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Defying the protestations of precious metals investors, a former U.S. Federal Reserve President argues that U.S. money supply has been declining since Chairman Bernanke announced the upsizing of Fed's open market asset buying program. Supported by recent data, the lack of money supply growth should assuage fears of U.S. hyperinflation and reduce the attractiveness of gold-related investments.
Bob McTeer spent 14 years as President of the Federal Reserve Bank of Dallas during a 36 year career in the Federal Reserve system. From his current post as Distinguished Fellow at the National Center for Policy Analysis, Mr. McTeer writes,
"[the] assumption that the Fed is printing boatloads of money simply isn't true. … The latest estimates from the Fed's H.6 Money Stock Measures show M2 growth actually declining since the Fed resumed significant asset purchases last fall.
Asset purchases by the Fed normally lead to a multiple expansion of money since, at the margin, reserve requirements are only about 10 percent of deposits. The roughly $2-trillion of asset growth from before the financial crisis through QE2 was largely offset, however, by an expansion in excess bank reserves of $1.6 trillion."
Our chart, showing three month change in U.S. M2 money supply, supports Mr. McTeer's contention that "printing money" is not currently an issue for the U.S. economy. Similarly, the contention of bank hoarding is evident in the Fed's velocity of money (the speed at which funds spread through the economy) calculations. Sharply declining velocity strongly suggests that banks are not lending.
As long as major U.S. banks continue to hoard cash reserves rather than use them as a capital base for client loan growth, money-based inflation fears are misplaced. By extension, investors in gold with the intention of benefitting from a dilution in spending power of the U.S. dollar are also likely to be disappointed.
Mr. McTeer's comments are important in an environment where fears of Weimar-style hyperinflation abound. But, it is also important to note that Mr. McTeer's attempt to mitigate the hysteria only for this moment in time. If the U.S. economy, and particularly the housing sector, continues its recovery, a surge in bank loan growth will bring inflation fears and gold right back to the forefront.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow