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.

SP 500 September Futures; Gold Daily and Weekly Charts: Silver Weekly Chart

SP 500 Futures
@ 11 PM EDT

Existing home sales tomorrow at 4.6 Million consensus. Refis are progressing so quickly the NY Fed is growing concerned about its shrinking MBS portfolios that it took over from the banks. As refis are done the mortgages leave the pool.

US GDP second estimate for Q2 on Thursday 27 August. Consensus is for 1.4% versus the first estimate of 2.4% and a chain deflator of 1.8%. If the deflator deviates lower from this figure then it might to 'enhance' a bad GDP figure. Watch inventories as well.



Gold Daily Chart

It is options expiration this week (26 August) at the Comex for the precious metals.



Gold Weekly Chart



Silver Weekly Chart

CFR: China Poised to Shock the Oil Market And Its Possible Consequences for Hyperinflation

I found this paper published by the Council on Foreign Relations to be a plausible argument in favor of the exhaustion of cheap oil, also known as Peak Oil. This growth in Chinese oil consumption into the 'knee of the curve' given its growing per capital income could very well cause an oil shock as the title of the paper suggests. As you may recall it was an oil shock that triggered the stagflation of the 1970's, a black swan event if there ever was one.

The weakness in its logic is assuming that things which happen in one country will necessarily happen in others, based on relatively simple vectors like per capita income. Examples of possible differences are the national infrastructure in roads, deployment of population relative to travel needs and the availability and pricing of public relative to private transportation. Since these are often significantly affected by policy decisions it is sometimes difficult to forecast them accurately.

Notice that China is under running the trends of the comparison countries at current levels. Why would we assume they would start tracking more closely to model once a certain threshold is surpassed? And then there are the growth assumptions for China, which could be optimistic. Extending aggressive trends is sometimes a dangerous forecasting method. It would also have been interesting to see where India fits on this chart.

Most of these factors modulate the timing of the outcome, but not necessarily the outcome itself. So the trend to cheap oil exhaustion remains persuasive; but as we all know, anything can happen, and sometimes it does.

As competition for oil increases it could have interesting effects on currency valuations, inter currency rates, and international relationships.

It was a bit of a coincidence that I had just reread How Hyperinflation Will Happen by Gonzalo Lira. It is a compelling read.

He had asked me to provide some feedback and any possible weakness in his argument, which I did in a comment at his site and in a few email responses.

Here is my edited comment from his site:

Although the scenario of a 'run on Treasuries' is possible as a path to hyperinflation, I do not think it is probable unless there is a significant 'trigger event' to precipitate it. The magnitude of the 'trigger event' required could lessen with time if the US financial situation continues to deteriorate.

Why do I say this? Because the TBTF banks have no incentive to join in the selling if the Fed stands to defend a price in the market. For JPM and Citi it is likely to be suicide to do so. Even the mighty Goldman is unlikely to buck the system, as it were. The NY Fed not only knows where the bodies are buried, it has helped to bury quite a few of them itself.

It took a 'Soros' for example to call the Bank of England out in their support for the pound in that famous incident. I see no such party of sufficient size and inclination now to take on the US Treasury and NY Fed in the debt markets.

I do think a trigger event or incident is possible. I believe it would involve an exogenous party of size, for example China, and an announcement regarding Treasury reserves.

I also think the Treasury run could be triggered by a precipitous decline in the value of the dollar. Note this implies the Treasury run would start on the shortest end of the curve, Fed notes of zero duration. Then the longer end would follow.

Very nice description of such an event, and chilling to say the least. But I think we are some distance from this without a substantial 'trigger event.'

And then I picked up this CFR essay which describes something which might fit the criterion of a 'trigger event.' After all, it was the oil embargo which precipitated the stagflation of 1970's. An oil shock could shake an already weakened US dollar as the trade deficit opened into a yawning chasm.

But I do remain convinced that hyperinflation is unlikely simply because the TBTF banks 'have the Fed's back' which is why they were allowed to continue to remain in business, with substantial subsidies, and grow even larger. All it takes to create a money machine is the Federal Reserve of New York and one or two captive Primary Dealer banks. The dodgy backroom deals are probably more abundant than we realize or suspect even now. And I do not even wish to thing of the loathsome creatures that would enjoy taking advantage of a crisis of this magnitude to further promote their oligarchy and a New World Order.

As a reminder, black swan events like market crashes and runs on banks tend to be on the edges of probability. But they can happen, and are more likely to happen at certain times. Therefore it is potentially fatal to assume that things will always remain the same, and that the big trend changes will never occur.

Council on Foreign Relations
China Will Force the World Off Oil
By Paul Swartz
August 23, 2010

As a country’s per capita income increases, its per capita oil consumption increases. Consumption growth tends to be modest up until $15,000 income per head, but then accelerates rapidly. China is quickly approaching this point. South Korea, which consumes 3% of world oil output, is too small to disrupt oil markets.

China is too big not to disrupt them. Were China’s per capita oil consumption to be brought up to South Korea’s, its share of global consumption would increase from today’s 10% to over 70%. In order to cap China’s share at 22%, which is the U.S. share today, global oil output would have to increase by a massive 13% per annum over ten years – well beyond the 1% growth averaged since 1975.

This rate of growth is inconceivable, even if vastly more expensive sources of supply, such as the Canadian oil sands, were developed at breakneck speed. If China’s recent economic growth pace continues, it will surpass South Korea’s current per capita GDP shortly after 2020 – meaning that the world may be forced onto alternative energy sources much sooner than it realizes.