2. The Overstimulated Monetary Base
Our money supply, or monetary base, is simply the total amount of currency in circulation plus commercial bank deposit reserves. Since the crisis, in addition to the Fed’s balance sheet quintupling, our monetary base has quadrupled from ~$850 billion to $3.6 trillion. These are two of the largest forms of monetary stimulus used to prevent the Great Recession from becoming another Great Depression. We are grateful to have avoided another depression, but how do we get rid of the stimulus outlined above without sparking new unintended consequences?
Meanwhile, from 1/1/08 to 12/31/16, the U.S. economy (real GDP) has only grown 12.3% or 1.3% annualized growth1. In 2016 the U.S. economy had a record 11thstraight year with real GDP growth less than 3%2. Politics aside, we wonder if the economy has grown enough to absorb the stimulus outlined above. Put simply, the monetary stimulus that has been injected into our economy is larger than anything tried before and we are concerned that any hint of inflation may cause interest rates to rise rapidly due to this monetary stimulus leftover in the system. We also worry that if the Fed or another entity starts to sell a significant portion of the bonds it owns (large selling means more supply without increased demand) it will likely just add to the rising rate fire!
Interested in Part 3? Stay tuned for next week's post continuing the state of the bond markets and facts to consider.
1. The Balance: U.S. GDP by Year Compared to Recessions and Major Events. The Strange Ups and Downs of the U.S. Economy Since 1929. Kimberly Amadeo, March 1, 2017.
2. CNSnews.com: U.S. Has Record 10th Straight Year Without 3% Growth in GDP. Terence P. Jeffrey, February 26, 2016.
