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There has been much written about the coming end of the Mayan calendar; a calender thought by some to mark the end of time. For experts on Mayan culture the calender shows cycles that the Maya believed marked the end of one era and the beginning of another. Historically the cycles seem to correspond with world changing events or at least events that forever altered their world. Thus the end of a cycle was a time associated with chaotic change.

Although the Maya intellectual elite that created the calender have long ceased to exist their calender and its cycles is only just about to end. For the U.S. any events that correspond to this calender’s end is probably just coincidence. That said there is one scenario of apocalyptic proportions that does seem to be developing before people’s eyes. Although there are many experts warning of this coming disaster you will not find it talked about in most of the nations newspapers or even mentioned on a evening news cast. In fact you are more likely to hear about fanciful theories of a unforeseen meteor hitting the earth or fanatical people heading to a special mountain to avoid some coming cataclysm than this nearly inevitable disaster that is fast approaching.

The source of this ill wind is the Federal Reserve monetary policy. A policy that helped create two massive bubbles in the space of a decade and is poised to create another. The money that went to fund these financial disasters came directly from the vaults and offices of the Federal Reserve.

M2 and Income Data

As the chart above shows, the massive increases in the top 1% wealth over the past thirty years has followed the Federal Reserves increase in the money supply almost step for step. In fact if it was not for the bursting of the Tech and Housing Bubbles the correspondence would be perfect. This would seem to show a smoking gun of financial disaster held firmly in he hand of the Federal Reserve. Despite this the Fed has not only continued the reckless expansion it has accelerated it!

Expansion of the money supply is natural and necessary in a growing economy.  As long as it is balanced to the growth it is beneficial to all. What the Federal Reserve has done is use money as a drug, a stimulant to offset its and the governments economic failures. It has done so by creating much more money than the market needs, a sort of adrenalin rush for the Marketplace. Just like in the human body, this false burst of energy for the economy is followed by a crash.

The fact is there are three possibilities that can happen when the money supply expands beyond what is essential to match natural economic growth.

  1. It can enter into general circulation in which case it causes inflation.
  2. It is concentrated into the hands of the wealthy who, lacking enough opportunities to properly invest it, sink it in select areas causing a kind of localized inflation. An action that causes an investment frenzy (a bubble) which eventually collapses.
  3. The last possibility is is that the money does not move at all but just sits in the bank. Such a situation is temporary until the reason for it not moving is removed, after that either one or both of the previous two happens.

Historically the first scenario has been the most common. It is what most economists look for to show the expansion of the money supply has gotten out of hand. The fact is the U.S. has seen inflation over the last thirty years but not excessive by historical standards. What has been seen is a rapid expansion of the dollar wealth of the top 1% and two rapidly following market bubbles. Events that show just as conclusively as inflation that the money supply has risen far too much. Just as alarming the bottom 50% have seen stagnating wages since about 2000 with virtually no increases for the last six. In real terms their wages have actually fallen as inflation continues to eat away at their purchasing power.

Today, in an ironic twist, the incompetence of the present administration occupying the White House is giving the world a respite. The Obama administration’s combination of runaway regulations, ObamaCare and Dodd-Frank has caused such uncertainty that much of the money that would normally be either feeding the next great bubble or inflationary Armageddon is setting in bank vaults and corporate coffers. A situation that will not last forever.

Today as the world’s great movers and shakers are alternately licking their wounds and licking their chops, the next great melt down is being staged. The present expansions of the money supply has not been seen in any industrialized power since the Weimar Republic, for students of history this alone should be an alarming trend. The fact that this trend is now being accelerated under the auspices of expanding employment is something even more troubling.

Just as the real estate bubble was far more disastrous than the Tech bubble, the next one will even be worse. That is because each one builds on the last. A cycle sure to continue as long as we have a Fed dedicated to propping up its failures by printing money. The Chief Economist from Yale calls the situation a ticking time bomb. In the minefield of possible disasters facing the U.S including the massive debt and out of control entitlement spending this threatens to dwarf them all. Whether it is death by the financial deep freeze that accompanies massive financial collapse or the scorching fires of inflationary hell, the possibility of an economic apocalypse likes of which the Mayas could of scarcely imagined is being set.

“The Conservative Mind”

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For a those seeking to further their understanding of the effects of monetary policy on the economy “Money Mischief”(can be purchased here) by Milton Friedman will go a long way towards opening up this world to you.