Australia’s monetary debasement & credit expansion

January 5th, 2008

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Today, we will show you a graph of the latest released figures of Australia’s monetary supply growth:

Australia?s Monetary Aggregate & Money Multiplier
Click above for the full-size image

This graph shows the growth of standard (base money) and fiduciary (credit) money from July 1959 to October 2007 (see Are we heading for a deflationary type of recession? for an explanation on what standard and fiduciary money is). That graph also shows the standard-fiduciary money ratio over that time period (i.e. the multiplier effect of standard money into fiduciary money).

From the graph, we can see that Australia’s M3 money supply (one measure of fiduciary money) grew 20.75% from October 2006 (A$ 777.7 bn) to October 2007 (A$ 939.1 bn)! At the same time, you can see that the standard money multiplier effect (see 363 tons of US dollars to Iraq?how much money will eventually be multiplied into the economy? for an explanation of the money multiplier effect) has been increasing steadily to a record high- in October 2007, the reserve ratio is at record low of 4.1%. If you use the broad money (another broader measure of fiduciary money), the ratio is even lower (i.e. higher multiplier effect)- 3.8%!

What does this 3.8% mean? It means that, overall, every $3.80 of physical cash in the economy gets lent and re-lent, over and over again until it becomes $100 of credit (broad money). This means that every dollar of debt default in Australia can result in the ‘disappearance’ of up to $24.40 of fiduciary money (see How money & credit can shrink (i.e. deflation)?) in the economy [insert on 06/01/2007: assuming that this 3.8% is to be maintained].

You can easily imagine what the effect on the economy will be when that happens.