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Federal Reserve Cranks Up the Printing Press Supply of Money Rising at almost 50% Annual Rate

by Adam Price |
February 2, 2009
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San Jose, CA - Latest figures from the Federal Reserve show that the basic measure of the country’s money, or M-1, rose by $100 billion in the last three months of 2008. M-1 includes coins, paper money and checking deposits, which are all used to buy goods and services and also serve as a store of wealth. This increase in money in only three months comes to an almost 25% annual rate of increase in money.

Economists usually measure what is called the real money supply. This adjusts the amount of money by the prices of goods and services. In the last three months of the year the Consumer Price Index fell at a 12.7% annual rate, mainly due to falling gasoline prices. When the increase in money is compounded by this fall in prices, the real money supply (or amount of money measured by how much it can buy) is growing at more than a 40% annual rate. When you factor in the decline in the economy as measured by Gross Domestic Product, money (relative to the economy) was growing at almost a 50% rate.

Growth of the amount of money in circulation could increase in the near future. The Federal Reserve is talking about buying more U.S. government bonds to try to lower long-term interest rates (it has already pushed short-term interest rates to almost zero). Since the Fed would be creating money to buy the bonds, there would be even more money in circulation. With the U.S. government budget deficit on track to be the largest since World War II, it should be no surprise that the Federal Reserve is creating more money to help pay for the spending and tax cuts to come.

Conservative economists argue that more money will cause inflation. This is not a big concern right now since prices are actually falling, that is, there is deflation going on. Deflation can be very toxic for an economy, and is one of the factors that made the Great Depression so bad. Deflation makes it harder to pay debts, leading to more defaults, bankruptcies and bank failures, dragging the economy down even more.

Big increases in the supply of money could cause the value of the U.S. dollar to fall. This could help the U.S. economy by making our exports cheaper and easier to sell. However imports would become more expensive. Foreign investors might be less willing to buy U.S. government bonds, which would lead to either higher interest rates or the Fed printing even more money to buy the bonds.

Underlying the growing economic mess is the fact that capitalism is a dangerous and irrational system that is facing a crisis of overproduction, where working people do not have the money to purchase the goods they produced. People are living on the streets and foreclosed homes are sitting vacant.

While the future impact of the surge in money creation can’t be known, one thing is clear: Printing more money is typically only done by governments in fairly desperate straits, when they can’t get the money they need from taxes or borrowing. For example, when the Confederate government was on its last legs during the Civil War, it resorted to printing money. The fact that the Federal Reserve has been forced to crank up the printing press is another reflection of how bad the economy is.