Money supply plays an important role in every economy. It is the lubricant which oils the internal system, lack of its stops the machinery and too much of it makes the operation sub-optimal with lot of wastage. As the topic suggests the agenda for this blog is check on this money supply. Since i remember central banks have been responding to each crisis by simply increasing the money supply and hoping that the increased liquidity will solve the problem.
Lets look at the money supply growth rates in US. Graph 2 shows the money supply CAGR rates. Each of the periods tells us the story of the effect of increased money supply. From 1960 to 1970 the CAGR was a high of 8% per annum, which eventually led to the gold standard being abolished. The period from 1970 to 1980 which had a 10% CAGR led to a high inflation environment in US. The period from 2010 to 2013 in recent years also has been a period of high growth rates in US money supply. This is evident from the easy monetary policy of the Fed. The only period wherein the money supply growth rates have come down is during the period from 1990-95, it was a period wherein even there was no global financial crisis and the ones that occurred were localised (Mexican currency crisis). Post that period, we have seen a sustained increase in monetary supply with atleast a 6% growth rates and we have witnessed one global financial crisis every 5 years.
Source of data: tradingeconomics.com
Graph 1 shows the money supply currency wise. This chart clearly shows that money supply in the global economy has been growing year on year. To a certain extent the graphs look like an exponential curve.
Graph 1: Global Currency in circulation
Lets look at the money supply growth rates in US. Graph 2 shows the money supply CAGR rates. Each of the periods tells us the story of the effect of increased money supply. From 1960 to 1970 the CAGR was a high of 8% per annum, which eventually led to the gold standard being abolished. The period from 1970 to 1980 which had a 10% CAGR led to a high inflation environment in US. The period from 2010 to 2013 in recent years also has been a period of high growth rates in US money supply. This is evident from the easy monetary policy of the Fed. The only period wherein the money supply growth rates have come down is during the period from 1990-95, it was a period wherein even there was no global financial crisis and the ones that occurred were localised (Mexican currency crisis). Post that period, we have seen a sustained increase in monetary supply with atleast a 6% growth rates and we have witnessed one global financial crisis every 5 years.
In addition to the fact that we are increasingly dependent on an increasing money supply, the frequency of financial crisis is also decreasing. In effect it is like a drug whose effect is decreasing with every injection. The tapering could create certain problems in such scenario wherein economies are addicted to such sustained increases in money supply over 20 years
Source of data: tradingeconomics.com
