The chart below is a chart of the US monetary base. In simple terms, it charts how much money the Fed has pumped into the system. So it’s a kind of visual of when the Fed is really pouring money into the system. Given the events of the past few years, we can assume when the monetary base explodes higher, the Fed is concerned about stability in the system and therefore pumps liquidity into circulation.
You can see that during the financial crisis the Fed didn't do much until the autumn of 2008 when it pumped nearly $1 trillion into the system - the first vertical spike. Through various Federal Reserve programs the monetary base continued to grow during 2009. Now, after the monetary base actually declined during much of 2010, it has recently jumped another $450 billion to roughly $2.45 trillion. While some of this can be attributed to QE2, most of it is beyond QE2.
It could be the Federal Reserve just wants to keep liquidity in the system to be sure economic growth continues. Or, it may be the Federal Reserve is worried about the stability of the system and is adding liquidity. We will monitor this monetary expansion to see if it continues over the next few months. Either way, going from less than $1 trillion in the monetary base to over $2.4 trillion in a little over 2 years is concerning and can't continue at this rate without consequences. Stay tuned...
