Inexorable Money Supply Growth

Michael Pento

ECB President Mario Draghi is promising to increase the level of base money, hoping to increase the rate of broad money supply growth. In other words, to do whatever it takes to dilute the euro's purchasing power and create more inflation. Apparently, the answer to Europe’s problems is more of what created its troubles in the first place.

China’s PBOC has injected record amounts of currency into money markets and lowered the reserve requirement for banks. This has caused China's money supply to increase 14.8% YOY, the fastest pace in 15 months.

In the US, anemic growth persists and jobless numbers continue to rise. GDP and earnings growth is just about flat. The Fed’s 0% interest rates for the last four years have caused money supply to increase 7% YOY.

Governments and central banks are lowering interest rates and pumping money into the system in order to re-inflate asset prices and releverage the economy. Although they have been successful at debasing their currencies, an increase in money supply growth and inflation does not lead to an improving economy. When taken to the extreme levels we see today, it results in a protracted period of weakening economic growth.

Money supply growth should never eclipse labour force + productivity growth. When inflation rises faster than GDP, malinvestments are created and asset bubbles form. Today, a dangerous bubble is being created in the developed world’s bond markets. And government debt is being systematically monetized by central banks, slowly destroying any confidence left in fiat currencies. As that faith erodes, GDP growth will continue to decrease in real terms.

As long as governments continue to produce massive annual deficits that are purchased by their central banks, the global economy will continue to stagnate and inflation will increase. Equity markets may rise, but the increase in equity values seldom keeps pace with the rate of inflation.

Only through owning hard assets can the goal of attaining a real rate of return on investments after taxes and inflation be achieved.

source: gold-eagle