Viewed from a practical definition of money, the banking system appears to be engaged in a significant monetary inflation. The use of reserve-sweep programs, which started in 1994, has allowed banks to reduce the effective reserve requirement on transaction deposits (demand and other checking deposits), freeing up high-powered money for other purposes. This activity has effectively lowered the reserve ratio of banks. While this is old news, this paper examines the monetary evidence over the past decade of sweeps programs and finds there is ample reason for concern that monetary inflation is accelerating because of these programs. The sweeps programs produce distortions in reported monetary components that tend to hide this fact. The symptoms have been a low growth rate of transaction deposits and M1 from 1995 through 2001 coupled with an abnormally large increase in reported savings deposits since 1995. The growth rate of reported savings deposits has accelerated further since early 2001. Two correction methodologies are used to estimate the true level of savings accounts, transaction deposits, and M1. One method uses sweeps estimates from the Federal Reserve, and the other uses an extrapolation of the growth rate of savings accounts from a period before the initiation of sweeps programs. Both methods show a large increase in transaction deposit money. The author concludes that a significant monetary inflation is taking place and is laying the foundation for price inflation in the years ahead.
Inflationary Deception: How Banks Are Evading Reserve Requirements And Inflating The Money Supply
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