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.

Gold Daily and Silver Weekly Charts

Silver is still struggling, but gold looks like it is getting ready to launch higher, break and run to at least 1810.

Let's see if it can do it. That will scare Benny and his Central Banking cronies.

If it does it may unleash silver, which is like a rocket when it breaks free.

SP 500 and NDX Futures Daily Charts

The European situation is starting to make Wall Street edgy again. The Merkel-Sarkozy proposal for a financial transactions tax especially spooked the financials.

The market is showing weakness, but there is a strong desire for it to recover. A long down or up candle this week may illuminate its next sustained direction.

"How far that little candle throws his beams!"

Wm. Shakespeare, Merchant of Venice

US Markets and Foreign Ownership, Portfolio Risk and Net Investment Position

Keep in mind that when they talk about the "US position" or the "China position" this can include all ownership, both official and private, unless otherwise specified.

I was a little surprised to see the relative size of the US equity market versus the debt markets, ex-Federal Reserve ownership.

Also a bit of a surprise was the size of European Direct Investment in the US compared to other regions. No wonder Benny felt compelled to bail out their banks.

Things to look for in these graphs:

 Since 2002, the increase in foreign ownership of Treasury bonds has been driven almost entirely by government buyers. Until the 2007–2009 crisis, the same was true for bonds issued by governmentsponsored enterprises (agencies). In the postcrisis recovery, foreign private holdings of agencies are rising,
while foreign government holdings continue to fall.

 From 2005 to early 2007, foreign governments’ Treasury purchases were driven by China’s purchases. However, China became less significant during the crisis as other investors crowded in. Today, China’s purchases have remained elevated while the rest of the world is purchasing less than during the crisis peak.

 The Net International Investment Position (NIIP), meaning foreigners’ holdings of U.S. assets minus U.S. holdings of foreign assets, has remained remarkably resilient, even though the large U.S. current account deficit reflects a steady flow of net foreign purchases of U.S. assets. This trend is likely to persist if the dollar depreciates, since dollar depreciation results in gains in the dollar value of U.S. holdings of foreign assets.

 The U.S. portfolio of foreign assets is relatively risky, with a significant share of holdings in equities that generate gains during a boom but suffer losses when crisis strikes. By contrast, foreign holdings of U.S. assets are less volatile because of the concentration in treasuries. Following a sharp decline in 2008, the U.S. net international investment position recovered in 2009 due to strong equity market performance.

The entire report can be found here: Foreign Ownershp of US Assets - CFR Chartbook

click on a chart to view a larger version

In Case You Were Wondering Who the Mainstream Media DOESN'T Support...

Crouching Corn Dogs, Hidden Agendas: The Coverage of the Iowa Straw Poll

Management of the news by the vested interests and status quo could not be more obvious in this case.

The problem with Ron Paul is that agree or disagree with him, he is honest, consistent, and he doesn't sell out his opinions for lobbyist money.

I don't care for some of his positions on civil rights, and the other 'intrusions of government' to protect the rights of people against majorities.

Not every crook carries a gun, and not every man and woman carries their dignity in their wallet. There is such a thing as an overly narrow interpretation of the Constitution. Paul may have moderated on these positions, but I have not yet heard it.

As with Obama, it is difficult and dangerous to assume what someone might do in particular situations and issues if they are elected. He needs to weave that into his overall philosophy to be credible. And he must say where he stands vis a vis other politicians from his wing of the party.

But on the economic front Ron Paul is better than most on several points. And his continual theme of restraining the reach and the expense of the American military involvement is powerful.

Ron Paul has 'third party' written all over him. The status quo of the powerful and their demimonde in the media fear him, and will do all that they can to stifle his message. Given the chance, they will 'Ross Perot' him. What was done to Perot, the real threats to harm his daughter, and then the media circus which painted him as 'a nut' for going public with those threats, was disgraceful.

As you may recall a credibility trap is when an organization cannot perform effective change and reform because it would require them to admit the corruption that exists, thereby placing the powerful insiders who are complicit at risk. So this sort of systemic distortion continues until there is an 'unavoidable crisis' like a war or a domestic event, and the past offenses can be swept under the rug for the sake of expediency in a swell of patriotic fervor.

Ron Paul is one of the few politicians who apparently "didn't take the money." And that makes him dangerous.

"The fight for justice against corruption is never easy. It never has been and never will be. It exacts a toll on our self, our families, our friends, and especially our children. In the end, I believe, as in my case, the price we pay is well worth holding on to our dignity...

We can holler and shout, but we also have to light the lamps that show the corruption, injustice, ineptitude and abuse of power. When we do, you will see the villains scurry into the woodwork the way roaches do when you turn on the light.”

Frank Serpico

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Gold Daily and Silver Weekly Charts, La Douleur du Monde, and The Fall of Troy

"A shudder in the loins engenders there
The broken wall, the burning roof and tower,
And Agamemnon dead."

William Butler Yeats, Leda and the Swan

No this is not a reference to birth of Greenspan, but to the grand arrangement of the allied powers after the war, the Bretton Woods Agreement, and the birth of the world's still reigning wonder, the world's reserve currency, the dollar.

The partnership of the financiers and the government in the States has taken the reserve currency hostage, turning it to its own purposes starting with the closing of the gold window by Nixon some 40 years ago today, and provoked a long, smoldering currency war.

But behind their slanted walls of mighty Wall Street by the Hudson flowing on the plains, the States have seemed implacable, almost invulnerable. And in their pride so have tempted the wrath of the gods.

Will the rest of the world find a champion to contest with the city on the hill? Many have stood so far and seemingly failed, most recently the son of Aërope.

And in his tent, brooding after a long period of unappreciation, is that legendary champion, Achilleus, armored in gold, with his wily companion, Odysseus, dressed in silver.

Is Bernanke the stalwart Hektor to stand against him, and Timmy the persuasive Paris?

And so the story goes...

SP 500 and NDX Futures Daily Charts - Options Expiration Week

As a reminder this is stock option expiration week.

Stocks were in rally mode today. The volumes were a little lighter than last week's downdrafts. Some might call this a seller's strike.

The key question for the intermediate term, is if this is a bear market rally, or a bull market correction.

The charts may provide us some information there.

The correction from the long rally proceeded as far as it possibly could before it would be called a new bear market.  We are now seeing what might be a technical bounce.

It is the continuation from here, perhaps after this option expiration, that will let us know if this is a bull market correction, or a new bear market. 

I am reasonably sure we will know by October.

Weekend Reading - The Glory of the Human Individual

A relative of my wife's in-laws was called away in her sleep last night, at age 69. She had not been ill. As they say, only God knows the time and the place.

She was still working, to try and make ends meet. She was always cheerful, and always provided the meals for family gatherings. Some of her dishes were legendary.  She was no great person, and the world will not remark her passing. One less old person. And some will say good riddance, just another statistic.

And yet her children and grandchildren are heartbroken and will be missing her greatly. She was a remarkably good wife, a good mother, and a good woman, always.

And her soul will still exist when planets decay and fall from their orbits, and stars burn out, and those who think they are doing God's work will still be regretting their selfish carelessness. And so the individual can be treasured, much more than objects.

Boxed and labeled, and viewed as things, at first a few, and then millions of people, can be efficiently eliminated and burned, and be counted as a mere statistic.

If we have learned nothing in the twentieth century, we should at least remember this, and never forget it. But the darkness, and the madness, will rise again in banal men with hardened hearts and sickened, deformed minds.

"God beholds you individually, whoever you are. He calls you by your name. He sees you and understands you, as He made you. He knows what is in you, all your own peculiar feelings and thoughts, your dispositions and likings, your strength, your weakness.

He views you in your day of rejoicing, and your day of sorrow. He sympathises in your hopes and your temptations. He interests Himself in all your anxieties and remembrances, all the rising and failings of your spirit. He has numbered the very hairs of your head and the height of your stature.

He compasses you round and bears you in His arms; He takes you up and sets you down. He notes your very countenance, whether smiling or in tears, whether healthful or sickly. He looks tenderly upon your hands and your feet; He hears your voice, the beating of your heart, and your very breathing.

You do not love yourself better than He loves you. You cannot shrink from pain more than He dislikes your bearing it; and if He puts it on you, it is as you would put it on yourself, if you would be wise, for a greater good afterwards....

God has created you to do Him some definite service; He has committed some work to you which He has not committed to another. You have your mission -- you may never know it in this life but you shall be told it in the next.

You are a link in a chain, a bond of connection between persons. He has not created you for naught. You shall do good, you shall do His work. You shall be an angel of peace, a preacher of truth in your own place while not intending it if you do but keep His commandments.

Therefore I will trust Him. Whatever I am, I can never be thrown away. If I am in sickness, my sickness may serve Him; in perplexity, my perplexity may serve Him. If I am in sorrow, my sorrow may serve Him. He does nothing in vain. He knows what He is about. He may take away my friends. He may throw me among strangers. He may make me feel desolate, make my spirits sink, hide my future from me -- still He knows what He is about.

May the Lord support us all the day long, till the shades lengthen and the evening comes, and the busy world is hushed, and the fever of life is over, and our work is done.

Then in His mercy may He give us a safe lodging, and a holy rest, and peace at the last."

John Henry Newman

It is easy to lose sight of the humanity of others. The objectification of the individual, the reduction of the person to a placeholder, is at the heart of all prejudice, most hatred, and much injustice..

Some think that a human being is a wonder of creation, one of the few things in all creation that lasts, and that each person has a potential for value and inherent worth, even if not greatness in this world. They are great, they are essential, they are unique, each significant in their own way. But not everyone turns out well.

Crudely and badly developed people tend to diminish the individual with respect to themselves, even if carelessly, often because of how they themselves have been treated, or how they have learned, and they seek to elevate themselves above the crowd whom they privately despise.

They attempt to climb out of the deep well of emptiness and self-deception that they have become by filling the hole in their being with things and people.  And people of this sort of development and viewpoint are always with us, to some degree in their minority. It is how they influence the majority, society as a whole, that is different from time to time, and place to place.

It is the attitude of society towards the individual, and its obligation to protect the weak, the elderly, and the different from the criminals and the unbalanced predators that sets its character out for all to see.

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed..."

The American Constitution, even with its imperfections in realization over time, is laid on this founding principle, as expressed in the Declaration of Independence.

This is why corporatism is the very antithesis of American liberty.