Now that the Fed has decided to increase the money supply for the foreseeable future, investors are placing their bets on the success or failure of such a policy. As I write this, gold has briefly fallen below the price it was at the time of the announcement of QE3. Perhaps gold is trying to tell us something.
I remember when Paul Volcker was appointed to the Fed to combat double-digit inflation. Most remember that he allowed interest rates to seek their own level soaring to around 19%. That kind of penalty rate stopped inflation in its tracks. But few remember the money supply figures of that time.
In 1981 under Volcker's Fed, M2 growth averaged 8-9%. In 1982 it continued to increase at an 8-10% pace. In 1983 the pace of growth went up to 10-12%. Milton Friedman predicted we were in for a bout of renewed inflation because of the increasing money supply, and Alan Greenspan, who was a private forecaster at the time, said, "This time Milton Friedman will be wrong."
Greenspan won that argument as inflation rates fell continuously along with interest rates during those years. Gold also began its long decent from 850 to about 250.
Paul Volcker and his colleagues set money growth in the 8-12% range for over five years, while under the Bernanke Fed, M2 growth has fallen from 10.55% in January 2012 to 6.5% this September. . .View Full Article