The conventional wisdom is that the year 2009 will be a tough one. We’ll all have to cut back on spending, get our debts under control, skip the annual family vacation, and clip coupons, but by 2010, we’ll have a “return to normalcy.” Unfortunately, this just isn’t in the cards. The era of Permanent Prosperity has turned out to be not-so permanent, and in ’09, the bills are finally coming due. Sure, we’d like to hunker down and pay them, but the president, the Congress, and most importantly, the Federal Reserve, aren’t going to let us. As bad as 2008 was, we’ll one day look back on it as The Last Good Year.

The Political-Media-Banking Complex

Even though they’re the ones who will be taking us off the deep end, we can’t blame Obama and the Democrats for our sorry state of affairs. Clearly, the Bush administration bears the bulk of the responsibility, and the Reagan and Nixon-Ford administrations played their parts as well. In fact, it’s the hole that Nixon began digging for us with the closing of the gold window in 1971 that will ultimately burry the U.S. dollar.

Under the gold standard, every $35 represented an ounce of gold in the Federal Reserve’s coffers. Of course the Fed played tricks with accounting and created far more paper dollars than it had ounces of gold backing them, but there was at least some limit to the extravagance of their monetary machinations. All this changed on August 15, 1971 when President Nixon unilaterally reneged on America’s promise to redeem Federal Reserve Notes (a.k.a. U.S. dollars) in gold. Since then, the Fed’s ability to create money out of thin air has been entirely limitless.

The Fed’s rampant inflation has become so commonplace that the vast majority of financial journalists don’t even take notice of it. The federal government is deeply in debt, so where does it get the money to fund all of these bailouts? Few bother to even consider the question, and those that do assume the bailouts will be paid for with tax revenue. Pundits who are a little more on the ball might understand that the bailouts and “stimulus” won’t be paid for with taxes, but by issuing new government debt, but even this misses the point. That debt is largely “monetized” by the Fed, which is just a fancy way of saying the Fed creates new money out of thin air to pay the government’s bills. So how much money has the Fed created in this manner in the past three months? The answer is quite shocking.

How Money is Measured

M0 is the measure of the nation’s monetary base. It includes all physical currency such as notes and coins, as well as accounts at the central bank that can be exchanged for physical currency. This is the strictest of monetary measures, and the one least susceptible to rapid increases. M1, by contrast, adds bank reserves and checking accounts to the money supply, while M2 also tags on savings accounts, money market accounts, and CDs under $100,000. M3, which the Fed stopped tracking because the increases were too large to explain, is the most liberal measure of money supply, as it includes all CDs as well as institutional money market accounts, Eurodollars, and repo agreements.

The important takeaway from the monetary lesson above is that M0 is the most conservative measure of the money supply available and is completely indisputable: it is the physical currency in circulation or in the coffers of the Fed. It exists in reality, not electronically. And here’s the scary reality: for the period ending December 3, the Fed had increased the M0 money supply by as much in thirty days as it had in the previous eighty-three years! The amount of money in circulation was 74% higher on December 3, 2008 than it was on September 3, 2008. And here’s where it gets even scarier: each one of those $268 billion new dollars in print can turn into ten new dollars via the process of fractional-reserve lending.

This is not a conspiracy theory, but the cold hard facts. Many ancient civilizations met their doom by holding on to superstitions the likes of which we think our society is somehow above. But the truth of the matter is that all but a tiny fraction of Americans hold fast to the most absurdly false religion imaginable: the notion that prosperity can be created at the printing press. In 2009, this myth will be shattered once and for all.

Related posts:

1. The Massive Momentum Of 2009
2. Against Government Money
3. The mystery of inflation, deflation and printing money
4. Money Supply Flood to Drown US Economy
5. Hyperinflation: The Inevitable Result of Government-Manged Money