Political Metals

This is the most recent US Money Supply (M2) data and Adjusted Monetary Base as at February 24, 2011. To obtain a big picture view of the rate of monetary base expansion expansion since 1961, see Money Supply chart appearing in my previous post Investing in PMs or Holding PMs.

If this trend does not look bad enough,  the recent statement by Kansas City Fed President Thomas Hoenig may give an idea of where this chart will go beyond the “end” of QE2 in June 2011. With the recent sharp rise in oil prices downward pressure on the stock market and economy in general, QE3 may be just round the corner!

Feb 1 (Reuters) - The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data prove weaker than policymakers expect, Kansas City Fed President Thomas Hoenig said.

Another round of bond buying “may get discussed” if the numbers look “disappointing,” Hoenig told Market News International in an interview published on Tuesday.

And the reason for the sharp rise in the adjusted monetary base can be seen in the 2 charts below. The first shows top holders of US federal debt as at October 31, 2010. The second as at December 31, 2010. When foreign nations slow down or stop buying US treasury holdings, the Federal Reserve becomes the lender of last resort. That’s when the QE programs run at full steam creating money out of thin air and lending it to the US government.

- Click on chart to see larger image -

It gets worse. China sold $34.2bn of US treasury bonds in December 2010, raising fears that ­Beijing is using its financial ­muscle to signal that it has lost confidence in American economic policy.

Higher inflation coming to a country near you.

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