I have seen many blogs point to the huge increase in the US monetary base and conclude that the US will soon experience hyperinflation and a collapse in the value of the dollar. The graph for US money supply looks pretty dramatic. Never before have the Federal Reserve been increasing the monetary base so rapidly. This year, the growth of M2 has reached double figures. So why did the US see a FALL in prices last month?
The link between Money Supply, inflation and National Output has become increasingly tenuous over recent years
Velocity of Circulation.
Money Supply doesn't just depend on the amount of money printed (monetary base). It depends on the velocity of circulation - how many times it changes hand. The problem is that the velocity of circulation is falling faster than the Fed can increase the monetary base. The velocity of circulation is falling because of the recession - rising unemployment, falling investment and falling consumption - People are hoarding cash and not spending it.
This is why many economists argue the increase in the monetary base is absolutely necessary to avoid a deflationary spiral. See: What Would Keynes do at Economists view
Measuring the money supply is difficult because of evolution in the financial sector mean measures of the money supply are always changing. The Federal Reserve of bank of New York outline various reasons why money supply statistics are misleading to the state of the economy
Does this mean we can publish as much Money as we Want?
No, if the money supply does increase too much, then it will cause inflation. The problem is that it is quite difficult to actually know how much the money supply needs to increase. But, with the US economy facing most serious recession for a long time, the Fed are right to be more concerned about potential of deflation than inflation.
There is a danger the Fed could overshoot and create too much, but, at the moment this is not happening. Inflation is the least of our worries at the moment.