Is This The Chart Of A Broken Inflation Transmission Mechanism?

Tyler Durden's picture

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 explanation:

Despite a certain embarrassment along the way with rising prices last year, other people’s tightening efforts (notably in the emerging market engines of recovery) have spared Ben much difficult decisionmaking. Fortuitously, too, a goodly portion of the inflationary injection has stuck anomalously to the fingers of a corporate sector saddled with an unusual degree of certainty about its members’ individual prospects as well as about those relating to the fiscal and regulatory environment at large.


Thus, in devoting 85% of retained earnings—or 20% of ex-dividend, after-tax cash flow—to accumulating a $630 billion mountain of money (cash plus demand deposits) over the past 2 1/2 years, these most unlikely of ’hoarders’ have helped retard the incendiary effects of the Fed’s actions— for now.


This—together with the collapse in the ratio between the monetary base and the money supply itself—has fooled the more  mechanistic of the quantity theorists into believing the machinery of debasement has been broken. Meanwhile, the cranks who comprise the MMT mob are crowing that the gold bugs and associated survivalists who inhabit the wilder fringes of the hard moneyworld (whom they insist on conflating with us REAL Austrians) have again been horribly awry in uttering their cries of ’Wolf! Wolf!’


In truth, none of this is so hard to explain. Taking money creation itself, the LEH-AIG-EUR disruption has radically altered the normal generation of money, but has not caused its suspension. In fact, given the speed of its operation since the Crisis, we could even say its efficiency has been greatly enhanced!


Before that watershed, the Fed typically gave rise to around one quarter of the nation’s money (OUTSIDE the commercial banks, in the form of currency and reserve balances) while the remaining three?quarters used to be originated INSIDE the banks (by their grant of loans or their purchase of securities against the recording of a credit balance on the relevant demand deposit account in their books).


Since then, however, the position has been largely inverted, so that the banks themselves are now responsible for something barely in excess of two-fifths of the total, with the Fed supplying the other three?fifths through its various ’emergency’ programmes.


No?one should be under the illusion that just because the monetary base (the Fed’s particular contribution) has swollen dramatically in relation to the sum of the banks’ discretionary additions to it, this makes the whole any less spendable or any less assured in its provision—quite the contrary, given Mr Bernanke’s inflationary bent and the lack of restraint which attaches to the monstrous institution whose awful power he arbitrarily wields.

Not yet convinced? Tomorrow we will demonstrate how in Q4, 2011 the US Shadow Banking system experienced its 15th consecutive quarterly contraction, from an all time high of $20.9 trillion to just $15.1 trillion (advance teaser chart here), not even offset by the liability creation in the traditional financial system, even as US consumers finally relevered for the first time in years, as eager suckers maxing out their credit cards. All this goes to show that the Fed never had an alternative to pouring money into the system, and indeed has done so endlessly since late 2008, only taking a break in late 2011 when the baton was passed to every other central bank in the world. Now their time is over, and the baton will have to be handed back to the Fed.

Because when it comes to secular market moves, today's little bout of JPM-related euphoria will be truly transitory if not accompanied by much more printing. After all the chart below is exponential and demands a sacrifice soon: perhaps the PBoC will step in briefly, although unlike the other central banks, China's money tends to stick within its own system. As such a far bigger calf will be required.

Which means that far all its hawkish bluster, today's move by the Fed is to be faded, although not before the market will permit sticky energy asset prices to collapse: meaning more outside money injections are coming. Yes, stocks may go even higher briefly, but for all intents and purposes unless accompanied by even more liquidity, the latest peak in stocks will be just like that in April of 2011: short-lived (and yes, we do find it curious how 2012 still continues to play out just like a carbon copy of 2011 YTD).

The end result of the exponential surge in outside money is, sadly we must admit, one which will make Liesman correct. For once. Because, as our earlier anecdote on Weimar showed, this is all precisely just as the Fed has intended from the beginning.

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fonzannoon's picture

anyone see the Kyle Bass interview with Pisani? It was a little bit of a bummer.

sIewie the pi-rat's picture

watch CNBS you support CNBS

use comcrap you support CNBS


economics1996's picture


I am a little surprised at Bass’s lack of understanding of the gold standard.  With gold/silver the banks would issue their own currency with 100% reserve requirements.  There would be no “tying the nation to a metal that comes from the ground", only tying the hands of bankers in creating money not backed by real metals.

His idea of tying currency to a basket of goods is insane.  What basket of goods?  Why not change the basket?  Who picks the basket?  Just another excuse for central bankers to print.

For those not familiar prices swarm up and down like bees in a swarm.  Trying to measure the swarm is foolish.  The CPI is nothing more than a excuse for central bankers to print.

With gold/silver restricting the money supply there would be deflation as productivity increased.  The common man could save and not have to worry about inflation like we do today. 

Bass is so disappointing in this interview.

Here is a free copy of money sound and unsound that explains the concepts Bass puts forward and the fake CPI


hedgeless_horseman's picture



Thank God I already own nearly everything I want, or need.  For everyone are fucked.

Sakka's picture

Gold + Guns + Gas + Grain + Ground = Girls


Chicks like surviving, they just don't appreciate what it takes until they have to escape through a sewer.

illyia's picture

But then how would they tap the revenue stream? They might be noticed. They might have to produce something. That means work. Competition for real, material innovation.

Shucks. Savers... are... dinner. Easy.


Sabremesh's picture

Kyle Bass is very pro-gold as an asset for investors to own to protect their wealth. This position does not entail that he must be in favour of fixing the price of gold in fiat terms, ie creating a "gold standard". They are completely separate arguments.

Cole Younger's picture

I am for the gold standard however, I do understand that if we went back on it today the price / wage shock would send most nations into anarchy. 

hadriansnightmare's picture

So the guy that got University of Texas to buy a billion in gold has set them up to be MF Globaled?


piceridu's picture

Even the great Kyle Bass doesn't want to be out of business...if we went back on the gold standard, he and every other hedgies would be toast.

Let The Wurlitzer Play's picture

You hit the nail on the head piceridu.


LongBalls's picture

I'm sliding my virtual beer down the bar to that man.

Amagnonx's picture

Many people (including Bass) seem stuck in the paradigm that money is created by central source, that it is automatically a monopolized commodity.  The idea of using silver and gold as currency is a worthless idea if you hand over the minting or creation to a monopoly.  Money should belong to the people, anyone should be able to create whatever money they like, then allow the market to decide what it wants to use. 

If anyone could mint, or print their own money - then how would people determine what money is going to hold value over time - its fairly simple to see, when money is not monopolized, then there arent a whole lot of sane choices for what it can be.

Money is a commodity - its value lies in its monetary characteristics, divisibility, durability, acceptance, recognition of value as a payment - when you hand it over to a monopoly, then you allow whoever controls the monopoly to set the value - its price fixing.


So, in an indirect way, I agree with Bass - you should not have a gold standard - that implies that some central source will control it.  instead - you should simply allow silver and gold to be legally used to pay debts, and you should allow it to be issued, mninted, coined or even printed as certificates by ANYONE.  Counterfieting someone else certificate is still fraud, you dont need any new laws there - but as long as they promise to pay the bearer on demand a certain weight of a certain commodity, then the market will enforce discipline, and limit fraud.

Cole Younger's picture

"Money is a commodity - its value lies in its monetary characteristics, divisibility, durability, acceptance, recognition of value as a payment"

Money in its simplest form is labor. Commodities are born from labor. 

Lost Wages's picture

Kyle Bass bought a million dollars worth of nickels. Not sayin' that's good or bad. Just sayin'.

Yen Cross's picture

 That chopy chart through the " Aggregate" says it all.  All (3) of the charts say so. Is anyone watching that "Troglodyte" , Jon Stewart on /Left wing central?

  I stumbled across that " Haberdashery", Accidentially.   Like the " Galapagos Islands"!

kito's picture

they've banned short selling, they've banned contract law, they've banned due process......shirley they can price increases........

jcaz's picture

Don't call me Shirley....

kito's picture

Should read"ban" price increases....but I gather my point came across anyway...still can't adjust to this swype keyboard..... Wheres my old trusty blackberry.....

tickhound's picture

ya know, THEM.  The canadians.

Uber Vandal's picture

Senator Palpatine asked Darth Vader the very same question starting at 0:29:

Buck Johnson's picture

They banned all that to control the market from going down and companies from going under.  But entropy happens when you continue to add variables into a system.  It gets to the point that you have no way of knowing or forecasting correctly what is coming down the line toward us.  So as that one person said that no way for Hyperinflation because his charts that bernanke sees says it won't happen is BS.  Because he can't chart correctly this highly manipulated market and it does make sense about China exporting inflation to the world along with others.  To much hot money was printed and continue to be printed and it has to go somewhere. 

The guy said you are basically saying that Bernanke is lying, I'll say it yes he is.  Because he can't go up there and say we will have massive inflation from the printing of money we have been doing and I knew it but it was done to buy time for some miracle that didn't happen.  So in Bernankes case hell yes he's going to lie.

UP Forester's picture

But, but, I thought they said everything is fine, the iceberg didn't do much damage!

tekhneek's picture

Well this is going to end well.

sablya's picture

The chart looks quite a bit like the chart of the Weimar Republic's inflation rate - ready to go ballistic.  

MayIMommaDogFace2theBananaPatch's picture

Beaker was bound to come around eventually. 

Remember when he cried like a girl to Tyler about his coverage? 

DavidC's picture

Inflation up, stocks up.


Joedimatteo's picture

I’ve found this post on polish blog. It is in polish so you'd better use google translator. The message is more less: high time to sell.


What do you think? If there will be inflation maybe it is better to buy?

TruthInSunshine's picture

The hole in the theory that proclaims inflation is always (let alone often) good for equity values is that the dynamics change when the economic fundamentals (job/wage growth, asset values tied to credit, e.g. homes, suck wind, the 70% of the economy that is consumer consumption is contracting in real terms, and businesses are finding sticky prices put them in a bind between lower volume on higher pricing or margin compression, etc.) are not just bad but terrible.

When the economic fundamentals are terrible, inflation isn't the result of growing organic real demand and consumption, and leads to the opposite consequences for margins, revenue and profits, as well as leading to a negative feedback loop making employment, wages and asset values tied to credit even worse.

This is not the inflation that results from good economic times. It's inflation that results from The Bernank raping the CTRL+Print keys, during a time of serious, real economic fundamental deterioration.

Almost any alleged "bright" economic data point involving retail or home sales has a black lining; easy credit is beginning to find its way to subprime borrowers again, while a fully 1/3 of all homes being purchased are either foreclosures or short sales (it's far higher in many areas of the country) purchased for cash by speculators.

The economy is terrible and getting worse, and The Bernank is on the cusp of losing whatever inflation fighting farcical credibility he had even amongst his soon-to-be-former supporters.

Liquidity quick sand swallowing the fundamental mechanisms of whatever is left of a real economy fueled by real, organic demand by pushing prices higher and accelerating demand destruction : ---> Way to Bernankeville.

donsluck's picture

Hey, I resent that remark. I bought my house last year for cash proceeds from selling my house six years ago! You call me a speculator? Oops, wait a minute, maybe you're right...

Atomizer's picture



Again, this is my theory. Believe we have insider/FOMC trading by the balls. The stunt [JPM] Jamie pulled off today sent off alarm bells. 

IID Reports Downturn in Fortune 500 and Major U.S. Government Agencies Infected With DNSChanger Malware 

download Cote's March 5 order

2012-3331. Federal Register 

Lastly, JPM||Net Money Flow -$88.82 M


Take an old snap shot of indexes. Look very closely, you will find something very disturbing. Goodnight ZH troops.

Non Passaran's picture

Hmm, for all we know you may be spreading infected PDF files (I'm not claiming, just saying).
I didn't look at them so I've no opinion about your claims here (and which seem unclear anyway).

Yen Cross's picture

Stick to the squib! Lawyers are a dime a dozen! Ya! You know who I'm talking to!

Albertarocks's picture

Oops!  Wrong article.

UP Forester's picture

This isn't about 700R4s or Turbo 350s?

LongSoupLine's picture



I'm pretty certain Steve Liesman doesn't know and/or understand more than half the shit that flys out of his fat yapper.

slewie the pi-rat's picture

again, tomorrow sounds fine!

see ya!

azzhatter's picture

LIESman is what, like a Columbia journalism major who masquerades as an economist on that bullshit station. That jackoff is nothing more than a mouthpiece for the Fed and banksters. I hate that bald headed fucking goebbels prick. Hope he gets some rare untreatable painful form of contagious cancer and gives it to Bernanke and Geithner before dying a painful death

Atomizer's picture

What I find funny, you have to pay to hear their past lies now a days.


Fed chairman Ben Bernanke will testify before the Joint Economic Committee today. Insight on the Fed's projections and how banks will fare under the stress test results, with CNBC's Steve Liesman & former New York Gov. George Pataki. [2009]

Banks & Stress Tests ||05-May-2009 at 07:31 AM EDT


ADD TO CART:  fund our lies & corruption by burying truths & half-truths we spun in the past.

Unprepared's picture

I'd say the problem is coming from the engine itself. And the brakes. And suspension...

UP Forester's picture

Maybe it's not a bus, but a Taurus....

hidingfromhelis's picture

...that and the ID 10T error behind the wheel.

devo's picture

Does it matter if inflation is 10%? Joe Sixpack doesn't read ZH, so he believes it's 2% and any increase in necessary goods is due to speculation, bad crops, etc. At what point does Joe Sixpack care? I think that's a good question. Because if he doesn't care, the collapse we all expect may not happen (since it has to be driven by currency failure).