The Phaserl


Steve Hanke on Hyperinflation, Money Supply, and the Great Unwind

from Financial Sense:

With the Fed “printing” so much money, why has the U.S. not experienced hyperinflation?

The main thing that confuses people is that the Fed’s contribution to the money supply—that is, what I call “state money”, which is high-powered money produced by the Federal Reserve—is only about 15% of the total money supply. The other 85% is what’s called “bank money”—that’s money or deposits created by private banks. What we’ve had since the fall of 2008, when the crisis started, is the Federal Reserve opened the floodgates and almost tripled the size of its balance sheet and as a result of that, the contribution of state money to the total money supply has gone from 6.5% of the total being produced by the Fed to an amount now equal to about 15%. So, it has increased its contribution enormously, but it’s still small potatoes relative to bank money.

You have another money supply index called Divisia or M4. Can you explain that for our listeners and, since it’s starting to rise, what that means for the economy moving forward?

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