US Monetary Base Hits New Record

Precious metal prices have endured a correction in trading this morning, following last week’s impressive gains. Gold remains above support at $1,750, while silver is still above the important $35 mark, however. Yesterday the G20 warned that it was not prepared to contribute more IMF cash to eurozone bailouts until eurozone governments have themselves made more contributions to the European Stability Mechanism (ESM).

As the Telegraph reports, markets had been hopeful that the G20 would agree to provide extra support. Add to this signs of disagreement between the Germans and Americans – with the latter once again demanding Germany and others dole out more bailout cash – and it’s no surprise to see a slight “risk off” move in the markets this morning, with equities struggling, crude oil prices slipping and the dollar rising against the euro.

Today also sees the German Bundestag vote on the €130 billion Greek bailout deal agreed to last week; chances are they will of course endorse it, though Interior Minister Hans-Peter Friedrich has stirred things up slightly by suggesting that Greece be “given an offer it can’t refuse” to leave the eurozone. As he noted in an interview with Der Spiegel at the weekend, “outside European monetary union, Greece’s chances of regenerating itself and becoming competitive are definitely better than if it remained inside the euro zone”.

Two thirds of Germans are opposed to further bailout cash for Athens. This places Merkel’s coalition government in a tough position as far as “being good Europeans” and bailing out the Greeks goes. Likewise in America, the presidential election campaign is starting to heat up, and Barack Obama’s administration can ill-afford to be seen throwing US taxpayers’ money indiscriminately at IMF bailouts for Europe. Throw in this year’s French presidential election campaign – as well as the question of Greek elections (supposedly to be held in April) and it’s a good bet that we’ll see lots more disputes, posturing and brinksmanship before any kind of conclusive IMF deal is announced.

Behind the scenes, however, central banks continue to print vast amounts of money. As ShadowStats’s John Williams notes in an article released at the King World News Blog on Saturday, the US monetary base has spiked to a new record high during the two-week period ending February 22, and now stands at just under $2.8 trillion.

Increases in the monetary base are caused by the Federal Reserve buying assets off of banks with newly created electronic money. In this exchange, the Fed receives an asset – usually a government bond – and the bank receives new reserve currency, which results in an increase in the “monetary base” – the monetary base consisting of physical currency held by the public and reserve cash that banks hold at the Fed. Fractional reserve banking has the potential (depending on reserve requirements) to multiply every new dollar of base money 10-times, meaning that the $2 trillion of new base money created since the 2008 crisis morphs into $20 trillion’s worth of new credit money sloshing around the banking system – inflating asset bubbles and sending consumer prices to the moon.

Little wonder then the optimistic gold price projections seen in this chart, courtesy of Nick Laird of ShareLynx.