Not long ago, I read an article relating the fact that there were 70% more dollar bills in circulation on January 1, 2009 than on January 1, 2008. That’s a rather stunning fact, if you know anything about our monetary system. While the Fed has been busy buying insurance companies, flooding banks with cash, and guaranteeing Fannie and Freddie, it’s been printing money like mad.
The visual, however, is much more striking:
The link takes you to the St. Louis Fed’s explanation of the chart, which is probably a lot better than mine. But it’s fairly self-explanatory. The blue line is our money supply – the amount of dollars in circulation. The grey bars are our recessions since 1910. If you lose the blue line in the last grey bar, there’s a reason – IT GOES STRAIGHT UP. That’s where we’re living today, folks. There are two dollars in circulation today for every dollar you had in your wallet last year.
What does this mean for you and me? When the federal government abandoned the gold standard in 1971, the dollar essentially became “fiat money.” In other words, the value of the dollar is not fixed by any background par value, like a certain amount of gold or silver. Rather, it is worth what another person will pay for it on the international money market. That value is largely based on the strength of the economy and the government behind that currency, as well as the total amount of that currency in circulation. The reason is simple – if you think of dollars as “shares” in the nation they represent, if the strength of the nation represented by the currency remains constant and the number of dollars increases, the value of each dollar is diluted and is thus reduced. Similarly, if the number of dollars remains constant but the government/economy backing them diminishes (the economy goes into recession; the government’s debt increases), the value of each dollar is likewise reduced.
Now, think about the past year. The amount of dollars circulation has almost doubled. The economy is in the midst of a deepening recession. The federal government is rushing headlong into unprecedented trillion dollar annual deficits with total debt in excess of $10.6 trillion. And don’t forget that the Fed has simultaneously reduced interest rates to basically zero, making the value of you saving that dollar in your wallet virtually nil.
The only thing really going for us is that the rest of the world is in the same boat, so there is no alternate currency or store of value for money investors to rush toward. Don’t think they aren’t looking for it, though – if another currency emerges from the recession as more stable and less diluted, we may see the end of King Dollar on the international stage.
Oh, and how is Congress reacting to the loosest monetary policy in U.S. history, when the rest of us are tightening our belts?