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I like pictures!

February 24, 2012

Especially pictures I can plagiarize to make my point about liquidity! It works so much better than me describing money supply and monetary policy run-amok.  

Click on image for larger view

While our central bank, the Federal Reserve, has increased their balance sheet (created new money/liquidity) by some $2 trillion over the past four years, European central banks are not about to be outdone at the liquidity trough! Our monetary policy prowess is apparently something to be emulated by other central banks.

In total, the world’s central banks have opened the flood gates to the tune of nearly $7 trillion over the past four years. With all this new money creation, it has to go somewhere, and that somewhere has been equities, government bonds, commodities and…

Note that on the chart itself, the authors point out that money creation has doubled in the last four years, having doubled in the prior five-year period. This is what I would describe as a doubling factor that will require a decoupling factor; or, in English, a massive infusion of liquidity that will have to be surgically unwound. The natural tendency would be to inflate your way out, but that is a tremendous level of inflating. A picture of what our central bankers around the world are doing is worth a thousand words, or in this case $13,000,000,000,000… was that enough zeros?

Note: My biggest concern, as always, is what happens to the value of our currency when so much liquidity is infused into our economy?  The way money works is that the more of it that exists, the less each individual dollar is worth.  And sometimes it takes a bit of time for that phenomenon to show up in our economy in the form of massive inflation.  If our central banks continue to pour money into the economy so quickly, I can’t help wondering where we’ll be down the road when that money starts having the effect of devaluing every dollar you own.

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