Deflation = A Collapsing Money Supply

One of the struggles of writing articles on economics is showing how our system truly operates. Most people think of dollar bills when the term ‘money’ is used. This leads to a conclusion that our nation is on the verge of major – or even hyper – inflation due to an increase in the amount of dollars. We are told that this increase in dollars will devalue our money to the point where we will suffer a monetary collapse. We’re led to believe that only gold and/or silver will protect us from this looming threat.

Please permit me to offer an alternative view. To do so will require a clear definition of terms, and it is imperative that we learn to use proper economic terms in our daily vocabulary so as not to confuse the subject at hand.

US dollar bills should always be referred to as either ‘currency’ or ‘Federal Reserve Notes’. To call them ‘money’ creates confusion – and is technically incorrect (as I will be showing in an upcoming article).

So what is ‘money’? To answer that question we first have to determine what ‘debt’ is.

‘Debt’ is simply a promise of future labor. If I take out a car loan for $10,000 then I will sign a ‘promissory note’. I am promising the lender that I will repay them with future labor. This might be my own future labor – or it might be the future labor of others that I have a claim to. This claim is known as ‘money’.

‘Money’ is a claim on ‘debt’. Substituting in the definition of ‘debt’ we get: ‘Money’ is a claim on the promise of future labor.

With all of this in mind we need to ask ourselves the question: “What is the money supply?”

Is it the total amount of currency that the Fed has put into circulation? No. Our nation’s money supply is the sum total of ALL claims on ‘debt’ (promises of future labor).

In order to examine our nation’s money supply we must look to see if the total claims on debt is increasing, or decreasing. Let’s see what the facts show. I will be taking my information from the Federal Reserve Economic Data web site.

This first graph shows the % change from the previous year of all Commercial and Industrial loans at commercial banks. Notice how the end of the line is still below the ‘0’ level on the vertical axis. This means that there are fewer loans than existed twelve months prior. Fewer loans equal less claims on debt, which equals a smaller money supply.

This graph shows outstanding real estate loans at commercial banks as a % change from the previous year. Again, notice how the line is below the ‘0’ level – indicating fewer claims on debt, or less money.

This graph is one of my favorites. It shows the total of Consumer loans at commercial banks as a % change from the previous year. One would be tempted to look at this graph and say “Wow!!! Look at the HUGE increase in consumer spending!” In actuality, this graph shows the period of time when commercial banks brought an immense number of loans that they had been hiding “off balance sheet” back onto their regular financial books. In other words, other than an accounting change we can still see the decrease in loans that have taken place. There has been no increase – even though the graph would seem to indicate otherwise at first glance.

Here we have a graph showing the % change from the previous year of Total Consumer Credit. We see how the line is still below ‘0’ – meaning a decrease of credit (claimed debt), which also means a decrease in the money supply.

This graph shows Revolving Credit as a % change from the previous year. We see where it is below the ‘0’ line, again indicating a reduction in the money supply.

Look here! We see that Non-Revolving Credit has actually gone up from the previous year! Does this mean that things are at least better in this one sector? No, not really. It shows a shift of accounting from when the US government took over the student loan market. Notice the large vertical increase near the end of the line? Without this takeover we would still see non-revolving credit at, or below, zero.

Lastly, we see a clear picture of how our US Federal government is attempting to take the place of the consumer in order to hold back a deep, deep economic depression. The amount of loans they own is more than 70% higher from the previous year! This is an unsustainable path that will lead to economic destruction.

Our Federal government’s annual budget deficit of $1.6 TRILLION dollars each of the past two years is all that is masking what I have just shown to you. This is why there is absolutely no possibility that the Republican Party will dare to make large cuts in the deficit. To do so (even though it is the correct thing to do) would bring about an immediately recognizable depression. Instead, they will posture with smaller ‘cuts’ of less than $100 billion dollars – even though the budget deficit will likely surpass $2 TRILLION dollars this year. In other words, Congress will ‘cut’ $100 billion, but end up going an extra $400 billion in the hole.

Be careful folks, the ride is going to get ‘interesting’.

Your comments and questions are welcome… or visit www.newfamilyeconomics.com

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