Money Supply

In advance of ever louder demands for more, more, more NEWER QE-LTROs (as BofA's Michael Hanson says "If our forecast of a one-handle on H2 growth is realized, then we would expect the Fed to step in with additional easing, in the form of QE3") , it is an opportune time to demonstrate just what the traditional monetary "plumbing" mechanisms at the discretion of the Fed are, and more importantly, just how completely plugged they are. So without any further ado...

 The ponzi will fail, and the economy will reset - the only question is when.

This is truly Orwellian: the latest and greatest Executive Branch/Federal Reserve power grab is labeled "consumer protection." I am indebted to correspondent Jim S. who seems to be one of the few Americans to have actually sorted through this monstronsity and gleaned its true nature: an unprecedented extension of Executive (i.e. Imperial Presidency) and Federal Reserve power. Let's start by recalling that the Federal Reserve is a consortium of private banks. Calling a private consortium of banks the "Federal Reserve" is the original Orwellian misdirection, for there is nothing "Federal" about the Federal Reserve. It is not a government agency. Now guess who will fund and control this vast new bureaucracy of "consumer protection"? Yes, the private consortium known as the Federal Reserve. "The Consumer Financial Protection Bureau (CFPB) will be an independent unit located inside and funded by the United States Federal Reserve. It will write and enforce bank rules, conduct bank examinations, monitor and report on markets, as well as collect and track consumer complaints." Since managing the money supply and interest rates is the ultimate "consumer protection," we can ask how well the Fed managed those tasks in the past 15 years: alas, their management has been catastrophic for the nation and the middle class, which has been gutted by their policies of serial bubble blowing, leveraged speculation and bank predation.

• Obama budget defeated 414-0 (Washington Times) yes, the Democrats too...
• German Central Banker: ECB Loans Only Buy Time (AP)
• Baku grants Israel use of its air bases (Jerusalem Times)
• Japan May Understate Deflation, Hampering BOJ, Economist Says (Bloomberg)
• BRICS flay West over IMF reform, monetary policy (Reuters)
• Five Portugal Lenders Downgraded by Moody’s (Bloomberg)
• SEC Registration Captures More Hedge Fund Advisers (Bloomberg)
• EU Nears One-Year Boost in Rescue Fund to $1.3 Trillion (Bloomberg)
• Consumers plot emergency oil release as Saudi decries high prices (Reuters)
• Japan Plans to Draft Stopgap Budget for First Time in 14 Years (Bloomberg)

Dumbfounded. That’s the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system. We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one. With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything– financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc.  One man.

This chart tells millions of stories. That’s right: since 1984 (surely an appropriate year) while the elderly have grown their wealth in nominal terms, the young are much worse off both in inflation-adjusted terms, as well as nominal terms (pretty hard to believe given that the money supply has expanded eightfold in the intervening years). So why are the elderly doing over fifty times better than the young when they were only doing ten times better before? There is enough money to keep the economy flowing so long as there are opportunities for people to make themselves useful in a way that pays. With the crushing burden of overregulation and the problem of barriers to entry, these opportunities are often restricted to large corporations. These issues of youth unemployment and growing inequality between the generations are critically important. Unemployed and poor swathes of youth have a habit of creating volatility in response to restricted economic opportunity.

Last week, Bernanke's first (of four) lecture at George Washington University was entirely dedicated to attempting to discredit gold and all that sound money stands for. The propaganda machine was so transparent that it hardly merited a response: those away from the MSM know the truth (which, simply said, is the "creation" of over $100 trillion in derivatives in just the first six months of 2011 to a record $707 trillion - how does one spell stability?), while those who rely on mainstream media for the news would never see an alternative perspective - financial firms are not among the top three sources of advertising dollars for legacy media for nothing. Still, for those who feel like the Chairman's word need to be challenged, the following extensive and annotated reply by QBAMCO's Paul Brodsky makes a mockery of the Fed's full on assault on gold, and any attempts by the subservient media to defend it. To wit: "Has anyone asked why so many powerful people are going out of their way to discredit an inert rock? We think it comes down to maintaining power and control over commercial economies. After professionally watching Fed chairmen cajole, threaten, persuade and manage sentiment in the markets since 1982, we argue this latest permutation is understandable, predictable and, for those willing to bet on the Fed’s ultimate success in saving the banking system (as we are), quite exciting.... Gold is no longer being ignored and gold holders are no longer being laughed at. “The Powers That Be” seem to have begun a campaign to discredit gold."

• More HFT Posturing: SEC Probes Rapid Trading (WSJ)
• Fed’s Bullard Says Monetary Policy May Be at Turning Point (Bloomberg)
• Hilsenrath: Fed Hosts Global Gathering on Easy Money (WSJ)
• Dublin ‘hopeful’ ECB will approve bond deal (FT)
• EU Proposes a Beefed-Up Permanent Bailout Fund (WSJ)
• Portugal Town Halls Face Default Amid $12 Billion Debt (Bloomberg)
• Hidden Fund Fees Means U.K. Investors Pay Double US Rates (Bloomberg)
• Europe Weighs Trade Probes Amid Beijing Threats (WSJ)
• Bank of Japan Stimulus Row Fueled by Kono’s Nomination (Bloomberg)

Depending on debt to fuel nominal growth leads to an economic death spiral. Sometimes one chart says it all. Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then. The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many. So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite.

Yesterday, Ben Bernanke dedicated his entire first propaganda lecture to college student to the bashing of the gold standard. Of course, he has his prerogatives: he has to validate a crumbling monetary system and the legitimacy of the Fed, first to schoolchildrden and then to soon to be college grads encumbered in massive amounts of non-dischargeable student loans. While it is decidedly arguable that the gold standard may or may not have led to the first Great Depression, there is no debate at all that it was sheer modern monetary insanity and bubble blowing (by the very same professor!) that brought us to the verge of collapse in the Second Great Depression in 2008, which had nothing to do with the gold standard. And as usual there is always an other side to the story. Presenting that here today, is Antal Fekete with "The Gold Problem Revisited."

A "little" inflation will destroy capital, rob you of your savings, disrupt all of your long-term financial planning, create market instability, and leave you unprepared for retirement. You can protect yourself and you must. Here's how.

Ray Dalio released a study he did on deleveraging. The piece was featured prominently here at ZH. I am a fan of Dalio, but his analysis was surprising. His interpretation of the economy is, remarkably, based on a very conventional ideas and is shockingly wrong. For a guy who is known for thinking out of the box and has who has led Bridgewater to become the biggest hedge fund in the world, he has got the deleveraging process all wrong. 

Following the latest temporary swoon in gold, the PM naysayers have once again crawled out of the woodwork, like a well tuned Swiss watch (made of 24K gold of course). Of course, they all crawl right back into their hole never to be heard of again until the next temporary drop and so on ad inf. Naturally, the latest incursion of "weak hand" gold longs is screaming bloody murder because the paper representation of the value of their hard, non-dilutable, physical gold is being slammed for one reason or another. Ironically, these same people tend to forget that the primary driver behind the value of gold is not for it to be replaced from paper into paper at some point in the future, but to provide the basis for a solid currency following the reset of a terminally unstable system, unstable precisely due to its reliance on infinitely dilutable currency, and as such any cheaper entry point is to be applauded. Yet it seems it is time for a refresh. Luckily, SocGen's Dylan Grice has coined just that with a brief explanation of "when to sell gold" which while having a modestly different view on the intrinsic value of gold, should provide some comfort to those for whom gold is not a speculative vehicle, but a true buy and hold investment for the future. And in this day and age of exponentially growing central bank balance sheets (chart), this should be everyone but the die hard CNBC fanatics. In brief: "Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK. Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the  time to sell gold."

Sean Corrigan presents an interesting chart for everyone who still believes that, contrary to millennia of evidence otherwise, money is not fungible. Such as the Lerry Meyers of the world, who in a CNBC interview earlier said the following: "I’m sorry, I’m sorry, you think he doesn't have the right model of inflation, he would allow hyperinflation. Not a prayer. Not a prayer.  If you wanted to forecast inflation three or four years out and you don't have it close to 2%, I don't know why. Balance sheet, no impact. Level of reserves, no impact, so you have a different model of inflation, hey, you like the hawk on the committee, you got good company." (coupled with a stunning pronouncement by Steve Liesman: "I think the Fed is going to be dead wrong on inflation. I think inflation is going up." - yes, quite curious for a man who for the longest time has been arguing just the opposite: 5 minutes into the clip). Because despite what monetary theorists say, monetary practitioners know that money always finds a way to go from point A (even, or especially if, said point is defined as "excess reserves" which in a stationary phase generate a ridiculously low cash yield) to point B, where point B are risk assets that generate the highest returns. Such as high beta stocks (and of course crude and other hard commodities). And the following chart of Inside vs Outside Money from Sean Corrigan shows precisely how this is accomplished.

The latest in a series of reports evaluating the future of the energy markets, especially in the context of the increasingly inevitable Iranian conflict, may just be the best and most comprehensive one (not just because it looks at the commodity from an "Austrian" angle). In 82 pages, Austrian Erste Group has extracted the key aspects and variables for the world oil market and come up with a simple conclusion: "nothing to spare." To wit: "We see the risks for the oil price heavily skewed to the upside. At the moment, the market is well supplied, but the smouldering crisis in the Persian Gulf could easily push oil prices to new all-time-highs should it escalate. We believe that new all-time-highs can be reached in H1, at which point we could see demand destruction setting in. We forecast an average oil price (Brent) of USD 123 per barrel between now and March 2013...The latently smouldering Iran crisis seems to be close to escalation. The most recent manoeuvres, ostentatious threats, sanctions, embargoes and the shadow war currently ongoing, have heated up the situation further. It seems we may soon see the last straw that breaks the camel's back. Even though Iran could probably only maintain a blockade of the Straits of Hormuz only for a very limited period of time, the consequences would still be dramatic. The oil price would definitely set new all-time-highs and could reach levels of up to USD 200." Enjoy those price dips while you can.