Fed rapidly increases money supply, stokes inflation concerns

Posted on June 11, 2009

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The chart above, from a Wall Street Journal article by Arthur B. Laffer, illustrates the rapid and sudden increase in the monetary base of our economy as controlled by Ben Bernanke and the Federal Reserve. It follows a percentage of growth in the money supply, which shows that the supply was growing steadily with small spikes at the Y2K scare and after 9/11.

As you can see, though, the amount of money in circulation massively jumped in September 2008 as a result of the economic crisis. At no time in the last 50 or so years has the money supply grown by so much at such a quick pace. Laffer argues that some of this monetary expansion was necessary to alleviate concerns about the availability of cash, but that the sheer size of the expansion of the monetary base was unprecedented and most definitely overkill. Now he says that the Fed ought to decrease the amount of money available, which might cause another short-term dip in the economy but will prevent devastating inflation down the road.

Like Laffer, I’m skeptical that such a contraction will take place. Bernanke won’t risk a public hit in popularity, and President Obama sure won’t force him to do it. As a result, the large pool of money will lower the value of the dollar, drive up inflation, and force suffocating taxes to pay for already unfunded public entitlements. That reality becomes even clearer when you look at the chart of the projected budget deficits with Obama’s 2010 budget and the stimulus package figured in:

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It’s either print more money or hike up taxes to pay for the drastic budget shortfalls, and right now the Fed and the Obama administration are choosing to print more money rather than risk complete voter meltdown over a skyrocketing in tax rates during a recession. This is what happens when you don’t exercise fiscal restraint, whether you’re a Democrat spending wildly or a Republican signing off on an ill-advised TARP bailout.

Ed Morrissey recognizes this pattern from a previous sector in history: the Weimar Republic in Germany, which crashed down in utter failure due to runaway inflation and economic ruin. Let’s pray we’re not headed down that road.

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Posted in: News, Politics