Before the Great Recession began in December of 2007, the M2 money stock was $7.40 trillion and the monetary base stood at around $800 billion. Therefore, the ratio between M2 and the monetary base was about 9:1. But now, thanks to Bernanke and his comrades at the Federal Reserve, the monetary base now stands at $2.7 trillion. The increase in the monetary base-which is also known as high powered money-was a direct result of the Fed's desire to take interest rates to zero percent and to vastly increase banks' ability to increase the supply of money and create inflation.
However, the Bernanke Fed has put this country in an unprecedented and extremely precarious position. Banks now have the ability to expand the money supply to over $24 trillion based upon the pre-recession level of lending. If you thought the inflation-led housing boom and credit crisis was bad just think what bubbles can now be created by expanding the M2 money supply from its current $9.75 trillion to well over $24 trillion!
Of course, the Fed and their apologists will be quick to explain that they will reduce the monetary base and raise interest rates once banks begin to aggressively push loans out the door and the money supply begins to grow rapidly. But what if the Fed is forced into a similar battle with that of European Central Bank? The European money supply is about to surge, as the ECB provides trillions of Euros in additional credit for banks to purchase distressed sovereign debt in an attempt to bring yields down. Likewise, our central bank has already given banks the fuel to expand the dollar supply by over $14 trillion. Such an increase in money supply will not come from loans made to commerce and industry, but rather to the U.S. Federal government.
In addition, since our addictions to debt and inflation have become so entrenched in the economy, any attempt to significantly increase interest rates will remand the economy back into the middle of an economic crisis. Not only would the government find debt service impossible but the value of all real estate related investments would plummet. The result being that the Great Recession would turn into the Greater Depression.
More importantly, an increase in interest rates would render the Fed incapable of removing enough money from the economy for years to come. That's because a tremendous amount of their assets (such as the $852 billion in Mortgage Backed Securities) would have fallen so much in value that they will not have anything left to sell to banks. Therefore, the American economy is most likely facing a protracted and difficult battle with rapidly rising prices and a lower standard of living.
The plain fact is that the Fed is both unwilling and unable to fight inflation. They are trapped. Interest rates will significantly increase regardless of whether the Fed does it voluntarily or if the market does it for them. And it is at that time that our true condition of insolvency will be revealed.