Money Supply

All you need to know.

The meeting between Merkel and Sarkozy on Monday is likely to be the main focus of next week, as well as continued debate of the Greek PSI. Overall, this process is likely to push the EUR lower in the next couple of weeks, while the missing details for better fiscal policy coordination are getting negotiated. On the macro side, IP in Germany will have slowed by 0.2% mom in November and consensus expects the aggregate Euro-zone IP to have contracted by the same amount. But we also get November IP in many other places, including the UK and India. Already released over the weekend, Chinese money supply data has been stronger than expected and the amount of new loans issues in December is clear evidence of policy easing.

The Keynesians and Monetarists have fooled people with a clever sleight of hand. They have convinced people to look at prices (especially consumer prices) to understand what’s happening in the monetary system. Anyone who has ever been at a magic act performance is familiar with how sleight of hand often works. With a huge flourish of the cape, often accompanied by a loud sound, the right hand attracts all eyes in the audience. The left hand of the illusionist then quickly and subtly takes a rabbit out of a hat, or a dove out of someone’s pocket. Watching a performer is just harmless entertainment, and everyone knows that it’s just a series of clever tricks. In contrast, the monetary illusions created by central banks, and the evil acts they conceal, can cause serious pain and suffering. This is a topic that needs more exposure.

The fact is that the US has been on a slippery slope for decades, and it's about to go over a cliff. However, our standard of living, while declining, is still very high, both relatively and absolutely. But an American can enjoy a much higher standard of living abroad. On the other hand, if I were some poor guy in a poverty-wracked country with few opportunities, I'd want to go where the action is, where the money is, now. Today, that means trying to get into the United States. The US is headed the wrong direction, but it's still a land of opportunity and a whole lot better than some flea-bitten village in Niger...This is one of the advantages of studying history, because it shows you that things like this rarely happen overnight. They are usually the result of trends that build over years and years, sometimes over generations. In the case of the US, I think the trend has been downhill, in many ways, for many years. Pick a time. You could make an argument, from a moral point of view, that things started heading downhill at the time of the Spanish-American War. That was when a previously peaceful and open country first started conquering overseas lands and staking colonies. America was still in the ascent towards its peak economically, but the seeds of its own demise were already sewn, and a libertarian watching the scene might have concluded that it was time to get out of Dodge –

Is idiosyncracy the substitute for a fledgling Sovereign Bond Market?  Including our recommendations for 2012

Gold prices are mixed today as markets remain on edge due to increasing divisions amongst European leaders on how to solve the intractable Eurozone debt crisis. There continues to be very strong demand for physical bullion globally and support is  strong at the $1,600 level due to this demand. The sharp fall of copper yesterday, by 6%, is an indication that the US, Chinese and indeed global economy is very fragile and may soon begin to contract. Physical demand in Asia, mainly India and China, has entered the traditional peak season with Indian festivals and the increasingly important Chinese New Year. This is reflected in premiums in Asia which remain good. There are reports of massive physical buying out of China on gold’s fall close to $1,600 yesterday. The most active Shanghai gold futures traded at a premium of more than $10 over spot prices earlier today. The contract stood at 335.22 yuan a gram, or $1,634 an ounce, at a premium of $3.

Developing China’s M2 money supply has been rising by a large 20% and Russia’s by a very large 30%. Even developed countries such as Switzerland have seen money supply growth of 25%. Japan’s M2 is gradually moving higher after the ‘Lost Decade’ and after recent events exacerbating an already fragile situation. Global money supply growth is increasing by 8%-9% per annum. Meanwhile annual gold production is less than 1.5% per annum. We looked at money supply growth and charts regarding global money supply, debt levels etc in a comprehensive article in early August (‘Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not’ - http://www.goldcore.com/goldcore_blog/gold-bubble-14-charts-facts-and-da... ) when gold was trading at $1,670/oz or much the same price level as today. The charts and conclusions remain apposite. In order to fight economic problems brought about due to too much debt, debt based paper and electronic currency has been created at historically high levels. There is no sign of this abating any time soon given the scale of the global financial and economic crisis.

By now everyone has read Ambrose Evans-Pritchard's article discussing the historic plunge in the M3, which speculates that due to the failure of attempts so far to reflate the economy, Obama is likely considering a renewed stimulus. To validate his point, Evans-Pritchard quotes Tim Congdon of International Monetary Research": "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly. Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantitative easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty." SocGen's Albert Edwards chimes in with an observation from a slightly different angle, namely that the collapse of global FX reserves, whose explosion until 2007 "fuelled both global GDP growth and the credit bubble," which are simply indicative of global imbalances and are a very useful measure of total liquidity, are now plunging. This merely reinforces the deflationary pressures of the plunge in money supply, and forces the Fed into a corner from which there is no escape except by activating another multi-trillion QE program. Yet away from the US, Edwards argues that the huge imbalances within the Eurozone will serve as the seeds of its own destruction.

As the financial crisis has unfolded over the last two years, the Federal Reserve has been responding in a variety of unprecedented ways. Therefore, it is logical to assume that these never-before-used actions have altered long-established ways of viewing things. One area that has been impacted is the US dollar money supply.