Wednesday, December 13, 2006

Fed Watching M3 Like A Hawk

The carry trade, repo purchases, coupon passes.
Is the US Treasury / Fed scared silly?

"We're convinced inflation absolutely is on the Fed radar
screen at all points in time. But not in the way most folks
might think. They are the provocateurs, not the policemen."

Tuesday, December 05, 2006

Reconstructed M3

Here is the March 16, 2006 press release by the Fed that they would be discontinuing M3:
M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits.

What balderdash! They don't want people to see that the rate at which the "money" (digital tokens) supply increases is increasing, and that there is a compound curve going on in the last few years.

(click to enlarge)

Can you imagine what this is going to do to the US dollar price of gold? The thing is, there will be competitive devaluations amongst almost all government fiat tokens. It's just that the USD has the most potential on the down side.

Thanks to for the reconstruction effort.

Another source for reconstructed M3 is John Williams' Shadow Government Statistics:

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.' - Ayn Rand, author of Fountain Head, Atlas Shrugged, Capitalism: The Unknown Ideal, Philosophy: Who Needs It? and others

An example of what baseball great Yogi Berra says: "It's deja vue all over again.", what Ayn Rand is talking about, and probably what's coming is Mike Hewitt's Hyperinflation in China, 1937 - 1949

"Till 1927, China had a free banking system through the interaction of private banks operating in various regions of the country. Privately held banks operated like any other Chinese business and competed with one another to obtain customers. Most banks issued their own notes which were redeemable in silver, the traditional medium of exchange in China. The notes from each bank circulated freely with the notes from other banks.

These Chinese banks operated largely without state regulation. A free banking system has inherent checks against inflation - primarily because customers will flee from depreciating currencies - and instances of banks’ inflating their currencies were extremely rare."

More ...

"Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by a deluge of bank paper, as we were formerly by the old Continental paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who instead of employing their capital, if any they have, in manufactures commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs. Prudent men must be on their guard in this game of Robin's alive, and take care that the spark does not extinguish in their hands. I am an enemy to all banks discounting bills or notes for anything but coin. But our whole country is so fascinated by this Jack o' lantern wealth, that they will not stop short of its total and fatal explosion." - Thomas Jefferson

Saturday, December 02, 2006

The US Dollar Illusion

(click to enlarge)

The left hand chart is the Dow priced in US dollars. The right hand chart is the Dow divided by the price of gold. Most investors in the American stock markets do not understand inflation (increase in the supply of "money", tokens really) and what it does to the purchasing power of the dollar, their stock portfolios and their real estate. Therefor they do not understand that despite the nominal dollar recovery of their portfolio and the increase in the nominal dollar price of their real estate, they are still way under or behind in terms of the purchasing power of their stocks and real estate.

Because they do not understand the difference between supply inflation and price increases, they will turn to those that caused the problem (the combination of government and their central banks) to fix the problem when they are seriously economically and financially hurting.

There are 3 ways a government can get funds to operate.
1. Taxation which has its limits.
2. Borrowing funds which has its limits.
3. Creating "money" (tokens) for free which has its theoretical limits,
but those limits are really really far out there.

The worse the economy gets, the more the pressure on governments to create new fiat, which means creating new debt (increasing government expenses), to spend on stuff and payrolls to keep the masses calm. At the same time government expenses are increasing, their revenue is decreasing. A vicious circle, that the US is already in.

When Japan topped out and started its long decline, the world was not awash in Yen (wasn't the world's reserve currency, OPEC wasn't forced to demand Yen for oil), they had a high savings rate and huge savings, little debt, and a substantial trade surplus. Yet their national government felt compelled to go on a debt accumulation spree to enable a spending (construction) spree.

The US has topped out and is in the opposite position of Japan.

The US, prior to the start of its last great depression, had a small trade surplus.

Which way do you think prices of *necessary* stuff and services inside the US are going?


"The state -- or, to make matters more concrete, the government -- consists of a gang of men exactly like you and me. They have, taking one with another, no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can't get, and to promise to give it to them. Nine times out of ten that promise is worth nothing. The tenth time it is made good by looting 'A' to satisfy 'B'. In other words, government is a broker in pillage, and every election is a sort of advanced auction on stolen goods." - H.L. Mencken