Money Multiplier

When you analyze the relationship between the Federal Reserve and fractional reserve banking, there is always a discrepancy between the amount of paper cash in circulation and the amount of money supposedly deposited in bank accounts.

The M0, the smallest measure of money, calculates only the amount of money that has been printed as cash and bank reserves. Currently, the M0 money supply of US dollars resides at roughly $1.7 trillion. The M2 money supply, which includes hard cash and the value of savings, money market, checking and other demand accounts, is just over $8.2 trillion.

How can this be? The answer is the multiplier effect. Thanks to the way fractional reserve banking works, as well as how the Federal Reserve operates, commercial banks have the ability to expand the money supply up to 10 times greater than the amount of hard cash in circulation! Obama and the US government know this fact, and they are pushing commercial banks to make loans to increase the money supply.

Why Create More Money?

In the long term, more money created by process of inflation always proves to destabilize the economy. Eventually, prices catch up with the newly created money, and all that has occurred is a transfer of wealth to the person or business that used the new money first from the person who used it last.

Since the market can take up to 18 months to adjust for inflation in the money supply, those who first have access to new money get a quick benefit because their dollars have yet to lose their spending power.

Politically Popular Policy

In addition, the process of inflation proves to be politically popular. By inflating the currency, the administration in power can show an economic benefit as more money changes hands and inflation remains near zero. However, as consumer prices catch up with the value of the currency, the next recession begins, and government proposes more inflationary procedures to “stimulate the economy.

One well known economist, Paul Krugman, advocated a new real estate bubble, which could be propped up by inflation, large government spending and easy credit. Although the new real estate bubble would increase prices, history shows time and time again that bubbles are only temporary.

Why Own Precious Metals?

Not a single government economist or Fed chair since Paul Volcker has been willing to create a deflationary environment by decreasing the money supply and allowing empty credit to drain from the system. Instead, year after year, recession after recession, government takes the easy way out, inflating the currency and enjoying the few in between years of “economic growth.” Luckily, precious metals investors can be a benefactor of bad policy by profiting on inflation with the ownership of gold and silver coins.