says:
    April 24th, 2011 at 9:21 pm

    So, it means that SILVER will hit $100 and GOLD will meet $2000 within the next 18-24 month :)

    reply:
    ———–
    No, you should be using a variant of the consultant’s method of time estimation for your commodity price forecasts.

    A consultant’s time estimate would multiply by 2 and go to the next highest time frame. 1 week becomes 2 months. (Although back in the day, some used the lowball technique exclusively just to get in the door.)

    In this case silver will be $100 in 3.6 to 4.8 months. While this may be a little optimistic, I still think you can sell it in some circles, or at least a close variation. Perhaps $200 in 1.8 to 2.4 months?

  14. rip says:

    @dead: Play at your own risk.

    Gold, maybe, but when the big boys decide to take some profit. Duck. Especially if capital gains tax goes up. Which they should.

    All the capital gains rate is doing is fueling speculators. And free money from the fed.

    I played silver in the 80s on some bad advice. But it was a hedge. I had a new ARM and figured if inflation went up silver would follow. And balance my increasing mortgage rates.

    As it turns out, there are too few people controlling commodities markets. And when they choose to bail the rest get to eat it.

  15. VennData says:

    More Californians support taxes to Fix Budget

    http://abclocal.go.com/kgo/story?section=news/state&id=8092195

    God needs to send an earthquake down on them. His Son was fervently anti-tax, especially when it comes to the rich, The Bible says “It is easier for a tax account to walk through the eye of a needle than to stick his nose under the tent of a camel with the intent to audit… a heaven-bound man.”

    Also…

    “Getting rich is glorious”

    Renowned Christian, Deng Xiaoping

  16. wildebeest says:

    @ jankynoname, KentWillard, Bernie X

    you’re spot on.

    http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=EXCRESNS&s1range=5yrs

    http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=M2&s1range=5yrs

    yet despite FACTS we keep hearing hysterical comparisons with Zimbabwe and Wiemar Republic from some nut jobs.