Tuesday, March 23, 2010

Is the money supply shrinking?

That depends on how you measure it. Using popular monetary aggregates M2, M3, or MZM, you could draw the conclusion that the money supply is stagnating. However, all three of these measures include non-monetary components that skew their results, writes Steve Saville.
Judging by M2, M3 and MZM the US is now in, or bordering on, monetary deflation. However, TMS (True Money Supply) has risen by more than 13% over the past 12 months.
He observes:
Even though the money supply is growing rapidly, if Bernanke and his cohorts believe that the money supply is growing slowly, or not at all, then they could be encouraged to double their efforts on the inflation front. Under the current monetary system, nothing promotes inflation more effectively than fear of deflation.

Sunday, March 7, 2010

Gone Tomorrow?

Can a global empire like the U.S. fall overnight? According to Harvard historian Niall Ferguson, it's possible.
The challenges that face the United States are often represented as slow-burning. It is the steady march of demographics -- which is driving up the ratio of retirees to workers -- not bad policy that condemns the public finances of the United States to sink deeper into the red. It is the inexorable growth of China's economy, not American stagnation, that will make the gross domestic product of the People's Republic larger than that of the United States by 2027. . . .

But what if history is not cyclical and slow-moving but arrhythmic -- at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Great powers are complex systems, made up of a very large number of interacting components that are asymmetrically organized . . . . All these complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes . . . .

There is no such thing as a typical or average forest fire, for example. To use the jargon of modern physics, a forest before a fire is in a state of "self-organized criticality": It is teetering on the verge of a breakdown, but the size of the breakdown is unknown. Will there be a small fire or a huge one? It is nearly impossible to predict. The key point is that in such systems, a relatively minor shock can cause a disproportionate disruption. . . .

The most recent and familiar example of precipitous decline is the collapse of the Soviet Union. . . . If ever an empire fell off a cliff, rather than gently declining, it was the one founded by Lenin. . . .

Over the last three years, the complex system of the global economy flipped from boom to bust -- all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the radical monetary and fiscal steps that were taken in response.

Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will ultimately lead to much higher inflation rates or outright default. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece.

Dealers swap sterling for Mugabe's dollar

The two-year decline of the sterling boosts exports and is therefore good news to the brain trust at England's central bank. Suffering its "biggest rout on the currency markets for more than a year," the sterling "fell by more than 1.7 per cent against Zimbabwe’s much-mocked paper, completing a decline of more than 7 per cent since the end of January." When the value of the sterling falls to zero, Bank of England Governor Mervyn King and his Keynesian pals can celebrate with the mother of all bonfires, with paper sterling as fuel.

Fed Credit Increase is Beyond Crazy

Last week's increase in Fed Credit of $5.2 billion, though slightly less than the previous week's increase, was still twice the rate of the Great Inflationist Alan Greenspan, who pumped $10 billion a month in credit then blamed market craziness on "irrational exuberance."

Keynesians and Neo-Keynesians, of course, will see nothing fundamentally wrong with creating massive amounts of credit. As renowned Fed hysteric Mogambo Guru puts it:
Interestingly, a crucial part of the stupid Keynesian nonsense holds that the government can, by virtue of borrowing the money, replace any perceived lost “consumer demand”, in any economic downturn, by merely borrowing and spending money, even if borrowing and spending money was the cause of the original downturn, and that there are no repercussions that cannot be solved by more borrowing and spending, and that inflation in prices has nothing to do with the money supply but with irrational exuberance! Which doesn’t even make any sense! Hahahah! It doesn’t even freaking make sense!!
He concludes:
The preponderance of people on this planet, and in our universities, and in our media, and in our governments, and in our central banks are BFC [Beyond Freaking Crazy] lunatics if they think that borrowing (racking up debt) and spending money will “cure” the bust of the boom produced by borrowing (racking up debt) and spending the money! Hahahaha!

FDIC: Pace of bank seizures likely to increase

Those who believe happy days are almost here again might want to reflect on the condition of the banking industry, which is afraid to do business. With bank regulators "shuttering" banks in Florida, Maryland, Illinois, and Utah, the number of bank failures in 2010 has climbed to 26, with the pace of bank seizures likely to accelerate in coming months, according to the FDIC. The total for all of 2009 was 140. According to an AP report,
As the economy has weakened, with unemployment rising, home prices tumbling and loan defaults soaring, bank failures have mounted, sapping billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31.

Banks, meanwhile, have tightened their lending standards. U.S. bank lending last year posted its steepest drop since World War II, as the volume of loans fell $587.3 billion, or 7.5 percent, from 2008, the FDIC reported recently.

Thursday, March 4, 2010

What if all the gold mines closed?

Steve Saville tells us:
The crux of the issue is that most of the gold mined in the past has not been consumed (burnt, eaten, used-up in industrial processes or built into structures); rather, it remains available today in readily saleable form. Consequently, gold-mine supply adds only about 1.5% per year to the total supply of gold, and changes in mine supply have very little influence on gold's supply/demand equation. . . .

By way of further explanation, imagine that gold were money. In this case, the contribution to total supply made by the mining industry would be the monetary inflation rate. If the inflation rate were zero, that is, if the gold-mining industry ceased to exist, then gold's purchasing power would tend to increase over the long-term at roughly the same rate as the economy grew. For example, if, during a 20-year period, there were no money (gold) supply growth and average annual economic growth of 3% then gold's purchasing power would be expected to gain a total of about 80% (3%/year compounded for 20 years) over the course of this period. At no stage would there be a shortage of money (gold), assuming that prices were permitted to freely adjust.