For years now we’ve been hearing stories about how the US central bank was going to expand its balance sheet and reserves would fly out of banks like they were being dropped from helicopters and hyperinflation would quickly ensue. Of course, no such thing happened, however, we did see a remarkable increase in the money supply. No, not the US money supply, but the Chinese money supply.
Two years ago I said the Chinese were venturing into dangerous territory with a massive stimulus plan that was likely unnecessary and excessively large. I believed it had the real potential for an inflation scare in China. Two years later that appears to be the case. And we need look no further than the money supply to put this into perspective. Over the course of the last three years the Chinese M2 money supply has skyrocketed higher by over 70%:
Given the extraordinary actions of the Fed in recent years you might assume that the USA has an equally awful looking situation. But the evidence simply doesn’t support such a conclusion. The USA’s M2 money supply has expanded by a meager 16% over the last three years. That’s a 5% increase per year during one of the most destructive recessions the USA has ever experienced. Broader measures of the money supply show that the M3 supply is still contracting (see Shadow Stats or nowandfutures.com for some perspective). This is not to say that the Fed has not encouraged imprudence, speculation and no loser capitalism, but if high inflation is their goal it’s difficult to say that they have succeeded. After all, inflation in the USA is running at 1.5%-2.25% depending on your source.
China has vowed to combat inflation, however, there are little to no signs that they are serious about tackling the issue. After all, they have elections coming up and a national target of 8% GDP growth that you can be certain they will maintain at any cost. Even if it means rapidly increasing inflation and ensuing commodity price increases that only hurt the rest of the global economy.