Money Supply and Demand, and the Monetization of Debt

The growth of the broad short term money supply remains strong for a slack economy, although not quite as robust as when there was a flight to quality out of equities and Ben did his moonshot with the Fed's balance sheet.



Demand for money? What demand? This is something new in the post World War II era.



Relative to the growth of bank credit, the growth of broad short term money as measured in MZM is outsized as the Fed intends it to be.



The limit of the Fed's ability to monetize various debt instruments already in existence is the value of the dollar relative to the purchasing power of the other major fiat currencies.



Do people realize that a monetization of the dollar is occurring? Some do.



As one might expect the velocity of money, which is the ratio of money supply to the aggregate demand for money (GNP), is very low. This is helping the Fed to keep inflation selectively low, because although there is a lot of money relative to bank credit demand, that increased money is not doing much chasing of goods. It seems to be flowing once again into financial assets, which is probably an artifact of where the money has been allocated. How many cars and meals can a wealthy person or corporation consume? They do not create consumption out of their excess, they increase their speculation and the acquisition of the means of future production.

As the velocity of money starts increasing then the Fed will have to change its stance on quantitative easing, which is really nothing more than the monetization of existing debt.

SP 500 Volumes and Cash Flows Fading

They got the Dollar General IPO out the door and a few more deals were done so its "Mission Accomplished" for Wall Street. The SP 500 looks to be completing a hand off to the retail crowd of overpriced paper in this cycle of the price pump. Time to dump the bids and let it drop, with maybe one more push higher at most to suck in a little more money from the productive economy, or at least what is left of it.

Be aware. This rally is a ponzi scheme thinly disguised even by US Wall Street standards. But do not try and get in front of it, to short it prematurely.

The Obama administration is as asleep at the switch and coopted by its masters in New York as was the prior administration's regulators under Chris Cox, and that is a real accomplishment in a failure to reform.

People forget what the markets were like in the late 1970's when the pits were dead and the average person wanted nothing to do with the US equity markets. The creation of 401k's and more gambling tables like the options exchanges helped to perk things up. This latest generation of jokers will not stop until they have trashed the markets once again.

Expect more token reforms like position limits out of this crew in key commodities, with loopholes big enough for a vampire squid to slip through without inconvenience like the other 'reforms' being crafted by Barney, Tim, Larry, and Chris.

America, what are you becoming?

"How are the mighty fallen, and their devices of empire perished..."

Sachs: Obama Has Lost His Way On Jobs

Obama has not lost his way. His team led by Summers and Geithner are making the same mistakes that they did in the formation of the first tech bubble in response to the Asican currency crisis and the Russian debt default. The Obama Administration is serving its employers and contributors on Wall Street.

The banks must be restrained, the financial system reformed, and balance restored to the economy before there can be a sustained recovery.

Here is a perspective from Jeff Sachs of Columbia University.

Speaking of Garish Bling, the US Long Bond Is On Sale Today

Some US institutions are being compelled by new government regulations to buy long bonds to 'match duration' of their obligations per a ruling of a few years ago.

Other than that, anyone buying the 30 year bond, other than for the Fed carry trade, in an time of quantitative easing and free spending government, should be institutionalized.

The Fed bond carry trade is when the primary dealers buy Timmy's bond with Ben's money, and then sell it back to the people's short term debt in dollars via the Fed. It keeps yields on the long end down, and maintains the appearance of stability. The dealers get to front run the buys and short the sells.

It is a pyramid scheme to accomplish a short term objective.

MarketWatch
Treasurys edge up before long bond auction
By Deborah Levine
Nov. 12, 2009, 11:11 a.m. EST

NEW YORK (MarketWatch) -- Treasury prices edged up Thursday as investors anticipated the government would garner sufficient demand for a record amount of 30-year bonds sold during the session.

The $16 billion bond sale follows two major note auctions earlier in the week that were met with plenty of demand from investors.

Traders also pointed to a significant amount of maturing debt and coupon payments when the auctions settles that create a natural bid, as investors may roll that cash into the new securities.

"After the success of the first two offerings, this one is also expected to garner good support too," said analysts at Action Economics. "There remains a lot of cash to invest."