I’ve been writing about the vast increase in the U.S. money supply and I’ve wondered out loud what will happen when the economy returns to some semblance of normal velocity. While loosening credit is a good thing in an economic shock, there can be too much of a good thing. And if this chart from the St. Louis Fed doesn’t scare the bejesus out of you, nothing will.
As Peter Robinson points out in The Corner, we’ve never been here before. That small blip in 2000 was the Y2K expansion (remember Y2K?), when the Fed loosened the purse in anticipation of a technology-induced lockup that never happened. And remember what happened thereafter? The market peaked in March 2000 and then went down, down, down as the Fed soaked up the excess cash from the economy.
At this point, we’re in a position where both fiscal restraint and monetary policy are out the window. The most likely scenario seems to be a period of deflation followed by severe inflation. And since inflation is a monetary phenomenon, the only tool left to the Fed will be to tighten the money supply dramatically.
Amity Shlaes, call the Congress. Please.
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The market is already starting to figure this out and pricing accordingly . . . gold is starting its price ascent. As for the dollar, well, watch out below!