An interesting analysis (not mine):
When the money supply grows faster than real GDP, the extra money causes inflation.
John Williams (at Shadow Government Statistics) posts M1 and M2 (both published by the Federal Reserve).
More important, Mr. Williams recalculates and publishes two critical numbers that the government no longer does: M3 (the money supply including large institutional investors) and the original Consumer Price Index, before the government suppressed it with "hedonic adjustments."
http://www.shadowstats.com/alternate_dataMr. Williams shows that the annual growth of M1, M2 and M3 are all higher than real (inflation-adjusted) GDP growth. This is inflationary. Mr. Williams calculates real inflation far above the government-massaged inflation rate.
The government reports the real GDP growth rate as 1.9% but Mr. Williams calculates it as negative 2.5%. This is because real GDP is adjusted by inflation.
Any growth in M1, M2 or M3 in excess of GDP growth is excess.
The excess money supply came from the Federal Reserve lending money --- money that it creates out of thin air (contrary to Mr. Bernanke's explicit denial that this is what the Fed does).
Bernanke is of the opinion that the Great Depression was mainly caused by monetary contraction, the consequence of poor policymaking by the American Federal Reserve System and continued crisis in the banking system. In this view, the Federal Reserve, by not acting, allowed the money supply as measured by the M2 to shrink by one-third from 1929–1933, thereby transforming a normal recession into the Great Depression.
Bernanke is staying true to his word by increasing the money supply while GDP contracts. We will see more QE even if thinly veiled under another name.
