The Federal Reserve’s record increase in the U.S. money supply — the
largest such monetary expansion in its history — in anticipation of
Y2K-related financial problems may well lead to inflation, depending on
how bad Y2K turns out to be, according to economic experts.
The expansion, while considered necessary, has nevertheless worried
financial planners and money managers, forcing some to conclude that the
Fed’s unprecedented move has occurred in the days and weeks leading up
to the new millennium because of closely held fears over the effects of
the Y2K bug on U.S. financial markets.
Worse, they say, the burgeoning monetary supply — now measured at
over $194 billion — seems to come with no traditional fears of
“The money supply has gone through the roof and the increase,
adjusted for inflation, is the biggest in the nation’s history,” said
Don Hays, president of The Hays Market Focus Advisory Group, an
investment consulting firm. In a Reuters report, Hays suggested the Fed
may be “flooding the nation with cash” over fears expressed by central
bankers that “the Y2K bug could do more damage to the financial system
than most people expect.”
“I just don’t have another excuse other than Y2K to imagine why the
Fed would flood the system, unless there is something that’s happening
behind the scenes that we don’t know about,” Hays said.
Bill Murphy, president of the Gold Anti-Trust Action Committee, said
he believes central bank officials “are really scared.”
“This is why they are manipulating the gold market and holding it
down now as well,” Murphy said. “Gold is a barometer of financial
soundness. It doesn’t have to be, but our government has made it so.
This is just another reason why the Fed is doing what it’s doing by
adding gold supply to the market. They don’t want the public or
financial world to perceive any obvious market signs that signal
One other reason for the influx of cash could be the unavailability
of hard assets, like gold, if a Y2K-related or other financial crunch
hit the markets.
Robby Noel of the Patriot Trading Group, a gold and precious metals wholesaler who
has been tracking the U.S. financial markets closely throughout the
year, said, “I do believe when ‘the panic’ hits — if that happens —
there will likely be little physical gold to go around.” An increased
paper money supply would go far to stabilize monetary fears, he said,
though traditionally such increased supplies of paper money usually
signaled eras of inflation.
Inflationary fears were echoed by /news/archives.asp?ARCHIVE_ID=25Llewellyn Rockwell,
president of the Ludwig von Mises Institute
and a WorldNetDaily columnist. In a Nov. 15 report
about Y2K-related money supplies, Rockwell said his biggest concern was
“an exodus by the public to redeposit cash reserves after fears over Y2K
Rockwell added that he believes the potential for hyperinflation as a
result of massive redeposits of cash “could potentially be very
devastating” to the country’s economic infrastructure, which would feed
existing fears about markets many think are dramatically overvalued.
“This huge liquidity is the reason for the big rally in stocks since
October,” said Hays. “It’s a replay of the market’s run-up exactly one
year ago, when the Fed rushed to flood the system after the panic from
the Russian loan default and the Long Term Capital Management hedge fund
“We don’t have the slightest idea how Y2K is going to play out,” Hays
added. “From listening to all the ‘informed’ sources, I have to come to
the conclusion that no one else does either.”
Paul Kasriel, chief U.S. economist for Northern Trust Co. in Chicago,
said he is confident the increased cash from the Federal Reserve “has
been the elixir for the market’s rally.”
“People are not borrowing just to stuff the money in their
mattresses,” he said. “They borrow to spend and it ain’t a coincidence
that the stock market has picked up as the money supply has exploded.”
He added that “things could get interesting” for the market next year
as a result of the Fed’s action.
“The Fed may choose to ignore the rapid growth in credit and money
that it has a hand in creating,” he said. “But investors ignore it at
their own peril.”
But Dave Gitlitz, senior economist at the economic consulting firm
Polyconomics, said he “wasn’t at all
worried” about the Federal Reserve’s boosting of liquidity.
“At this point, I don’t think there are many implications in terms of
inflation,” he said. “The Fed is simply trying to provide the banks with
an insurance policy against the possibility of disruption or liquidity
crunch at year end. The banks are just stockpiling reserves — it’s not
showing up in increased lending” or any other real way except minor
What the Fed is doing, he said, is “a temporary operation” that will
expire early next year, when, if no Y2K-related financial problems
occur, the excess currency will be returned to the central bank.
However, Gitlitz cautioned, if more Y2K-related disruptions occur
than expected, “the Fed will be forced to liquefy the system and that
could have inflationary implications, depending on the duration and
extent of the disruption.”
“In order to avoid panic, the Fed would be compelled to assist banks
with liquidity,” he said.
Gitlitz compared this scenario with the injection of monetary
reserves into the financial system as a result of the stock market
correction of 1987. By the end of 1988, he said, “the Fed had to adjust
interest rates,” which did lead to some short-term inflation.