It shows what economists call the "monetary base," which in plain English just means the amount of paper money and coins in circulation, plus bank deposits at the Federal Reserve. Banks use their Federal Reserve deposits as a "base" on which to pyramid loans to businesses and consumers.
Look at the gigantic spike near the right-hand side of the graph. Kind of sticks out like a sore thumb, doesn't it? Beginning late last year, the Fed doubled the monetary base within two or three short months. From the graph we can see that the previous doubling of the monetary base took about 14 years.
Enjoy the sales and low prices while they last. At least we have debit cards now, so we won't have to push around wheelbarrows full of paper money like they did in Weimar Germany during their hyperinflation in the 1920s. It'll just be a race to see who can swipe their debit cards the fastest. When the value of the currency falls moment by moment, even seconds can make all the difference.
Oh, it gets even better than that. By some estimates, the government's recent and current spending sprees could inject up to $8 trillion of additional money into the system over the next several years. (The Fed just announced that it plans to inject an additional $1.2 trillion of money into the system.) You're quite right, though; we should expect to see inflation on a staggering level in the not-too-distant future.
ReplyDeleteHaving said that, I don't think it's likely that we will repeat exactly what happened in 1920's Germany. After World War I, Germany had agreed to pay reparations according to the Treaty of Versailles. But then in 1921 came the "London Ultimatum," which demanded two billion marks' worth of gold per year, plus 26% of the value of Germany's exports. That pushed Germany off an economic cliff, and just two years later the mark was essentially worthless. That was the end of the gold standard in Germany; the mark was replaced with the Retenmark, which was not backed by any commodity.
While Germany was pretty much alone in its economic woes during the 1920's, today's governments are overspending in unison. The result is that the dollar is still holding its own in relation to other currencies such as the Euro. I'm not saying that's a good thing; it may even turn out to be worse because we could end up seeing worldwide hyperinflation. Then again, all industrialized nations have adopted the Keynesian model in one form or another, and every official currency around the world is now fiat money, so how else should we expect this story to end?