07 November 2013

Adjusted Monetary Base Is On a Tear Again - Efficient Markets Policy Error

I thought we would drop in at policy central and see what the Fed has been doing with the US money supply using its policy and regulatory powers.

The first chart shows that the Adjusted Monetary Base is growing by leaps and bounds. This is Billions of Dollars in Fed Balance Sheet expansion.

This chart shows the leaps and bounds of monetary base growth a little more clearly, since it is the growth of the base, in Billions of Dollars, but in year over year terms. Those are essentially trillion dollar growth swings.

This next chart indexes a number of measures to the economic trough in 2009, for sake of comparison.

It shows the growth in the Fed's monetary base, as well as the excess reserves being held by the Banks.

Below those it shows Wages, Consumer Credit, M2 Money Supply and the Velocity of M2, that is, the rate at which money is being used by the real economy.

We should bear in mind that despite all the hoopla, sturm und drang, and whining by the Wall Street banking elite, the US financial system is still largely unreformed.

This situation brings to mind a quote about economic policy from John Kenneth Galbraith:
“Trickle-down theory represents the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”

― John Kenneth Galbraith
There wasn't a Fed database entry for the income of the one percent, but if there had been it would be doing very well indeed.

I did not include this in the already busy chart above, but here is Total Assets of All Commercial Banks, using the same indexing method that was used above.  Looking past the rhetoric, the priorities seem fairly clear if you look at the growth trend in assets starting in 2011, and then look at the same time period in the chart above.

This is when the Fed implemented QE2, from Nov 2010 through June 2011, and then began 'Operation Twist' in September 2011.

QE3 started in September 2012 and continues today.

I think that history may view the co-opting of the urge to reform the banking system, and the outrage at the Wall Street bailouts, into the Tea Party's strong popular backing for financial repression of the victims, and the centering of the political debate on throttling government spending for the public good while propagating a financial system that heavily favors and subsidizes the wealthy financiers, to be one of the great propaganda coups of the 21st century.

Almost as good is running a populist presidential candidate, packaged as a progressive reformer and widely denounced by the opposition as a socialist, who in policy practice is the virtual reincarnation of Herbert Hoover, but without his many prior logistical accomplishments.