Most of us are familiar with the various phenomena associated with supply and demand economics. One facet of the equation is the inverse relationship between supply and demand. In general, as the supply of a commodity increases, its value usually decreases. With regard to the money supply, this is what causes inflation. As the Fed prints more money, its value decreases, causing the items for which it is traded to cost more.
Although it is well known that accelerated printing of currency is one way to increase the money supply, many are not aware of other actions taken by commercial banking, which could have the same effect. This is due to the fact that the majority of funds held by the Fed, for commercial banking purposes, are labeled as “excess.” Nearly ninety-five percent of currency reserve is not, by legal definition, required to support demand deposits. Currently the Fed is creating an interest rate incentive for the banks to hold this reserve. If the Fed decided to reduce this incentive, potential action taken by banks could release supplies of reserved money into the economy.
An example of such action would be a large purchase of new Treasury Securities by the banks, effectively injecting trillions of reserve currency dollars into the economy. The reserve dollars spent on the government debt would cause a monetary shift of the money spent, from being defined as “excess” to “required.” Although the Fed would provide the incentive for such action, blame would probably never come back to roost.
Possible actions taken by central banking, such as potential monetizing of government debt, underscore the need for investors to take refuge in intrinsically valuable assets, such as silver.
