In an article I wrote here in December last year I included a chart showing the amazing spike in the amount of US cash entering into the global economic system. It was stunning because of the unprecedented magnitude of the spike. The Americans have been printing cash like there is no tomorrow. I suspect that some people didn’t really grasp what the chart was saying because it was a little bit technical but also because the shadows on the background of the chart kind of obscured the spike at the end of the chart unless you were paying close attention. If you want to go back and have another look then click here.
Or if you want to see essentially the same chart with slightly less detail but delivered with more entertainment value and drama then tack a look at the Glenn Beck video below.
If you have a large deflationary collapse in the banking sector then you ought to have a large increase in the supply of base currency. The inference in Glenns entertaining video is that such a spike would not have occurred on a gold standard. Setting aside the fact that I think we would have avoided this crisis if the USA had been on a gold standard and interest rates had been freely set by the credit markets I don’t otherwise think Glenn is entirely correct. A deflationary banking collapse will always create a massive demand for cash. This would drive up the real value of cash relative to most other real world things including gold. In order to maintain a fixed price of gold (which is after all what a gold standard entails) you would need an injection of new cash. Or looking at it the other way around, to prevent the value of cash rising relative to gold due to demand you would need to dampen any potential rise in the value of cash by supplying more of it.
Of course what should happen next as the crisis passes and the demand for cash declines back to normal is that you should see a massive winding back of the base money supply. A gold standard would essentially do this automatically. If the central bank does not replicate this winding back then you are left with a lot of cash in the system for which there is no longer the previous high demand. At this point the risk of inflation becomes extremely real and essentially inevitable.
Hopefully the central bankers in the USA are wise enough to know this stuff and they will move to avoid such problems. I must say however that faith in the wisdom of central bankers isn’t something I have a lot of and Glenn Becks worst fears may yet come true.