What are they drinking? Last week a well-known stock market commentator said, “There’s been no growth in the money supply for two to three years.” 

He also suggested that recent increases in consumer credit is a positive economic development.

The facts are quite different. The latest date for which data is currently available is the end of November, the most common measure of the money supply, the M2, had risen 11.4 percent since November 2005 and 16 percent since November 2004.

The M2 money stock includes currency, coins and traveler’s checks held by the public; balances in commercial bank checking accounts; balances at credit unions; savings accounts and certificates of deposit accounts less than $100,000; overnight repurchase agreements at commercial banks; and non-institutional money market accounts.

A broader measure of the money supply, the MZM money stock, has risen at an even faster rate over the past few years.

As of Nov. 30, MZM had risen 18.2 percent since Nov. 30, 2005 and 20.8 percent since Nov. 30, 2004. MZM includes all of the components of M2 mentioned before, plus institutional money market accounts and greater-than-one-day repurchase agreements.

Why even talk about the money supply?

Because the faster money is printed the less value it has and prices rise, as the money supply increases, short-term interest rates historically tend to decline, and when the money supply decreases, short-term rates tend to rise.

The Federal Reserve adjusts the target rate for the Fed funds rate by affecting the level of the money supply, or more precisely, by affecting the monetary base.

When the Fed seeks to lower the target Fed funds rate — the rate at which commercial banks borrow (overnight) from one another — the Fed increases its purchases of U.S. Treasury securities in the open market.

One the other hand, when the Fed wants a higher Fed funds rate, it sells U.S. Treasury securities.

The ongoing credit crunch and large sums of money that commercial banks have lent to financially-stressed businesses and to individuals over the past six months has caused commercial bank reserves to fall — even though the Federal Reserve has increased its purchases of Treasury securities.

As a result of the decline in bank reserves, the monetary base has grown at an anemic rate over the past few months. In fact, the monetary base rose only 1.5 percent during December 2007 from the same period a year ago.

With the ongoing credit crises, the Fed will most likely need to significantly increase purchases of Treasury securities to increase the monetary base. Most Wall Street economists have recently been encouraging the Fed to do this to lower short-term interest rates.

What do we think about this recommendation? These so called "experts" are persuading the Fed to increase the monetary base and one outcome is certain if the Fed listens to the desperate advice of these “experts”  in order to try to save the stock market and slow down the foreclosure rates.

The results will lead to the U.S. dollar will plummeting and inflation pressures skyrocketing. Gold prices are already breaking records, will continue to surge.

The biggest problem with freeing up credit right now is that consumers have become far more fearful of losing their jobs and the confidence upcoming economic conditions has fallen sharply and this is exactly what has been occurring over the past few months. So at this point increasing consumer credit is a very negative event.

Especially now when a large droves of consumers are using credit cards AKA: debt to help pay other debts like their home mortgage loans, like they have begun doing over the past few months.

The good news is that there is a way to profit from this type of  “positive” economic development. Get our latest FREE report just released January 11th and take advantage of the "Next Stage "  in the Gold boom.

You can watch your buying power plummet in declining dollars or convert to Real Money. Its your choice.

JMC