Money supply explosion will lead to accelerating inflation

For the “don’t worry, it has always worked out before” crowd, here is another timely article you can either dismiss or use as a wake up call. The funny thing about our money supply is that it’s 100% created by the expansion of credit. The other side of the credit transaction, and the producer of credit, is the consumer of credit. The consumer sees credit as debt. Our money IS DEBT. A similar chart with the same shape exists that describes consumer debt, private debt, Federal debt, Municipal debt, State debt, etc.

Debt is a compounding operation described by an exponential function. Exponential functions are boundless, and in the case of compounding interest they form a vertical asymptote. From Wikipedia:

In analytic geometry, an asymptote (play/ˈæsɪmptt/) of a curve is a line such that the distance between the curve and the line approaches zero as they tend to infinity.

There are potentially three kinds of asymptotes: horizontal, vertical and oblique asymptotes. For curves given by the graph of a function y = ƒ(x), horizontal asymptotes are horizontal lines that the graph of the function approaches as x tends to +∞ or −∞. Vertical asymptotes are vertical lines near which the function grows without bound.

Any quantity that grows or decays by a fixed percent at regular intervals is said to possess exponential growth or exponential decay. When a quantity grows by a fixed percent at regular intervals, exponential growth, the pattern can be represented by the function:


Here is the equation for compounding interest:


…where “A” is the ending amount, “P” is the beginning amount (or “principal”), “r” is the interest rate, “n” is the number of compoundings per year, and “t” is the total number of years

As an example, here is a graph of  Y=abx

Notice in the example a vertical asymptote forms at 14.

This same type of vertical asymptote is forming on an graphs of real word applications such as money supply growth, debt etc. But, there is a key distinction to be made, in the world of mathematics the vertical asymptote goes to infinity on the Y axis. In real life nothings goes to infinity and reaches a limit where the function ceases, otherwise known as a discontinuity. A classic example is the growth of a virus or bacteria in a lab culture. There would, eventually, come a time when there would no longer be any room for the bacteria, or nutrients to sustain them.  Exponential growth actually refers to only the early stages of the process and to the manner and speed of the growth. So too exponential growth in our money supply only applies in the early stages up to a discontinuity where debt can no longer be serviced with new money creation without destroying the monetary unit itself. As the virus or bacteria culture collapses upon itself when it exhaust all available space and food, so will our money collapse when all credibility is consumed in an attempt to satisfy nominal performance of ever expanding debt.

Another curious property of exponential debt is that it does not decay in a linear manner when insufficient money exists to feed growth. Debt fails in an exponential manner. This means that it is not possible to slowly bleed debt levels down or to pay down debt. Debt is dynamically unstable in this way and requires constant monetary inflation to just maintain the status quo. Any prolonged period of monetary deflation will cause a sudden and accelerating collapse, a chain reaction if you will. Too Big To Fail banks and their need for a perpetual lifeline to bailout funding is a example of this unfortunate property.

Read the following and think it through. Be rational and ask yourself why does this not end in the same manner that the bacteria comes to its end in the Petri dish?

Money supply explosion will lead to accelerating inflation

This article was originally posted at GoldMoney


Stacks of coins This is the time of year when City pundits produce their forecasts for the forthcoming year. Historically there has been little point to this exercise. Instead, here is the one chart which defines the background to all events in the coming years. It is the Mises Institute’s True Money Supply (TMS) for the US dollar. TMS consists of cash, checking accounts and no-notice deposit accounts, as well as a few other minor cash balances. It represents the actual cash and electronic cash in the system that is instantly available for purchases of goods and services, and the chart goes back to 1959.

Money supply

The dotted line is the exponential growth trend, in other words the maximum rate of growth that can continue for ever. This trend was valid until mid-2002, since when TMS has accelerated at a faster rate, telling us that TMS growth entered a hyperbolic phase when the Fed eased rates in the wake of the dot-com collapse. Put another way TMS is already hyperinflationary.

Bear in mind that economists are now telling central banks to accelerate monetary growth even faster to offset the tendency for bank credit to contract. They see no other way to avoid a bank balance sheet implosion with all the deflationary consequences that implies. So the prospects for 2012 and thereafter are for TMS to continue its hyperbolic trend, and incidentally supply funds for a government deficit completely out of control. Also bear in mind that when such a trend becomes established it becomes almost impossible to stop, since the whole debt-based economy and the banking system would collapse.

The second chart shows gold’s established hyperbolic course. This chart was put together by Armand Koolen, a Dutch physicist, after reading James Turk’s and my writings on gold and economics. In Koolen’s words, the hyperbola fits in with the official gold price in the early 1900s, the revaluation to $35 in 1934, the onset of the secular bull market in 2001, the bottom in October 2008 and its approximate track since then.

Gold price chart, 1900-2011

His discovery is interesting. Singularity for this curve, or the point where the gold price goes to theoretical infinity, is in February 2014, only 26 months away. Unless this long-term trend is somehow broken, gold is also telling us the dollar is heading for hyperinflation.

It would be a mistake to vest magical powers in such an extraordinary discovery, but given TMS itself is showing signs of going hyperbolic we must sit up and take notice. And we know how difficult it is to stop printing money at an accelerating rate: after all, the ECB’s reluctance to do so is threatening to collapse the eurozone. Will the Fed pull the trigger on the US economy or chicken out? The answer is clear.

So in 2012 we can expect a further escalation of money-printing. This being so, it will be followed by unexpected and accelerating price inflation. Nominal interest rates will then rise at the market’s behest, bringing a sovereign debt crisis for the dollar with it as the cost of borrowing for the government escalates.

And the world is on a dollar standard, which is why the chart of TMS tells us all we need to know about 2012.

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