2012-08-28

How much money does the Federal Reserve need to print in order to end the the threat of deflation?

This chart shows the ratio of total credit in the U.S. to M2. A rising line means total credit is expanding faster than M2, or that M2 is falling faster than total credit. As can be seen, the massive money creation against a stagnant credit market has sent the ratio tumbling. In order to return to the ratio of 3:1 seen at the beginning of the 1980s, the Federal Reserve would need to print about $8 trillion or the credit market would need to deleverage by about $25 trillion. The latter number is about 30 times the size of the deleveraging that caused the 2008/9 financial panic and only the private market and local governments have deleveraged. The federal government has increased debt to offset the decline and total credit outstanding has remained steady.

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