Posted by: John Gilmore | September 16, 2006

U.S. Money Supply is Now Contracting

In the midst of this economic ‘recovery’ – a very important piece of data is rarely, if ever, discussed in the mainstream media. We hear lots of talk about housing, stock markets, bond markets, interest rates, derivatives, unemployment, inflation, commodities, household & government debt, etc. – but the one piece of economic data that drives all others – is almost never discussed by mainstream media or our financial and political leaders.

What is the most important piece of economic data? Let’s let some past financial and political leaders tell us.

“Whoever controls the volume of money in our country is absolute master of all industry and commerce….and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.” -James A. Garfield

“Whoever controls the volume of money in any country is absolute master of all industry and commerce.”(Paul Warburg, drafter of the Federal Reserve Act)

“Permit me to issue and control the money of a nation and I care not who makes its laws.”(Mayer Amschel Rothschild)

The volume of money. Under our current monetary system – if our money supply expands – we see economic growth and prosperity (albeit with ever growing – unsustainable – debt). If it contracts – we see recessions and depressions. It seems simple – and it really is – if you spend the time to understand how Central Banks control the volume of money throughout the world. They are the modern-day masters of all commerce and industry.

Of course, you never hear how the system works (how money is added to/removed from the system) or how the volume of money impacts our economy from mainstream media or the world’s leaders. Discuss all the things you want concerning the economy and the current economic situation – just don’t discuss the truth behind it all.

Since 2008, we’ve seen our total money supply growth (M3) slow considerably (chart below). The trend is definitely a cause for concern. After December 2009 updates – it should be a major concern for anyone paying attention. Now – our money supply growth is not simply slowing – our money supply is contracting. Think about this for a minute – if the amount of money in the system is decreasing – can you have economic growth or ‘recovery’? No. You can have all of the discussions you want about anything related to the economy – but if the amount of money in the system we use to buy, sell, invest, etc. is contracting – economic growth (and therefore recovery) is impossible.


If the money supply continues to contract – anything related to economic activity will also contract – corporate revenues/profits, personal wages & income, bond prices, stock prices, state and federal tax receipts, employment, etc. In our current monetary system, the only way to increase the money supply is to create more debt – the problem is that the world is currently saturated by debt to the point that it cannot create the new debt required to keep all of the balls in the air. It’s only a matter of time before things start to come crashing down. Government stimulus and Federal Reserve ‘programs’ have only delayed the inevitable.

We are now watching the final throes of the world’s debt based monetary system as it stumbles toward its inevitable end. It was reported this week that Germany’s economy (GDP) contracted 5% in 2009 – they haven’t seen a contraction like this since the end of WWII. We’re seeing articles now questioning whether the UK can turn around their economy with such massive debt loads. Greece is on the brink of default on their government debt. Spain’s economy is struggling with an official unemployment rate approaching 15%. Iceland experienced an economic meltdown last year and the value of their currency has plunged. The list goes on and on.

You may point to our recent quarter of positive GDP growth (revised downward twice) in the 2% range and say that we’re back on the positive growth path. Government GDP numbers are rife with all types of fuzzy numbers. You’d be amazed at how it is calculated and what is included. If you want to see a good, quantifiable number of how our economy is doing – look at state and federal tax receipts (below). You may ask how it’s possible to have positive GDP growth when State and Federal Tax Receipts are both declining at disturbing rates. Good question. The answer is that someone isn’t telling the truth. Since tax receipts are calculated using hard data – while GDP numbers are anything but quantifiable – we don’t have to guess which numbers to trust.


You may ask – what about all of the money the Federal Reserve has added to the system? Another good question. The answer shouldn’t surprise you. The majority of the money has ended up with banks. While the U.S. money supply is the total amount of money (dollars) present throughout the world – the monetary base is the amount of money that banks have on reserve at the Federal Reserve. We see that the money supply is contracting – but what is happening to the monetary base?

(Source: Federal Reserve)

Since the beginning of this crisis, the monetary base has increased from $800 billion dollars to over $2 trillion. Why is this happening? It’s simple – due to the state of the economy – banks are not lending at pre-crisis levels. They continue to hoard cash at the Fed. Why? They don’t want to make loans in this environment when the odds of default/foreclosure are high. The Fed is also now paying interest on bank reserves – which also increases the incentive for banks to keep money at the Fed and not make loans to consumers, corporations, developers, etc.

Remember – debt creation must continue to grow to create new money to keep the system from collapsing. Debt is no longer growing – it’s also contracting – which coincides with our money supply contraction.


What will be the sign to usher in the next phase of this crisis? Most likely – it will be a stock market decline of 300-500 points in one day. Could be a little less or could be more – but keep your eye on any significant market decline over a very short period of time. This will be the sign that the system is teetering – and about to go over the edge. There will be no rebound this time.

We’ve seen lots of positive ‘recovery’ talk over the past few months, but it only took one comment from the CEO of JPMorgan today to cause a 100 point stock market decline.

Chief Executive James Dimon warned the banking giant is cautious about the future, noting “consumer-credit costs remain high, and weak employment and home prices persist.”-Wall St. Journal

In the same article we get the following comments:

“To have two marquee-name companies like J.P. Morgan and Intel put out their earnings and have the market react like this is a very bad sign,” suggesting that a broader correction may be in store, said strategist Bill King, of M. Ramsey King Securities. –Wall St. Journal

Earnings and economic data combined to raise new doubts about the health of the consumer, and the strength of the U.S. economy. Globally, worries about the impact of Greece’s debt woes on the European economy drove investors toward so-called safe-haven assets. –Wall St. Journal

Pay close attention to what is happening in the markets in the coming weeks/months and be prepared to take action to protect your money/assets.

January 15, 2010


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: