by Alasdair Macleod, Gold Money:
Put simply, so long as a central bank decides to hold interest rates at a chosen level and is prepared to provide liquidity to any bank that requires it, the central bank stands in the market to offer unlimited quantities of money at the stated rate. As a result central banks are like motorists who do not know how to reverse from lack of practice. And the only times they apply the brakes are when bank credit is expanding more rapidly in proportion to measures of narrow money, and then always too late to avoid an accident. This is the well-established sequence of the monetary cycle of boom and bust.
The continual expansion of deposits was even true during Paul Volcker’s time at the Fed, and is illustrated in the chart below of true money supply (TMS), which is comprised of cash and liquid deposits at the commercial banks and covers the years of his tenure.
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