The Real Inflationary Threat - Decreasing Foreign Reserves: Why the US Should Expect 8% Inflation For The Next Three Years

Tyler Durden's picture

Submitted by Taylor Cottam of EconomyPolitics

The real threat of inflation, decreasing foreign reserves: Why the US should expect 8% inflation for the next three years

Weekly we put out information on the US Dollar Money supply.  Current M2 money supply is over 9 Trillion dollars. 
Source: Federal Reserve
This is a good proxy for money growth and good predictor of inflation except for one crucial flaw. 
There is some money which is
printed, but does not make it into the money supply.  Consider the
scenario that the Fed prints a dollar that is then either lost or
destroyed.  It then cannot be used to buy goods, or be lent out and thus
does not create inflation. 
There is something else which
can happen to our money which has the same net effect.  Foreign central
banks can take cash printed from the Fed and place it on their balance
sheet.  US dollars on foreign banks balance sheets gives investors
confidence that their own currency will not be debased. 
In our current (weakening)
dollar regime, the US dollar is the main foreign reserve currency.  When
foreign central banks put US dollars onto their balance sheet, they
take them out of circulation.  They are not being used to buy goods. 
These dollars are not lent out.  As such, they do not create

10 year USD/EUR

?Americans have benefitted greatly from having central
banks prefer our cash to even their own.  It has allowed the Fed to
print money like mad without the fear of inflation.  ??

In other words, the real threat
of inflation is not the current printing of money which Bernanke et al
have been doing.  It is the previous printing of money which has been
taken out of circulation.  The threat is as great as its ever been.  The
amount of money in foreign reserves is about one third or more of M2,
or every dollar which is held by US bank account (business or retail),
and all currency combined.
are signs that this dollar regime will be ending.  The cracks have been
apparent for some time, but we just blew a big hole in the US Dollar
dam.  This week, China has announced that they will reduce their US
dollar holdings by more than 1.7 Trillion Dollars. Via Xinhuanet:
The amount of
foreign exchange reserves should be restricted to between 800 billion to
1.3 trillion U.S. dollars, Tang told a forum in Beijing, saying that
the current reserve amount is too high.
China's foreign exchange
reserves increased by 197.4 billion U.S. dollars in the first three
months of this year to 3.04 trillion U.S. dollars by the end of March.

Trillion dollars  is the amount that we have added to our money supply
since August 2007.  If all that money were to come into the current US
money supply all at once it would increase money supply by 19%.  That
would make US inflation among the highest in the world. 

Source:  SIFMA


If this action were to be followed by
other central banks in Japan or Europe, there would be a real danger of
hyperinflation to the tune of 50%. 
Now, odds are they won't do this
all at once.  That is why we have said that at least the amount of
inflation, should it be spread out over 3 years should be 8% or more.
See the total allocated and
unallocated foreign reserves above.  You can see that the US Dollar, is
the king right now, but the Euro is gaining.  What is gaining even
faster is the Unallocated foreign reserves, which means it is either in
something else (gold, or IMF certificates), or they don't want to


Either way, it should be concerning to anyone who has money in dollars... very concerning. 

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Ancona's picture

8% inflation?!?!?

Try 15 to 20 percent. Obviously this author has not been to teh grocery store lately.

Imminent Crucible's picture

He's not even worrying about the larger issue. There are more dollars circulating outside the U.S. than sit idle in foreign currency reserves. I've read that there are more Ben Franklins in Russia (where they don't like to save in roubles) than in the entire U.S. economy.

If all these fall into disrepute and come home, we'll see the truth of FOFOA's statement: Increasing the velocity of money can induce inflation without actually printing.

Especially if the printing was already done.

Libertarian777's picture

but The Bernak can kill inflation in 15 minutes.

He said so on 60 minutes

it must be true.

(by my back of the envelope calculations Maiden Lane 2 portfolio duration is 0.00000000000000000001, so raising interest rates to 25% in 15 minutes will have no effect on the Fed's Balance Sheet)


/sarc off

10kby2k's picture

He can kill it....just like I can run around the city center nude.  I can do it, but never would.

kito's picture

this grocery store analogy is getting old and overhyped. none of our family's staple foods has gone up 20%. our box of pasta is still 1.29. our tomato sauce is the same price. the meat we buy is the same, even our lindt chocolate 90% cacao is still 2.49. our poland spring gallon bottles have been 1.33 for the past 2 years. should i go on? the only volitile foods we see are veggies and fruit, and thats usually do to weather.  

akak's picture

Please direct me to the portal to the alternate universe in which you claim to live --- mine is getting too damned expensive!

kito's picture

give specifics instead of self serving complaints about food inflation. im not saying there isnt inflation, as gas is way up, but there is no way ive seen a 20 pct increase in our grocery bill. we are not anywhere remotely close to major inflation with regards to food in this country--yet.

akak's picture

Certainly we have seen a 20% increase in groceries, and much more than that --- it just depends on exactly what starting point you want to chose as your basis.  But if you are talking about in the last year, then I would agree, but would have to say that overall prices are AT LEAST up 5%, and probably closer to 8% ---- in any event, vastly higher than the insulting and ludicrous claims constantly propagated by the pathological liar Bankruptke and his flying monkeys of disinformation at the BL(B)S.

Imminent Crucible's picture

A little anecdotal evidence from my neck of the woods:

Milk from $1.89 gal to $3.29

Rolled oats from $1.69 to $1.99 (18oz pkg)

Eight O'Clock whole bean decaf from $4.29 to $5.94 (12oz)

Eggs (dozen large) from $.89 to $1.29

We buy beef, pork & chicken only on the specials, but the specials are all up.

Produce up an average of about 15% or more over the past year.  But hey, that's probably all seasonal. It's inflation season.

I'm wondering how kito's grocery store is absorbing a 100% increase in fuel prices over the past two years. Transport costs are a big component of grocery store overhead.


akak's picture

Produce up an average of about 15% or more over the past year.  But hey, that's probably all seasonal. It's inflation season.

That's gold!

silvertrain's picture

They reduce package sizes..So your paying more for less..A double dip if I should say so myself...

Janice's picture

Please allow me give you a couple of examples.  All the gasoline in my area says that it now contains 10% ethanol.  Did the price of gasoline drop 35 cents when the ethanol displaced 10% of the gasoline?  Look closely at the can foods now, they are no longer in 16 ounce cans, now they are 14.5 ounces, I didn't see the price decrease to compensate for the reduction in product.  We have already seen inflation, just hidden.

Texas Gunslinger's picture





Cthonic's picture

Another day, another nudge of the caps lock key?  By the way, you stated 25% yesterday.

What exactly is your fascination with dog food, anyway?

The Alarmist's picture

Remember the good old days during the Carter years, when your grandparents could get by on Dog food.  You should be so lucky as you reach your golden years today, as dog food is increasingly more expensive than other "foodstuffs" because it has more nutritional value.


akak's picture



I believe that SNAP cards will also allow you to buy such things as ground meat and chicken --- no need to prematurely wear down your teeth.

On the other hand, I bet your coat is really nice and shiny.

knowless's picture

I usually don't buy pre-packaged deli meat, but I wanted a sandwich.. the price had jumped to 9.30 a pound (from 3 or or 4) a couple of months back.. soooo.. also signs screaming BEST DEAL BUY NOW for under a pound of bacon at the low low price of 7.47..

Midwest Prepper's picture

Don't you even know that... "The Rent is TOO Damn High!"

SDRII's picture

Dont worry there is a buoy system in place to foretell tsunamis


legal eagle's picture

Price of housing down 40%, price of food and gas and other necessities up 40%, no problem, zero inflation, lets move on.  (sarc off)

The Alarmist's picture

<nosarc>That would be funny if you bought a house as often as you bought gas or food.</nosarc>

Libertarian777's picture

back in 2005/2006 people WERE buying houses as often as gas and food.


I think The Bernak is trying to make sure we get back to that 'booming economy'.


Get rich quick! Flip-that-House!

Wynn's picture

This might take longer than 15 minutes to fix.

tarsubil's picture

See above. That is why I read the comments.

gwar5's picture

Exactly. 8-8.5% inflation is about where Shadowstats has been at for a while. Nothing on the horizon to change that except to make it worse. We're lucky since the DXY dropped a steamy 20% in the underpants this year.

OT: Anybody know what is going on with SLW and not keeping up spot silver? 

I know they changed CEOs and there are some sector mining issues (eg., Bolivia talk of nationalizations, strikes), but is that it? Am I missing anything? Thanks.

rich_maverick's picture

No clue... My SVM is underperforming too!  They have nothing to do with Bolivia or CEO change of hands.  Seems like someone is trying to keep the miners out of the rally...

goodrich4bk's picture

Same phenom with CEF.  Discount was -2.1 today.  Usually trades at a premium, at least for the past few years.

Whatta's picture

what is wrong with SLW is that I am sitting in between $44 calls and $40 puts....until "they" make sure my azz is handed to me in a bag IT AIN'T GOING ANYWHERE!!!

Richard640's picture

The fact that PM stocks have been diverging from G&S these past 2 weeks is very bullish for PMs

In markets, when something is seen by all, known by all and widely discussed, it often isn't worth's effect is mitigated...I wouldn't worry too much about the big, bad, scary, bearish  divergence in PM stocks...there is wide spread disblief about the move in PMs because the spectre of the 2008 wipeout in PM futures and equities is fresh in investors minds...additionaly the financial community and media are constantly warning the herd that PMs are in a bubble--risky--and could turn on a this disbelief and skepticism are very bullish for G&S--SLW is not alone--most PM stocks are way under their 2007-8 highs when silver was $21-the real mania in PMs has not started-we will see the same soaring values and panic to own PM stocks that we did in 1980...sit tight and be right.

Re-Discovery's picture

There is no inflation!  What you are witnessing is TRANSITORY like a flock of geese that shits on your (old) lawn (the one you used to have) but a few days later the rain washes it away.

How many times does the Chairman need to say it -- in public, and in front of the skeptical press no less -- to get it through your thick heads?

Now go eat your McD's Lil Mac for dinner, enjoy the 4 mile walk back to your tent, zip up your sleeping bag and go to sleep!

CrashisOptimistic's picture

It's a little sad.  People do not see oil production's scarcity as the underlying cause of essentially all the problems, and as things get worse, and flailing begins, they won't understand until it is too late.

cossack55's picture

Just tell them to read Darwin or Malthus.

zhandax's picture

Darwin was a moron.  Natural selection my ass!  The concept that traits which contribute to the survival of a species are propagated and traits which do not are repressed.  How do you reconcile that with the abundance of complete idiots on the planet today?

Iam_Silverman's picture

"How do you reconcile that with the abundance of complete idiots on the planet today?"

Easy - natural selection.  This was the strong force where - barring any outside influence to help those species that cannot adapt to a changing environment, the weaker examples were not spared by the fury of nature.

Once we invented politicians to give us the advanced socialism we so richly deserve, we no longer had natural selection - we have, whatever....

akak's picture

Once we invented politicians to give us the advanced socialism we so richly deserve, we no longer had natural selection - we have, whatever....

Unnatural selection?

zhandax's picture

Bingo; pols protecting the unfit of the species so the protected will feel obligated to vote for them.

Iam_Silverman's picture

"Unnatural selection?"

Thank you.  Due to self-medicating from the liquor cabinet I was unable to grok a good answer.

And the "deserve" part was the end of a rant I had been delivering to my wife about the advertising I see on TV:

Get the loan that you deserve!

Buy that new car that you deserve!

et cetera....

Seer's picture

I see that the "the earth is filled with caramel" folks are out junking again... You should be careful of telling addicts that their FIX isn't guaranteed!

malek's picture

Well the "it's all because of peak oil" folks are exposing the foolishness again... oversimplification won't help us here.

Banjo's picture

malek: It is no oversimplification. Quite basic really. You are correct that it is not "peak oil" in isolation it is "peak oil" and it's relationship to our growth based economic models.

Finite resource(s) are used to drive the global economy, oil alone comprising 38% of global primary energy and over 95% of transportation energy.

30 billion bbl of oil are consumed globally every year. The cost is:

$10 per bbl = $300 billion

$100 per bbl = $3 trillion

$150 per bbl = $4.5 trillion


As oil rises this money comes out of the consumer economy or pumped in via money printing or QE aka inflation. We have a growth based economic paradigm with over three billion Chinese, Indians, Africans and South Americans trying to get to the same level of consumption and lifestyle as the US and Europe.


As oil rises and sustains high prices it's input into mining down stream into manufacturing and the distribution supply chain causes either margin compression less profitabiliy or rising prices.

Some context the first stimilus was $750 billion.




malek's picture

I think I understand that part:
$200 per bbl = $6 trillion

But are you saying oil going to $200 per bbl will not reduce consumption??
Will the "finite" resources not last longer then?





Banjo's picture

malek: in theory it should last longer. ONLY if we have a sustained global economic contraction and less use of oil.

Last time that happened late 2007 and in 2008 global central banks raced out to sustain growth.

One number to look out for is global oil production year on year if this number stays at 30 billion bbl per year then it does not matter what the price is we are still using huge amounts of oil.

Ten years of 30 billion bbl is 300 billion

Thirty years is obviously 900 billion bbl. Some estimates put us at 1 Trillion bbl left.

If you are interested you can search on countries that are past their peak oil production capacity the USA being one of them but also includes, Australia, Mexico, the UK and Indonesio who used to be a member of OPEC.

This is part of a write up I did on Oil.

There are now numerous government reports on the subject of peak oil.


A 2010 German report evaluates the challenges of declining oil production and comes from the Future Analysis department of the Bundeswehr Transformation Center.


The report states "95% of all industrial outputs is dependent on oil as a fuel and/or as a chemical base for polymer production Oil has become a key driver of modern lifestyle and globalization."


"Substantial oil price increases pose a systemic risk, (emphasis mine) not just for obvious things like transportation, but equally for other subsystems." 4


A 2008 CSIRO report Fuel for thought. The future of transport fuels: states petrol prices could increase to between $2 and $8 a litre by 2018.

February 2010. The United Kingdom, The Oil Crunch A wake-up call for the UK economy Industry


"Virtually every sector of our economy is still dependent on oil"7


USA The Hirsch Report 2005 Peaking of world oil production: Impacts mitigation & risk management Robert L. Hirsch 8


"Without massive mitigation the problem will be pervasive and long lasting" (emphasis mine) 8



Peak oil is NOT about running out of oil it is about reaching a maximum amount of extraction and then starting to decline.



Some more stuff on the energy content in a bbl of oil.

Oil and our energy slaves.

We are beneficiaries of slavery and we really like it. Pause. I am of course talking about our energy slaves.


I want to discuss oil and energy and the benefits that accrue to us.


Energy content RAW numbers.

1 barrel has six billion joules of energy = 1,666,700 watts of energy. A barrel containes 42 gallons or 42*3.785litres or 158.97 litres.



We can't of course extract all that energy from the oil. Thermodynamics states we can't get more out than we put in and that you can't get 100%


Say we liberate 25% energy in ICE engines due to thermodynamics energy exchange with 75% lost in heat/friction/other.


Rubber hits the road energy. Real work. 1,666,700 * 0.25 = 416675


Pedalling stationary bike powers is equivalent to 100w of energy generation per hour. This would power a 100w light globe. If we were to pedal a bike how long would we have to pedal the bike to get the amount of energy in a barrel of oil?


Working 5 days 8 hours per day gives 4000w per week * 104 weeks = 416,000


If you convinced someone to work for you for $12 per hour it would cost you $49,920 dollars to produce the same energy as contained in the barrel of oil.


Alternately that same barrel priced at $80 is pricing the pedal energy at $80 / 520 days = (5work days pwk *104weeks) or

$0.1538c per day

$0.0192c per hour

$0.769c per day

$40.00 per year (52 weeks no holiday)


The bigger picture the economics of 85million barrels per day!


Let us use 25% thermic efficiency as a baseline this gives us a theoretical work capability in man hours of.


85*2.0(years of work per bbl) = 170 million workers * (520days) 8h/5d paying 1.92c per hour (15.36c/8hours) 44,200 million energy slave work days every day.


The secret behind these low numbers is that this cheap labor is essentially free.


Say we had someone earning $12 per hour and we said in order to hire twice as many people we would halve his pay the company has no extra money.


1 worker $12 goes to 2 workers $6

2 workers $6 goest to 4 workers $3

4 workers $3 goes to 8 workers $1.5

8 workers $1.5 goes to 16 workers $0.75

16 workers $0.75 goest to 32 workers $0.375

32 workers $0.375 goes to 64 workers $0.1875

64 workers $0.1875 goes to 128 workers $0.09375

128 workers $0.09375 goes to 256 workers $0.0468

256 workers $0.0468 goest to 512 workers $0.0234


What this represents is that at 1.92c per hour you are getting the equivalent of

512 * 170 million workers or 87 billion workers on a 8h/5d work week.


Energy Slaves

If we suppose 1.5 billion people on the planet have access to cheap oil relative to their currency then we take that volume of hidden slave workers and we find that 87/1.5 = 58 slaves each.

Working tirelessly and without complaint, digging ore and minerals out of the ground. Cultivating hectares of fields. Moving you to and from work, helping you carry your groceries. Moving all manner of goods textiles, footwear, electronics, food, water around the world. See a coles or woolworths truck there go our energy slaves hard at it. The bus that moves people around our energy slaves are toiling away.


Truthiness's picture

thankfully, the oil scarcity problem will be unfolding over decades, as opposed to years.