Ballad of a Heartbreaking Money Supply

As much as I scream in Loud Mogambo Outrage (LMO) about the sheer amount of money that is being created that will create horrendous inflation in prices, using whatever data that I can easily get my hands on or, better yet, falling into my lap, or, as a last resort, just making up facts and figures to prove my point, I may, for once in my over-the-top, obnoxious and irritating life (“The Way Of The Mogambo (TWOTM)”), be understating the case! Understating it!

James Turk of Goldmoney.com notes, “There has been an unprecedented amount of deposit currency created by the Fed over the past two years. From December 2002 until the collapse of Lehman Brothers in September 2008, the quantity of deposit currency created by the Fed averaged $11.8 billion, an amount that is relatively insignificant compared to total M1. Presently, it stands at a record high of $1,246.2 billion, which of course is highly significant.”

Well, personally, I can think of many ways that this can be “highly significant”, which I figure is already inherent in the fact that the M1 money supply figure (mostly just cash and near-cash), “stands at a record high.”

In effect, he says, “the traditional definition of M1 does not accurately capture this process when the Fed uses deposit currency to pay for its purchase”, which I am not sure I understand, as I am usually too busy with the kind of currency that kids and wives want, like the ever-popular “I need five dollars” and so I ask, “What for?” and they give me some kind of stupid reason, and I tell them, “No” and then they want to argue with me about my decision, and the argument goes back and forth between us until they are screaming, “I hate you!” and I politely ask, “And I am expected to give money to someone who hates me?” and they ask, “Is a father supposed to hate his children?” and then I am yelling, “I hate you!” and then we are both yelling, “I hate you!” until my wife comes in and tells us to shut up and for me to give the kid the damned money and stop acting like the stingy little bastard that I am.

Well, Mr. Turk is not interested in my personal troubles or how it costs me plenty, but goes on that, “The Federal Reserve reports M1 to be $1,716 billion as of February 15th. When deposit currency created by the Federal Reserve is added to the traditional definition of M1, M1 after adjustment is actually 170% higher at $2,918 billion”! 170% higher! Yow!

Ignoring my spontaneous outburst of surprise and horror, he goes on, “Its annual growth increases to 29.5%, nearly 3-times the rate reported by the Fed and, more importantly, is an annual rate of growth in the quantity of dollar currency that is approaching hyperinflationary levels.”

This talk of hyperinflation is what I am planning to blame for my taking off work early to go drinking, which worked out serendipitously because, since my head was already hanging down in a kind of alcohol-inspired stupor, I was looking at the top of the bar where I saw what I hoped was a little pool of beer and tears, mostly because it rhymed so nicely that I thought maybe I could make a hit C&W tune out of it, maybe about Charlene, she of the luscious lips, blond hair and budding breasts that made her the darling of the whole 4th grade.

I figured that the first verse could be something like “Tears and beers is all I have now, since you left me I’m dying somehow, but only in the figurative sense, unlike how the Federal Reserve is literally killing our money since, by creating so damned much of it, the idiot Congress and the moron Obama can deficit-spend us into (switching again to the figurative sense) the hell of (back to the literal) inflationary bankruptcy and ruin us completely, sort of like how your sweet, sweet love literally ruined my whole freaking life, metaphorically broke my heart and literally ruined my trust in women ever since, so that now I think females are all lying, two-timing, heart-breaking tramps like you, and all I have left is a currency that is losing its buying power, and the aforementioned tears and beers!”

I was pretty sloshed, which may explain how I immediately saw the chart-busting potential of this terrific new song of mine, and was working on the second verse (where I work in how you ought to be buying gold, silver and oil, and if you aren’t, then you are an idiot like, umm, Charlene) when I realized that perhaps I ought to do a little market research as to its popularity before I invest any more time in it.

So I turned around and said to the listless barflies around me, “Hey! Listen to this!”, and I sang them the first verse. From their reaction, I learned a lot, like about how tuneless, slurred monotones delivered in a bizarre meter are not as popular as I had hoped, but mostly in the, “I don’t get it, and it sounds stupid” genre.

So I explained, “It’s a sad story of a star-crossed love gone wrong, you morons, where a beautiful girl named Charlene breaks a good boy’s heart, and who tells him to his stricken face that she would never have agreed to let him copy her homework in the first place if she had known how creepy and weird he was, which is such a tragic blow that it is killing him inside, not unlike how the Federal Reserve is killing our money by creating so much of it that we are doomed to ruinous inflation in prices, which means your money is being killed! Can’t you see the obvious parallels, you morons?”

I saw that I was not getting through to these drunken sots, and I knew that they would be similarly unimpressed with the news that the Federal Reserve increased Total Fed Credit by a whopping $30 billion last week, and then apparently used the money to buy another $39 billion in US government securities, taking their massive, monstrous, corrupt accumulation of this crap to $2.011 trillion. I sigh.

And I am sure that they would be completely uninterested that Foreign Holdings held at the Fed increased by a big ol’ $15 billion last week, and the total of these holdings of foreigners who are, I assume, up to their necks in US dollars, is now less than a measly $4 billion away from crossing the $2 trillion mark! Wow!

Do you really, really, really need me to tell you to buy gold, silver and oil after all of that? No, I didn’t think so.

Ballad of a Heartbreaking Money Supply originally appeared in the Daily Reckoning.

Down to Earth in Germany?

It was hard not to sense that part of the IMF’s recent inquiry into Germany’s economy was also aimed at asking the country to eat a little bit of humble pie in the context of the ongoing difficulties facing the Eurozone. Consequently, Germany has been the poster child for the good pupil in class and  an example to follow as the world seemed to have  come to a near end in Greece, Spain and elsewhere. Today’s hint from the IMF should alert us to the fact that all is not well in the so-called engine room of Germany.

(quote Bloomberg)

The International Monetary Fund cut its growth forecast for Germany after a recovery in Europe’s largest economy came to a halt, and said the government needs a “credible” plan to reduce its deficit. The IMF expects the German economy to expand 1.2 percent this year and 1.7 percent in 2011, the Washington-based lender said in a report published today. In January, the fund forecast growth of 1.5 percent in 2010 and 1.9 percent next year.

(…)

The IMF urged the German government to foster domestic consumer spending. “Strengthening domestic sources of growth will help cushion the German economy against external shocks as well as benefit the euro-area countries and the global economy by reducing trade and payments imbalances,” according to the report.

(…)

Germany mustn’t lose sight of its goal of fiscal consolidation, and policy makers must be careful as they exit from the economic support measures put in place during the global financial turbulence, the IMF said in the report.

“The authorities face the challenge of sustaining recovery while preparing to exit, as part of an international coordinated strategy, from the extraordinary measures introduced during the crisis,” it said. “Over time, fiscal policy will have to transition from support to credible consolidation.”

There are two concrete points of note above the first about how Germany should see to it that it expanded domestic demand has already gotten plenty of air time not least in the context of Merkel’s continuing nein to any suggestion that Germany should aid Southern Europe in their plight through giving a little back in terms providing demand for imports.

The problem is of course that Germany is structurally positionend to be a supplier of a excess savings to the global economy through an external surplus. And the reason, well try almost four decades worth of below replacement fertility and next to non net migration, but I guess most of you know my rant here.

More importantly, this points us to the real underlying issue  in the context of a global economy. In a recent very astute comment, Martin Wolf coined the concept Chermany to signify the folly of Germany and China in believing that they can demand that hitherto prolifigate deficit nations scale down while they continue ramping up external surpluses. This simply does not add up. Wolf really manages a home run with the following observation;

Behind all this is a fundamental divide. Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners. That was a big part of the catastrophe of the 1930s, too.

So, Germany suffers from a bit of delusion here. However, what caught my eye in particular was also the IMF’s subtle but firm indication that Germany also has to tend to its public finances and now that growth seems to be less vibrant than initially assumed, it is all the more important that Germany takes proactive action sooner rather than later. And herin lies of course the rub since Germany is only surpassed by Japan when it comes to demographic ageing and thus the future liabilities of Germany are substantial.

True; Germany is moving into this with an overall lower level of debt/gdp and if there is something the Germans take pride in, it is their ability to impose self-inflicted pain and austerity to correct and to increase competitiveness and achieve growth from external sources. Yet, this brings us right back smack into the wall here since this is exactly where we don’t want Germany to go, but exactly because of the demographic prospects, it is where Germany must go. In this way, Germany needs an external surplus for the same reason that Japan needs one; the expected return in the German economy and the underlying future government liabilities would not allow Germany to finance an external deficit at “acceptable” yields. This is curious in light of that that the yield on German bonds are used as benchmarks for the obvious reason that Germany is a net external lender, but what if this changed?

Of course, this is not only about Germany, but also about the majority of the Eurozone edifice which leaves, yet again the tricky question of just how we are to find those brave economies willing to stand on the opposite part of the scale as ageing and overleveraged economies crowd the savings surplus side.This is really the question we must answer (c.f. Wolf above) even if it is indeed tempting to rely on Germany to do the heavy lifting. So far, the signals from Germany have suggested that this won’t happen with the good will of the German government, but ultimately it won’t happen because Germany is fundamentally unable to step up to the plate and provide the capacity for the surplus of others.

One would hope that as Germany slowly wakes up to this reality and the limitations of its own economy, it will hopefully bring the country and her politicians back down to earth.

Economic Events on April 1, 2010

At 8:30 AM EDT, the weekly report on initial jobless claims will be released, and the consensus is 440,000 new jobless claims, which would be a slight improvement over last week’s better than expected report, and would continue the positive trend in employment.

At 10:00 AM EDT, the Construction Spending report will be released, and the consensus is a decline of 1.1% compared to the previous month.   Given that new housing starts were down sharply in February, construction spending should weaken as well.

The figures for motor vehicle sales in March will be released today.  The consensus estimate is that 9 million autos were sold in March, which would be an increase of 1.4 million over February, though February sales were hurt by winter storms and Toyota’s recalls.

Also, there are a number of Treasury bond auctions today.  Recent auctions have shown some weakness in the Treasury market, causing interest rates to rise, and investors will watch these auctions to see if the trend continues.

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