Pictures of an Exhibition in Policy Error - Without Oath or Honor

The growth in money supply is very strong, both in M2 and MZM, both broad measures of overall supply, each with a differing emphasis on duration.  Both are growing at around 7 percent year over year.   This is certainly in excess of the GDP, and the growth of consumer loans and bank credit, which is only growing at 2.5 percent year over year.

What is particularly disturbing is that the growth rate of real disposable income at this late stage of The Recovery™ is sub one percent, even as corporate profits, cash levels, and executive pay return to stratospheric levels for the large multinationals with large cadres of lobbyists and significant political influence through the revolving door.

I am not saying this is solely a Federal Reserve driven policy error.  Not at all.

Quite a bit of it is being driven by fiscal policy, and specifically by the Congress and a Wall Street friendly Administration.  This is not a New Deal, it is the Raw Deal.

But the failure of the Fed to act aggressively in conjunction with other regulatory agencies to reform the financial system, given the additional powers as regulator which they actively sought in the aftermath of the financial crisis for which they were a primary contributor, makes them equally culpable for the folly of this 'trickle down' approach.  And the 'hands off, see no evil' approach to widespread financial fraud and abuse that continues even today.

There is a credibility trap at work, that prevents those in leadership positions from addressing the real problems frankly and honestly. They will attempt to shift the blame and the pain to the people, but with the pay and privilege of leadership comes responsibilities and obligations, what at another time would have been lumped together as 'honor.'  

Oaths and the highest principles of the land are just pieces of paper, not allowed to stand in the way of the personal god of the day, gettin' paid.

And I think that the ruling elite have lost all sight and sense of the consequences of this in a frenzy of personal advancement and enrichment.

This is neither sustainable nor decent, and will not end well.

 

"I believe we have a crisis of values that is extremely deep, because the regulations and the legal structures need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I'm going to put it very bluntly. I regard the moral environment as pathological. And I'm talking about the human interactions that I have. I've not seen anything like this, not felt it so palpably.

These people are out to make billions of dollars, and [think] nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people [or] counterparties in transactions.

They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can't find its voice. It's terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I'm afraid to say... both parties are up to their necks in this.

...But what it has led to is a sense of impunity that is really stunning, and you feel it on the individual level right now. And it's very very unhealthy. I have waited for four years, five years now, to see one figure on Wall Street speak in a moral language.

And I've have not seen it once. And that is shocking to me. And if they won't, I've waited for a judge, for our president, for somebody, and it hasn't happened. And by the way it's not going to happen any time soon, it seems."

Jeffrey Sachs, Address By Video to a Conference At the Philadelphia Fed, April 2013

Pictures From a Monetization

The Fed is printing money. Or perhaps more properly, monetizing debt, both public and private, but not efficiently or effectively from the perspective of the broader economy. That money, sometimes euphemistically called liquidity, is flowing directly into the financial system through the Banks as a matter of public policy.

It is not unlike sending aid to a third world country, where it is seized by small groups of powerful warlords for their own use and purposes, with them deciding how much will reach the people.

It is not even sophisticated math.  Look at the first chart. It is simple arithmetic.

Granted, the printing is not yet showing up as a pure monetary inflation, but primarily as asset bubbles in financial paper and selective items subject to secular monopoly market and speculative pressure: certain categories of consumer good, medicine, health care, financial fees, perks and bonuses, high end housing and collectibles, and political contributions by large organizations and the one percent for example.

That is because of the 'trickle down' approach of money distribution which the Fed, and the their partners in the government, are pursuing. It manifests in the declining velocity of money, slack aggregate demand, and the stagnant median wage. It has some of the appearance of financial feudalism in which capital substitutes for land.

The games being played in the markets are apparent, heavy-handed, and beneath contempt, operating under the rationale of a 'necessary perception management.' Necessary for whom? It is officially sanctioned theft, pure and simple, however one wishes to rationalize it. The 'new normal' is really the new awful, with a decidedly oligarchic taint.

Please be aware that all the two line charts below are using two scales, one on the left for monetary base and one on the right for the other.  The purpose here was to show how the monetary base compares in change, even if the change is not linear, or one for one.

The Fed will not stop expanding its monetary base anytime soon.  The economy is on life support.

They can monetize all the private and public debt that they can, but it will not have a positive effect until that money reaches the real economy.  For now it is flowing heavily to support a corrupt financial system that has not been reformed, to sustain speculation, and to further enrich those who made outsized gains during the credit bubble.

The government is as culpable and more than the Fed in this.  This applies to the Congress, the Administration, and the regulators. 

Related: Money Supply: A Primer

There are a number of ways to repair the damage to the real economy and get it growing again.  One way NOT to do it is to look at the landscape through the eyes of the trader or the speculator, and those who serve the financial interests.  For the most part they are self-absorbed and blinded by their predatory instincts.They are not creators of real wealth.  And they tend to distort the vital avenues of economic activity and discourse.

Charles Ferguson, Larry Summers and the Subversion of Economics

The ascent to power of the financiers, facilitated by the Clintons in the 1990's, is at the root of the problems of the day.  But to be fair, the last three Presidents and the Congress are all a disgrace.  And I see little hope on the horizon except for a few points of isolated light amidst a general erosion of stewardship.

My concern is that as the situation becomes worse, the elite will tend to punish the innocent and the weak.  This has been their response so far and in a broader swath of western countries than one might have otherwise imagined.  It may get so bad, so out of hand, that I can even imagine calls for a 'financial war crimes' trial some day, or worse. Probably worse, since these fellows are shameless, abusers of oaths, and masters of deceit.

So this will probably not end well.  But it will end.

Money Supply Figures: Monetary Inflation But Real Economy Is Dysfunctional

"He that gives good advice, builds with one hand; he that gives good counsel and example, builds with both; but he that gives good admonition and bad example, builds with one hand and pulls down with the other."

Francis Bacon

The growth in the MZM and M2 money supplies are very strong, almost remarkably so given the very slack growth in employment and GDP.

So why do we not see any serious inflation in prices?  Or real gains in employment for that matter.

As an aside, I think some of the more 'modern'  and aggressively modified measures of price inflation, like chained CPI, do not measure price inflation at all, but the consumer behaviour of product substitution under increasingly trying circumstances as people cope by reducing their standard of living. That is a measure of gradual deprivation, not inflation.

I would like to see a system where no social policy is passed that the leadership of a country does not accept first.  If there is to be austerity, pension cuts, reductions in medical services and food, let them accept it first for the good of the country and an example to their citizens.  I do not say this out of meanness, but charity.  For the double standard with selective justice is the slow and silent killer of oligarchies.

The velocity of money tells part of the story. Please note that those charts below are based on much longer timeframes to show that they are a trend, and not a short term affect of the collapse.

The 'velocity of money' is a calculation that shows the relationship between money supply and real economic activity as a ratio. It is falling to new lows. Some might even use the word 'plummet.' There is lots of new money, but not so much real activity.

The standard economic answer would be that the US is in a liquidity trap, and the recovery will have lags in employment gains.   The money is added, and then recovery follows, with employment showing the longest delay.  The standard remedy would be to create more jobs, artificially if necessary.  But that is not much different than unemployment insurance and programs like food stamps.  It is kind, and sensible, but not sustainable. 

A liquidity trap is described by Keynesian economics as a condition in which injections of money can support zero interest rates, but fail to generate real economic activity.

I think the current situation in the US and UK in particular involves a serious policy error in the failure to address the problems and imbalances that caused the financialization of the real economy, and its subsequent collapse under the weight of malinvestment and corruption.

Aggregate demand is not stimulated because sufficient money does not reach consumers, as it passes through a corrupt and broken financial and political system, being diverted largely to insiders at 'the top.'  Nothing could be more clear than looking at the statistics regarding income inequality.

Any gains by the large middle and lower classes will tend to be short term and illusory, involving more household balance sheet problems and debt until the system is reformed.  Some of this has to do with a policy bias that considers the vast mass of the people as consumers, but not as workers.

Merely adding more financialized money into an unreformed system will further compound the problems, and ultimately force a more significant crisis and change.  This is true whether done does it via more debt issuance or flashier gimmicks like modern monetary totems.

The underlying social tensions can only be ignored by the comfortable for so long.  As a corollary, applying austerity without reform is insanely self-destructive.  The proof of this is forthcoming.

Japan has been able to hold their system together for a protracted period of slack recovery due to their demographics, their industrial policy position in the world economy, and a largely homogeneous and communal society that cares for its own.  The US and the UK will have a shorter half life I am afraid.

The situation is Europe is a bit different, and likely to result in serious dislocations in their organizational fabric fairly soon if some of the problems there are not addressed.  The monetary union without fiscal cohesion is inherently unstable.  Only fraud allowed it to last as long as it did.

There is a possibility that the current policies in the US may succeed if austerity if not applied, and something happens in the currency war to affect the balance of trade.  I am not optimistic  So let's see what happens.

The UK may provide a good counter example to the US  Some new school of economic thought may find some useful data from that, if they can free themselves from the 'say for pay' mentality that currently impairs the public policy discussion in a disgraced profession.

Monetary Deflation - Not Visible Yet

As a reminder, in a purely fiat monetary system, inflation and deflation are the result of policy decisions, and not any endogenous factors in the economy.    Extreme outcomes such as a protracted deflation or hyperinflation are almost always the result of some policy decision which may be in error, unless they are caused by some exogenous shock or force.

This is a fundamental fact of how a fiat money system works, and what makes it different from a system in which the money is tied to some external control or standard, or some other relatively inflexible metric from the perspective of the system.

Please see Money Supply: A Primer if you wish for an explanation of some of these money supply measures.

And for all the Austrian economists, I have included True Money Supply as the second graph.

Performance of Stocks, Bonds, and Gold In an Inflationary Environment

Jeremy Grantham's GMO group has produced an interesting study showing the performance of three asset classes against inflation.

I think the true correlation is with negative real interest rates rather than inflation itself. In an inflationary period, interest rates tend to lag the increase in inflation, producing negative real rates.

But in a period of economic decline in which the Fed lowers rates artificially, negative real rates can also be created and rather more easily than some amateur economic theorists believe.

To slightly complicate matters, the markets tend to anticipate, tend to act on expectations before the reality of something. So we might see something like gold or interest rates signaling a period of inflation well ahead of its appearance, if they are allowed to seek their own levels in the market.

If you think about it, the correlation with negative interest rates makes sense. In a period of negative rates, all currency heavy financial instruments are probably facilitating the confiscation of wealth by the official banking system. Since gold has relatively little counterparty risk if properly held, it is likely to be considered a safe haven, in addition to other hard assets and stronger alternative currencies if such things are available.

Unfortunately for analysis, things are never so simple in real life.

In addition to negative interest rates, there are other forms of wealth confiscation, including the fraudulent mispricing of risk, outright fraud itself, and currency devaluation.

And finally, there is the sort of price manipulation which the Western central banks engaged in for a long period of time in strategically selling off portions of their gold in order to hold the price lower in a disastrous attempt to manage the financial markets and silence the warning signal from gold as asset bubbles began to build in the credit markets and the Bretton Woods global monetary agreement began to fall apart.

And so what might have been a gradual price increase in gold and silver instead became a powerful rally as the markets sought to correct to the primary trend once the banks stopped being net sellers of gold.   Now the financial system can only use other means in order to try and control their ascent to a genuine market clearing price based on years of monetary inflation.  There are various estimates of what that eventual price might be, but it most certainly is much higher than where the price is today.

Years of underinvestment in mining has created a dangerous shortage of gold and silver relative to potential demand.  Various financial instruments have been introduced to provide 'paper gold and silver' to meet that demand.  In addition, even physical exchanges like the LBMA have been pushed to dangerously high rates of leverage as demand for bullion outstrips available supply.  And so the markets drift inexorably into great opaqueness and repeated frauds because the world of paper has unhinged itself from reality across multiple fronts.   The problem is that the state of the currency feeds into all finanical markets and so a mischief done there spawns its children everywhere.

As one might suspect, the credibility trap in which the financial engineers find themselves causes occasional outbursts of hysterical animosity and antagonism against the reactions of the markets, and the reality of their own economic chickens coming home to roost. 

This is a recipe for disaster, and we can thank the Anglo-American banking cartel, and their gullible accomplices in the other western banks, for it when it happens.  When Dick Cheney said, "Reagan proved that deficits don't matter" what he did not realize was that he was reading the epitaph for the dollar reserve currency system that had been in place since the end of WW II.   They do matter, but sometimes the lags in time between cause and effect can be deceptively reassuring.

Debt may not matter in the short run, and Keynes had some very good and valid points to make about government stimulus during short periods of economic slumps to avoid feedback loops and the spiral of decline.   As an aside I wonder, if Keynes came back and saw what his acolytes were saying in his name, if he could stop throwing up.  When he found new facts he changed his mind, and I suspect he might have changed his and strongly cautioned against turning a remedy into an addiction to support  habitual corruption and unsustainable privilege.  But I do not know if he was that honest of a intellect, or would have merely gone along with the rest for the benefits of his class.

Huge deficits over long periods of time to finance non-structural consumption and underwrite malinvestment and currency manipulation are almost invariably toxic.  The 'vendor financing' that gave rise to the age of 'Asian miracles' is the rope which will be used to hang the capitalist system unless strong measures are taken to clean up the corrupt system that grew up to support and profit from this economic Frankenstein.

The only reasonable course of action is for the West to nationalize its TBTF banks, dismantle them gracefully while keeping their depositors whole, and give up their dreams of global and domestic financial domination by adopting a system of real capitalism based on market pricing, price discovery, competition kept intact from monopoly through effective regulation and law enforcement, transparency and a climate of honesty.  But that would visit restraint, inconvenience, and even some pain on the powerful and privileged, those who have benefited greatly from this long charade, so it will be resisted to their bitter end.

While the stock and housing market bubbles have burst, the bond bubble, which includes the US dollar as a bond of zero duration, remains to be resolved and marked to market.

Source: Jeremy Grantham's 4Q 2011 Investment Letter

US Monetary Aggregates Update - Failure to Reform - At the Edges of the Policy Continuum

Dude, where's my deflation?

It may seem a little counter-intuitive, that the money supply measurements are growing strongly, at the same time that the growth of consumer credit and spending remains sluggish, with GDP lagging.

Well, perhaps not so sluggish as some might wish to portray, as show in the last chart, but certainly not with enough force to bring back jobs.  The Fed can create money but not real growth.

As a reminder, the changes in money supply are not independent, and must be judged in relation to other things in the real economy to determine their nature and its effects. Growth must match growth, and decline, decline, over some reasonable period of time and trend, in relation to population, real transactions ex-financial, or some other measure of genuine economic activity.

That is one of the better arguments, by the way, against the use of a gold standard.  To say that there is not enough gold is ludicrous, since it is just a relative thing, a matter of valuation.  The drawback is that the supply of gold seems to grow stubbornly slow, and may not keep pace with the growth of the economy in response to some event like the industrial revolution.  This could be handled by the revaluation of the gold and the currencies, so again one wonders how real the objection is.  Its greatest opposition is from those who wish to exercise a more flexible and stealthy monetary control.  

As I said I am not in favor of such a standard now, as the economies of the west are too weak to support their rigor, and they would be quickly corrupted.  A bi-metallic standard holds more promise, but that too is a discussion for another time.  These are remedies best used before the fact, and not ex post facto in response to long years of monetary abuse and distortions.

Increasing the money supply in response to a credit crisis, which the Fed is doing with historic vigor, is a blunt instrument. And despite all the so-called proofs and theories to the contrary, they said they would do it, they could do it, and so they are doing it.

There is certainly no lack of people who remain obstinate in their errors and illusions. I have a little more respect for those who try to maintain their theories while at least accepting the obvious. But unless they can create a whole of it, their theory is found to be lacking.

Money is a little esoteric I admit, but the mindsets of those who have been wrong for so long is even more mysterious to me, unless one assumes some misinformed, cultish adherence. And as forecast, their rationales and arguments are becoming increasingly hysterical, in every sense of the word. They are even reluctant and resistant to accepting any 'existence proofs.'

"...we stood talking for some time together of Bishop Berkeley's ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal. I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it. I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it -- I refute it thus."

Boswell, Life of Johnson

Deflation and Inflation in an otherwise unconstrained fiat currency regime is a policy choice. The restraints come from any external standards including the acceptance at value of the currency by those outside the system. This is what the proponents of Modern Monetary Theory, those sons of Zimbabwe, fail to understand. At the end of the day, money printing at will must always resort to continual expansion and the threat of force to maintain its value. And when that force fails, the money fails.

The Fed certainly can do more to curtail speculation and incent real money into productive activity rather than speculation in a web of financial instruments. The Fed as bankers have rarely done well with their regulatory functions. And it would be denounced as 'political' and interfering with the [rampant fraud and looting in the] markets.

Rather it is to the governance of the nation, and fiscal and legislative policy, that the nation must turn. Unfortunately that segment of governance is caught in the same credibility trap as the rest of the country's fortunate ones who profited abundantly from the status quo and the financial bubble, and are feeling very smug about it, rationalizing self-proclaimed genius in their delusions, and 'winning.'

Make no mistake, as a policy choice deflation is possible. And for debtor nations to voluntarily choose deflation, in the artificial constraint of money and debt in pursuit of a stronger currency, without systemic reforms to address what specifically caused the recent credit crisis, is an act of national suicide. Minds fixed to extremes either can not or will not see or find the via media, the middle ground. They pass from extreme to extreme without ever finding a balance.

If one considers the Political and Economic Continuum I have constructed before, it is easier to understand this, and how the neo-liberals can become neo-conservatives, seemingly overnight.  The energy to cross the boundary from one extreme to another is less than the required energy and effort of returning to the center.  

At that end of the scale one sees only their extreme counterparts, and loses the ability to view the more distant middle ground, the vast center of society.  It is more than a willful blindness; it is a pathological disconnect from reality and the particular, an implosion of the self into a dissolute abstraction of slogans, symbols, and ideas.

And the extremes will tend towards distortion and delusion, as life does not flourish naturally on the tails of probability.  The far Left is as noxious and rarefied as the far Right.  At the end of the day, there is relatively little distance between them in terms of what it means to be specifically human.  The others, the great mass of humanity clustered at the center, becomes fully objectified, stereotyped, and statistical.  The far ends of the continuum are the well springs of the cults of death.

From a practical standpoint, central planning, whether it is performed by faceless bureaucrats or the monoplies of oligarchs, will tend to corruption and failure.
The path being pursued by some Western nations today seems to be untenable and lacking balance, and so the bleeding begins.  Crony capitalism has the momentum to create ever bigger losers and winners.  They are unwilling, and seemingly incapable of, discussing and investigating the frauds, much less correcting them. They fear to implicate themselves, and to disturb their 'good thing.'   And so they keep pressing forward to the hard stop, and the precipice.

The governance of old has tolerated the occasional bloodbath, so long as the few might personally benefit, as corrupt governments, mad rulers, and empires are wont to do. I pray not for that tragedy there, or anywhere.

Reform is the hard medicine that the governance of the country refuses to take. The failure is with the establishment as they once quaintly called it, the monied interests in a former age, and as always, the venality, blind ambition, and vanity of the privileged.

US Monetary Aggregates

It is easy to be misled by short term trending in money supply charts, especially those showing year over year growth as a percentage.  Money supply changes are seasonal and often very volatile, but nevermoreso during a credit collapse and quantitative easing.

A look at the longer term trends is most useful. And if necessary a review of Money Supply: A Primer.

The last chart is an index where 100 equals the M2 supply around the end of 2007, and the onset of the credit crisis. Since then it has grown almost twenty percent. 

Has GDP or the population grown 20 percent? So money per capita or per unit of productive effort is growing.   All one has to do is look at some reality based metric of money supply growth and negative real interest rates to understand the ten year bull market in gold and silver, and commodities in terms of US dollars. 

I understand people like to look at the various independent M3 estimates, but since the Fed no longer reports Eurodollars I have not seen what I could consider a credible recent estimate. And I doubt VERY much that M3 is underrunning M2 given the dollars that the Fed has been spreading around the world's banks.

Can the Fed keep this QE up? Will deflation set in, finally? It is a policy decision in a purely fiat currency. That could change, and I will know what to look for when it does. The Fed could be subjected to some external force, either from foreign creditors or domestic politics.   I expect that foreign shock to be inflationary rather than deflationary however.  As for the domestic forces, a choice for third world status is always an option.

The top five percent of Americans hold by far most of the country's wealth. And deflation may be in their short term interests, as in the case in the UK which seems to be going down that path. These policy decisions bring up a different set of considerations, many of which will stress the social fabric to the breaking point.  But a people grown coarse by war and ideology have done much odder things before. 
But for now the trend has not changed, and it would probably take a global economic collapse to change it. That is possible. And in such an event everything will get sold, for a time, as they were in the market crash of 2008.

Those who have been betting on deflation for the past five or ten years have been wrong. They could be right some time in the future. But one can be wrong on a mistaken principle for a very long, long time.

US Bonds have been in a long term disinflationary rally. There seem to be a number of 'name' people now looking for a trend change. That is the crux of Bernanke's short term focus, and the target of QE^n.

Meanwhile In the US: It's Raining Pennies From Heaven

Money Supply: A Primer

Updated Money Supply Figures: Dude, Still No Deflation

For comments see the original post from August 2010, US Money Supply Figures

My forecast remains for a severe stagflation with the continuing devaluation of the dollar relative to real goods, in a Potemkin economy masked by newspeak and distorted metrics designed to make looting appear to be recovery, crime as sensible compromise, torture as benevolence, tyranny as stewardship, and hell as heaven. 

Despite a drop in aggregate demand the monetization that the Fed is performing will do its work. However, this liquidity's diversion into the banking and health sectors to the relative exclusion of productive investment will create a third world economy with large pockets of wealth amongst generally reduced living standards.  One cannot stimulate a failed economy into vitality while the corruption that caused the collapse still remains.

The solution is to go back to the 1980's when the median wage began to stagnate and see what changed, and begin constructing the remedies from there.  I doubt this will occur as the American middle class has been almost as thoroughly indoctrinated to its own destruction as any people had been in the first half of the twentieth century, without even realizing it.   Edward Bernays would have been proud. 

“Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal – that there is no human relation between master and slave.” Leo Tolstoy

Note: I see in the news that the NYSE and the Deutsche Boerse are in merger talks. One ring to rule them all...

“Independently of its misdeeds, the mere power, the bare existence of such a power, is a thing irreconcilable with the nature and spirit of our institutions.” Nicolas Trist, secretary to Andrew Jackson, writing on the privately owned Second Bank of the United States (Schlesinger, The Age of Jackson, p.102)

M2

M2 Year Over Year Growth

MZM

MZM Year Over Year Growth

True Money Supply (TMS) from Mises




 

US Money Supply Figures: Dude, Where's My (Monetary) Deflation?

As a review or refresher please read: Money Supply A Primer if you need to remind yourself what these money supply figures represent.

Considering the high unemployment and sluggish GDP the fall off in year over year growth in the money supply figures is to be expected, especially after the bubbliciously high growth rates (11% and 16% respectively) just prior to the financial crisis. That is why one should look at both the nominal and the percent year over year charts.

There is certainly price deflation from slack aggregate demand fueled by stagnant wages and high unemployment, and it may get worse as the Fed and the government coddle their unreformed pet Banks, leaving the real economy and most Americans to twist in the wind. But there is no true monetary deflation yet, the kind which is supposed to stiffen the back of the dollar and all that.

There is also sufficient room for concern about the US dollar and its sustainability as the world's reserve currency. This would be familiar to most economists as Triffin's Dilemma. As the world shifts from the Bretton Woods II compromise to a less dollar specific regime the adjustment could be quite traumatic, especially to the financialization industry. Here is another description of the same phenomenon called the Seigniorage Curse. It is why I have called the US dollar and its associated bonds The Last Bubble.

"The Seigniorage Curse appears to hollow out the economy by the following manner: First, the premium charged to holders of dollars becomes a new source of accrued, aggregate revenue. This extra capital flowing into the economy is initially seen as a global honoring of our economy’s strength, and innovation. But when innovation falters and less value is created, seigniorage is maintained–and thus the unhealthy dynamic begins. From this point forward, whether the US economy either leads in innovation, or lags in innovation, the Dollar advantage grows regardless. It then becomes clear that manufacturing Dollars, rather than manufacturing goods, is a better value proposition. Once that dynamic is in place, then a long cycle of financialization ensues, in which innovation and talent moves from design and manufacturing to the financial sector. The financial sector then becomes rapacious, as it scours what’s left of the economy to monetize. Whereas manufacturing and innovation were once monetized, the financial sector begins to monetize itself...

Every inheritance starts out as a gift. Just as oil-cursed nations remain ever vulnerable to swings in the price of oil, the United States is now vulnerable to its own number one export–the value of the US Dollar and by extension the value of US Treasury Bonds."

True Money Supply is included for all you Austrian Economists, and it has enjoyed a bumper expansion under Bernanke's chairmanship. This is the money that is ready and able to be used as a medium of exchange, what the Austrians consider 'real money.' I am quite sure that Messrs Ludwig and Murray would be aghast at Bernanke's banking practices.

I include Eurodollars chart at the bottom. This is the 'missing component' from the M3 series. Several commentators seek to estimate M3 by obtaining the other M3 components from existing sources and then estimating eurdollars based on correlations and trending. See M3 Hysteria and a Look at M2, MZM, GDP and PPI.

The Eurodollar is a particularly interesting money measure to me be because of the two enormous dollar short squeezes which we have seen in Europe as customers demanded dollars based on dollar assets deposited in dodgy CDOs. It was on a parabolic trajectory BEFORE the squeezes, and one can only wonder where they are now.

I am still comfortable with my forecast for a severe stagflation, considering both a protracted monetary deflation and hyperinflation as less probable 'on the tail' events that almost certainly would reflect fiscal and monetary policy errors. What also concerns me is the failure to reform and address the grossly imbalanced economy. I am less confident today however, that Bernanke and the Congress will not make these errors because of the blind greed of the oligarchy and their influence over the country.

M2



M2 Year over Year Growth



MZM



MZM Year over Year Growth



True Money Supply (aka Rothbard Money Supply)

"The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply. The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count. MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed. For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak (2000). The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions."

Eurodollars

I think a case could be made that the US is exporting its monetary inflation overseas, particularly to Asia. At some point these eurodollars may come home to roost, and the arrival could be quite memorable. I try to recreate some sense of Eurodollar growth from the BIS reports, especially when verifying these eurodollar short squeezes, but the lags of over a quarter in reporting are quite tiresome.