Money Supply

If the greatest trick the devil ever pulled was convincing the world he didn’t exist, the greatest trick our central bank ever pulled was convincing the world we couldn’t live without it. For most of that past twenty years, that PR campaign has been centered on the Great “Moderation”, so called because it apparently represented the full embodiment of economic management – a period of unparalleled prosperity, a Golden Age of soft economic central planning. Give the central bank enough “flexibility” and it will produce unmatched economic and financial satisfaction.

Bernanke’s legacy is still to be made. But he has put the US economy in a position from which it can succeed. If Europe falls apart, it will be more difficult. If we fall of the fiscal cliff we will have our own Thelma and Louise moment. The Fed Chairman has already said he can’t save us from that shock. It’s really time for fiscal policy makers to step up. As long as they refuse it makes Bernanke’s job all the harder. And the pressure on him is intense.

Bernanke is under a lot of pressure and is given little credit for what have been remarkable achievements. Do risks remain? They sure do. But that result is yet to be decided. Meanwhile risks elsewhere are at least as pressing. Look at his successes...

Anybody watching the EUR/CHF exchange rate this year was wondering why the volatility the pair saw last year had completely left. The pair slowly fell from 1.2156 over 1.2040 at the end of Q1 to 1.2014 today. FX traders hoped on a hike of the floor from 1.20 to 1.25, as many Swiss politicians and companies requested. Banks sold masses of Long EUR/CHF certificates and options. The retail market measured in SSI (Speculative Sentiment Index) was 96% long EUR/CHF.  We saw the typical Forex web sites telling regularly their masses of followers that the protagonists of these web sites were going long EUR/CHF in the hope that the SNB is going to act. This happened at multiple critical levels, at 1.2070, 1.2050, at 1.2030 and finally at 1.2010. The small FX trader was begging for months that the SNB would finally intervene. When all these people were long EUR/CHF, who was actually short, when the exchange rate continued to fall ? We speculated that some big accounts wanted their clients to be knocked out with their EUR/CHF longs, we thought that Swiss pension funds and big investors continued to repatriate their foreign funds.  What did the SNB ? Did they support the hopes of the masses, of all these SNB rooters ? But on the back-door of all this rhetoric they did the complete opposite: The central bank was happy to get rid of their Euros at a higher price than the floor they had set in September 2011 !

While Krugman does not by any means endorse the level of centralism that Diocletian introduced, his defence of bailouts, his insistence on the planning of interest rates and inflation, and (most frighteningly) his insistence that war can be an economic stimulus (in reality, war is a capital destroyer) all put him firmly in Diocletian’s economic planning camp. So how did Diocletian’s economic program work out? Well, I think it is fair to say even without modern data that — just as Krugman desires — Diocletian’s measures boosted aggregate demand through public works and — just as Krugman desires — it introduced inflation. And certainly Rome lived for almost 150 years after Diocletian. However the long term effects of Diocletian’s economic program were dire. Have the 2008 bailouts done the same thing, cementing a new feudal aristocracy of bankers, financiers and too-big-to-fail zombies, alongside a serf class that exists to fund the excesses of the financial and corporate elite? Only time will tell.

Forget Competing Theories … What Do the Facts Say about Quantitative Easing?

Krugmann fails to address even a single one of the arguments forwarded by Spitznagel. This is no surprise, as he has often demonstrated he does not even understand the arguments of the Austrians and moreover has frequently shown that his style of debate consists largely of attempts to knock down straw men.  After appraising us of his economic ignorance (see the idea that time preferences can actually 'go negative' implied by his argument on the natural interest rate above), he finally closes a truly Orwellian screed by claiming that everybody who is critical of the Fed and the financial elite is guilty of being 'Orwellian'. As we often say, you really couldn't make this up.

In perhaps the most courageous (and now must-read) speech ever given inside the New York Fed's shallowed hallowed walls, Economic Policy Journal's Robert Wenzel delivered the truth, the whole truth, and nothing but the truth to the monetary priesthood. Gracious from the start, Wenzel takes the Keynesian clap-trappers to task on almost every nonsensical and oblivious decision they have made in recent years. "My views, I suspect, differ from beginning to end... I stand here confused as to how you see the world so differently than I do. I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality." And further..."I scratch my head that somehow your conclusions about unemployment are so different than mine and that you call for the printing of money to boost 'demand'. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%." But his closing was tremendous: "Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats."

Support for gold is at $1,612/oz and resistance is at $1,663/oz and $1,684/oz.

There is no shortage of money in the world. Thanks to global Central Banks' extreme activism money supply has exploded. Since August 2011, the Fed has been less of a full-time player in this effort but in passing the baton, the rest of the world did not let them down with most notably the ECB having taken over with its own version of free-money printing for much of the first quarter - driving the ratio of outside (central-bank-driven) money relative to inside (the bank themselves creating money via credit) to record highs as a stealth nationalization of credit is underway (though as we noted earlier this morning - the transmission mechanism is not working). So where oh where is all that hard-earned free-money going? The story bifurcates here. In the US, non-financial corporates have grown their war-chests as high as they have ever been (and continue to do so) after being burned by short-term financing stresses and knowing (despite all outward media appearances) that the next abyss is potentially around the corner (given real-life growth estimates becoming more and more binary/extreme as opposed to normalized with a range). In Europe, the 'excess' has flowed to the core driving, as Sean Corrigan notes, what some surveys suggest is a consumer and housing boom (read mal-allocation of capital once again) in the decade-long stagnant German real-estate market. All that extra cash, however, while helping revenues and margins for non-financial corporates in the US has left wage growth languishing. So the sad reality of the Keynesian 'multiplier' dogma is that rather than garbage-in, garbage-out - it is freshly printed money-in, nothing-out-to-the-real-economy as each actor in the game becomes increasingly driven by a sense of self-preservation. Is it any wonder that energy/raw materials prices (as evidenced most recently by Whirlpool's comments this morning) are rising when firms are awash in cash? But of course, as the old-saying goes, a-biflation-a-day-keeps-the-Fed-hawks-at-bay.

In the science of physics, we know that ice freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.. There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building. It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building. Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

It's easy to expand the money supply and difficult to expand the actual production of real goods in the real world. Expanding the money supply and issuing debt that lacks collateral is just like printing quatloos on the desert island: you can print a million quatloos but that doesn't create a single additional coconut. If you print enough quatloos, then people will no longer accept them in exchange for coconuts. You will actually need a real coconut to exchange for fish. This is why Greek towns are reportedly reverting to barter, the exchange of real goods for other real goods. We can anticipate that silver and gold will soon enter the barter as means of exchange that can't be counterfeited or printed by wise-guys (central bankers).This is what happens when abstract representations, i.e. "money," vanish into thin air. Alternative systems of exchanging goods and services arise: actual goods are exchanged via barter, tangible concentrations of value that cannot be counterfeited such as gold and silver are used as a means of exchange, letters of credit or equivalent are traded and settled with tangible goods or gold/silver, and eventually, a means of exchange ("money") that is backed by tangible goods in the real world that can be trusted to actually represent the value being traded might enter the market. That which is phantom will vanish into thin air, while the real goods and services remain to be traded in the real world.

• A Forecast of What the Fed Will Do: Stand Pat (Hilsenrath) - they finally realized that they have to leak the opposite...
• Draghi's ECB Rejects Geithner-IMF Push for More Crisis-Fighting (Bloomberg)
• Wal-Mart's Mexico probe could lead to departures at the top (Reuters)
• The Sadly Unpalatable Solution for the Eurozone (FT)
• US Regulators Look to Ease Swaps Rules (FT)
• Yuan, Interest Rate Reform to be Gradual: China Central Bank Chief (Reuters)
• Run, Don't Walk (Hussman)
• Hollande Steals Poll March on Sarkozy (FT)

At first we were going to comment on this "response" by the high priest of Keynesian shamanic tautology to Mark Spitznagel's latest WSJ opinion piece, but then we just started laughing, and kept on laughing, and kept on laughing...

Four time Fed Chairman Marriner Eccles: "As long as the Federal Reserve is required to buy government securities at the will of the market for the purpose of defending a fixed pattern of interest rates established by the Treasury, it must stand ready to create new bank reserves in unlimited amount. This policy makes the entire banking system, through the action of the Federal Reserve System, an engine of inflation. (U.S. Congress 1951, p. 158)... [We are making] it possible for the public to convert Government securities into money to expand the money supply....We are almost solely responsible for this inflation. It is not deficit financing that is responsible because there has been surplus in the Treasury right along; the whole question of having rationing and price controls is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of money.. . . [W]e should tell the Treasury, the President, and the Congress these facts, and do something about it....We have not only the power but the responsibility....If Congress does not like what we are doing, then they can change the rules. (FOMC Minutes, 2/6/51, pp. 50–51)"

On a day when Lagarde happily trots out statement after statement that the IMF has another bucketful of promises to solve the world's excess debt problems with its own debtors providing more of the wealth-creating debt in ever-increasing circles of ridiculous indebtedness, we may have found the perfect antidote. Perhaps, given the weakness in European sovereign markets this week, bond market investors have already watched the following presentation. Explaining in simple terms and for the broadest audience Paul Grignon's 'Money As Debt' explores the baffling, fraudulent and destructive arithmetic of the money system that holds us hostage to a forever-growing debt - and how we might evolve it into a new era. Get your popcorn ready.