Gary North

October 15, 2008

To see what Federal Reserve policy has deviated from the norm in September, compare it with Y2K and 9/11. Before, we had spikes. the Adjusted Monetary Base went up fast. Then it went down fast.

After previous surges, which had been driven by panic, the FED compensated. It shrank the AMB. It did merely not return to zero.

If the FED does not repeat this performance in October, we will know that we have moved into uncharted financial waters. It has decided that the $700 billion bailout is not enough to ward off a major recession. It needs to provide fiat money reserves to the banks. This will indicate that the FED is worried about recession as well as bailing out the banks.

My hope is that it will shrink the AMB, then go back to as close to flat as we can expect, i.e., 2% per annum, max. If this happens, then the FED has decided not to use monetary inflation to keep the recession away. It is ready to suffer a recession in order to stabilize the money supply.

At some point, the FED will inflate in order to fund the huge increase in the Federal debt at rates that will not push the economy into a depression. The question is: How soon? I think before 2009 is half over. It may come sooner.

I await the conversion of the expansion into a spike. If we do not get the spike, then the FED remains in recession-fighting mode. That would indicate a reversal of policy from semi-stable money to inflation.