Money Supply

There’s a lot of talk right now, for example, about rising oil prices which have created uncomfortably high gasoline prices. In gold terms, however, gasoline prices are in a deflationary spiral. The chart below shows unleaded gasoline prices in grams of gold since January 1976. Priced in grams of gold, gasoline is near an all-time low. Buffett (and others) argue strongly that investors should be in stocks… that a company like Coca Cola or productive farmland is a better long-term investment than a useless hunk of metal.He’s probably right. Except that the useless hunk of metal isn’t really an investment. It’s an anti-currency… appropriate for those who want to sit out of the market and be in cash without having to be in cash.

While hardly needing a full-on onslaught by an Austrian thinker, when even some fairly simplistic reductio ad abusrdum thought experiments should suffice (boosting global GDP by a few million percent simply by building a death star comes to mind), Diapason's Sean Corrigan has decided to take MMT, also known as "Modern Monetary Theory", to the woodshed in his latest missive in a grammatical, syntaxic (replete with the usual 200+ word multi-clause sentences) and stylistic juggernaut, that only Corrigan is capable of. So sit back in that easy chair, grab your favorite bottle of rehypothecated Ouzo, and let the monetary hate wash through you.

• Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash (Bloomberg)
• Papademos Gets Backing for $4.3B of Cuts (Bloomberg)
• China February Bank Lending Remains Weak (Reuters)
• Romney Regains Momentum (WSJ)
• Shanghai Raises Minimum Wage 13% as China Seeks to Boost Demand (Bloomberg)
• Fiscal Stability Key To Economic Competitiveness - SNB's Jordan (WSJ)
• Bank's Tucker Says Cannot Relax Bank Requirements (Reuters)
• Life as a Landlord (NYT)

The modern, debt-based economy requires constant economic expansion if only to service all that debt. So what happens when the modern economy goes ex-growth and stops expanding? Iceland already found out. Greece is in the process of discovering. But we will all get a chance to participate in this lesson. Runaway fiscal and monetary stimulus throughout the western economies is in the process of destroying the concept of creditworthiness at the centre of the modern monetary system.  Private investors, we suspect, have little or no conception of the extent to which the state is now the predominant player in the financial markets. Central banks control the money supply and interest rates. Central banking and commercial banking interests have essentially become fused. The ECB's long-term refinancing operations are banking bailouts by the back door. Central banks are now also the swing players in government bond markets which directly influences the price for corporate credit. Central bank monetary stimulus also directly influences equity market direction and confidence. Be careful, be very careful about the sort of government debt you hold. You may well end up being paid in whole- but in such depreciated terms that being "kept whole" will be meaningless in real terms.

Every time we see oil prices go up we hear that it will cause inflation and/or the economy will go into the tank. The premise is wrong because that has never happened.

Yes, Greece had a smaller, shakier economy and doesn't have a central bank to print its own currency at will like Japan or the US. But even those countries with a printing press learn that, after a certain point, expanding the money supply only complicates the problem of too much debt by inflating key economic input costs and dangerously weakening the currency. The cold hard fact Greece is facing is that it's now at the point where extraordinary losses need to be taken. The problem is, no one wants to take them. And all the sturm und drang being exhibited by Brussels, the ECB, sovereign debt holders, and other world leaders is nothing more than a frantic game of hot potato. The one thing we can be confident of is that at some point, these losses will be taken. The market will eventually force it. And the second thing we can predict is: we don't know what will happen when they are. There is so much complexity in the counterparty exposure to Greece debt - as well as the much larger derivative exposure tied to this debt - that anything between "not much" and "worldwide financial conflagration" could be possible. And that's just Greece. As other larger countries begin to sink under the weight of their sovereign debts, the risks to the global financial system increasingly escalates. Which is why Ben Davies has a hard time finding a good home for investment capital other than gold.

• U.S. Postal Service to Cut 35,000 Jobs as Plants Are Shut (BBG) -Expect one whopper of a seasonal adjustment to compensate
• European Banks May Tap ECB for $629 Billion Cash (Bloomberg) - EURUSD surging as all ECB easing now priced in; Fed is next
• Madrid presses EU to ease deficit targets (FT)
• Greek Parliament Approves Debt Write-Down (WSJ)
• Mentor of Central Bankers Fischer Rues Complacency as Economy Accelerates (Bloomberg)
• Draghi Takes Tough Line on Austerity (WSJ)
• European Banks Hit by Losses (WSJ)
• Moody's: won't take ratings action on Japan on Friday (Reuters)
• Athens told to change spending and taxes (FT)

'All is not resolved' is how Morgan Stanley's Arnaud Mares begins his latest diatribe on the debacle that is occurring in Europe. While a disorderly default seems to have been avoided (for now), the Greek problem (as we have discussed extensively) remains unsolved as debt sustainability seems questionable at best, economic recovery a remote hope, and the growing political tensions across Europe (and its people) grow wider. Critically, Mares addresses the seeming complacency towards a Greek exit from the euro area noting that it is no small matter and has dramatic consequences (specifically a la Lehman, the unintended consequences could be catastrophic). Greece (or another nation) leaving the Euro invites concerns over the fungibility of bank deposits across weak and strong nations and with doubt over the Euro, the EU could collapse as free-trade broke down. The key is that, just as in the US downgrade case last year, a Euro-exit implies the impossible is possible and the impact of such an event is much, much higher than most seem to realize. While the likelihood of a Greek euro-exit may remain low (for now), the scale of the impact makes this highly material and suggests the EU will do whatever it takes (print?) within their mandates to hold the status quo. For all practical purposes, it would be the end of the euro as a genuine single currency and to preserve the euro if Greece left would require total federalism in the rest of the area.

• Spiegel: Stop the 130-billion bank transfer! (Spiegel)
• Greece Wins Bailout as Europe Chooses Aid Over Default (Bloomberg)
• Greek pro-bailout parties at all-time low, poll shows (Reuters)
• Eurozone agrees €130bn Greek bail-out (FT)
• Top Banks in EU Rush for Safety (WSJ)
• Medvedev Adviser Says Kudrin Would Be Better Prime Minister (Bloomberg)
• US and Mexico in landmark oil deal (FT)
• McCain calls for US to support Syria rebels (FT)
• Coal Shipments to India Overtaking China on Fuel Shortage (Bloomberg)
• Gillard Shrugs Off Ousting Threat (WSJ)

History is replete with the carcasses of failed currencies destroyed through misguided intentional debasement by governments looking for an easy escape from piling up too much debt. James Rickards, author of the recent bestseller Currency Wars: The Making of the Next Global Crisis, sees history repeating itself today - and warns we are in the escalating stage of a global currency war of the grandest scale. Whether it ends in hyperinflation, in the return to some form of gold standard, or in chaos - history is telling us we can have confidence it will end painfully.

Today, Rand’s fictional world has seemingly become a reality – endless bailouts and economic stimulus for the unproductive at the expense of the most productive, and calls for additional taxation on capital investment. The shrug of Rand’s heroic entrepreneurs is to be found today within the tangled ciphers of corporate and government balance sheets. The US Federal Reserve has added more than $2 trillion to the base money supply since 2008 – an incredible and unprecedented number that is basically a gift to banks intended to cover their deep losses and spur lending and investment. Instead, as banks continue their enormous deleveraging, almost all of their new money remains at the Fed in the form of excess reserves. Corporations, moreover, are holding the largest amounts of cash, relative to assets and net worth, ever recorded. And yet, despite what pundits claim about strong balance sheets, firms’ debt levels, relative to assets and net worth, also remain near record-high levels. Hoarded cash is king. The velocity of money (the frequency at which money is spent, or GDP relative to base money) continues to plunge to historic lows. No wonder monetary policy has had so little impact. Capital, the engine of economic growth, sits idle – shrugging everywhere.

Are we really in an economic recovery or is it a figment of the Fed's quantitative easing? This will be the biggest factor in the 2012 elections.

As you know, back in December the ECB conducted a 3 year LTRO operation that drew far more interest than anticipated. The operation saw banks draw a Gross (net liquidity injection was ~210 Billion Euros) ~490 Billion Euros from the ECB (and not according to plan, turned around and parked it back at the ECB instead of buying up shitty bonds).

Previously we presented some alternative thoughts to the mainstream misperception of the Iranian "isolation" by some of its biggest oil trading partners. Unlike others, we simply believe that the gulf nation, together with the new axis of anti-USD (as confirmed once again earlier today) is simply preparing itself for a barter based economy, or alternatively, one with commoditized intermediates. However, this ignores the likelihood of geopolitical instability caused by intervening US and Israeli interest in the region. Below are some thoughts from Doug Casey of Casey Research on the likelihood of another full blown shooting war erupting in the Persian Gulf, as well as his thoughts on how one may prepare for such a contingency.

While all the focus has been on Greece in recent days, the global nature of the debt crisis came to the fore yesterday and overnight. This was seen in the further desperate measures by the BOJ and Moodys warning that the UK could lose its AAA rating. Some of us have been saying for some years that this was inevitable but markets remain myopic of the risks posed by this. Possibly the greatest risk is that of the appalling US fiscal situation which continues to be downplayed and not analysed appropriately. President Obama unveiled a massive $3.8 trillion budget yesterday and he is to increase Federal spending by 53% to $5.820 trillion by 2022.  The US government is projected to spend over $6 trillion a year by 2022.  Still bizarrely unaccounted for is the ticking time bomb of unfunded entitlement liabilities - Social Security and Medicare, which Washington continues to deal with by completely ignoring them. While Washington and markets are for now ignoring the fiscal train wreck that is the US. This will change with inevitable and likely extremely negative consequences for markets – particularly US bond markets and for the dollar.