M3 Money Supply and Inflation: Got Gold?

People are running around trying to figure out why in the heck the price of everything from gas to food to electricity is going nuts.

Many, including some not so well educated financial analysts call this inflation.

The truth is, inflation is not the price of things increasing. When prices rise, this is merely the symptom of what true inflation is: adding more currency to the money supply.

This is not rocket science. When you have more of something, it is worth less. Therefore, if you add more dollars to the available supply of dollars, obviously each dollar is worth less. Preposterous you say? Well let me put it another way, if dollars were as common as rocks lying on the ground, how valuable would they be? Obviously they would not be worth much. Therefore one of the key requirements of any form of currency is that it remains somewhat scarce. So, when the Fed pumps billions of dollars into the economy to rescue our financial system, people cheer because the system goes on for another day.

What many do not realize, is that every time they do, it raises the costs of everything from bread to gasoline.

This of course causes devaluation of the dollar, and inflation, which are essentially the same thing. Devaluation means the dollar is worth less, and inflation means (to most people) that things cost more. It is not that the things we buy are actually worth more, its just that our dollars are worth less, so it takes more dollars to buy the same thing that less dollar bought in the past.

My dear reader I know you are a smart cookie, and you arent so dumb that you will actually fall for the governments reported statistics on inflation. Especially since they have chosen to change the way inflation is measured, by leaving out little things like the cost of food and energy.

The chart below shows the rate at which the Fed is continuing to add dollars to the available pool of currency. As you can see, it is approaching 20%, yet the government reports “core inflation” (a term that is applicable only to the aliens living on planet Washington, because they obviously dont shop for groceries where you and I do) at less than 4%.

Now we come back to my ‘forever rant’. Gold and silver are some of the only ways you can protect the value of your wealth given todays financial landscape. If you are storing it in dollars, I feel sorry for you because it is being devalued at a horrendous rate. If you are storing it in the stock market, again, I feel sorry for you, because it is only a matter of time before the baby boomers who put all their retirement money into the stock market, causing it to rise, start taking their money out to finance retirement, which will obviously cause it to fall. The question is, will you be the first, or the last to get your money out?

Gold on the other hand has retained its purchasing power for thousands of years. Did you know, that an ounce of gold would clothe a man in the finest clothing available thousands of years ago? Guess what, today, an ounce of gold will still, clothe a man in the finest clothing available. 75 years ago $20 would likewise buy you an entire wardrobe, yet what can you buy today with that same $20?

Got gold yet?

Disclosure: I hold positions in SLW, HL, CDE, AUY, SVM.TO, NXG

Comments

[Old Bull:]

Retirees aren't crazy. They don't finance their day-today income by eating their seed corn. For income they use fixed interest income, stock dividends and social security. They keep stocks for growth and diversity. Boomers won't dent the stock market by wholesale selling of stocks. Most who are in, or close to retirement, follow conventional advice and have ALREADY moved a substantial part of their stock holdings into fixed interest investments.

2008 Apr 13 03:47 PM

[punk_ash:]

magman, do not be so sure about that, let us assume that all the retirees are as astute as you claim them to be, even then, we got a problem that as they get closer to the retirement and also as they go deeper into the retirement, their portfolio should become more heavy weight on fixed income and this effect can not be ignored. Most of the money in stocks belongs to the mutual funds and most of this really belongs to the baby boomers, just 5% withdrawal will cause bad outcomes, why do you think that the stock market did not pick up that well in the last 8 years.

2008 Apr 13 04:23 PM

[Matt R:]

Magman and Punk_Ash, I'm worried about all the retirees who blindly move their portfolios over to a heavy weighting of fixed income because that's what has always worked in the past. Given today's low yields, you're already losing out against the real inflation rate. To hold a long term (10 year, 20 year) bond, you'd have to be extremely confident that inflation will remain in check for the next couple decades. I doubt it will. These retirees may find that they have to dump their stock holdings to pay their bills because their bonds' values will be inflated away to near worthlessness. And Hillbill, I think the inflation measure is correct. Check out shadowstats.com for accurate inflation, GDP, and employment numbers. We are all being lied to. My wife's grocery and gas spending has doubled in the last couple years. That's reality.

2008 Apr 13 11:16 PM

[Gigem77:]

hillbill, North uses the Adjusted Monetary Base for his argument. This is a subset of the money supply that supposedly measures high powered money, not "actual" as you think. That is his choice and it doesn't make M3 "highly flawed". MZM is growing at 18% now also. Inflation is defined as the growth in the supply of money that exceeds the growth in production of goods and services. M3 is the best official measure of the total supply of money. Once inflation is established, prices rise across a broad basket of goods and services. So over the past 7-8 years we see gold rising from 250 to 1000, oil rising from 12 to 110, and similar increases in most commodities. Food, clothing, education, health care, and energy are all singing with gold that we have inflation.

2008 Apr 14 07:26 AM

[robert99:]

Excellent article - We need more like it.

2008 Apr 14 11:45 AM

[NOWHEREMAN:]

The only reason actual inflationary statistics are not employed is the COLA factor built into Social Security payments.....PERIOD.

The Social Security System as a whole would be considered on the verge of Bankruptcy if THE inflationary rise in Medicaid/Medicare were used as the defacto Statistic for COLA adjustments.

Inflation is what prompted the US Treasury to remove Food and Energy from both the CPI and PPI monthly statistics...Using so called Core statistics instead of smoothed Headline Inflation allows the Treasury to essentially SCREW Soc. Security recipients into the ground. Fixed Income is worth less and less as inflation rises.

Go buy a dozen large Grade A eggs.....see how much a fixed income person pays now vs. just 5 yrs. ago.

2008 Apr 14 11:54 AM

[jcrash:]

$12 was artifically low for oil. So $12 to $112 is a bit of a stretch as a comparison. $30 or so, yes.

Inflation is not the rise in price of goods. The dollar is not the currency of the world. A large part of the price changes consists of 1) speculation and 2) scarcity. Neither has a relationship with inflation. If everyone gets $100 and there is enough food for everyone. Then you add some more people and use some food for box stuffing, some people aren't going to eat and the price of food is going to go up. So, some others are going to buy up extra food and make those that want it pay even more. That is what you see in oil and gold. All these ETFs etc specializing in commodities and short stock positions have created a whole new phenomena. The markets are fundamentally different because of it - that is part of the equation.

30 years ago we made up 65% of the worlds GDP. Today, it is 25%. So, the FED doesn't create inflation in a global sense.

That Shadowstat guy cracks me up. Look at his numbers for the 2000-2003 period...prices were not going up that much then.

Groceries and gas may have gone up, but has your house payment/rent? Cars are still about what they were 15 years ago and they last longer.

I own some gold stocks, but only enough so that I have a well balanced portfolio. When the commodities pop (which may be next week or next year), they will drop 50% in a quarter. At the same time interest rates will go up and your fixed income investments will be the place to move into.

2008 Apr 15 04:12 PM

[ralldrittvsa:]

jcrash,

Cars are the same price as 15 years ago? Hahahaha. Nope!

In 1993, you could pick up certain brand new compacts for under $9,000.

You can MAYBE get a few for under $16,000 today.

2008 May 14 07:22 PM

[Lester:]

All those unfortunate retirees present and future, who have their nesteggs managed by a mutual fund manager, need to compare their own standard of living with the fund manager's lifestyle, and then they will learn who benefits from mutual funds!
And when the "Fund" doesn't make enough profit or income to cover operating expenses, the manager's payroll is met from the capital account! Whose money is that?
Trust the System and get screwed.

2008 May 15 04:55 AM

[Rene Cohrt:]

I have no religous feelings about silver and gold, but not being in papermoney I am out of being in the hands of criminals.

2008 May 15 05:15 AM

[User 198722:]

"jt" you couldn't have said it better.

You want my advice?

Re-read what JT said a couple of times for it to sink in.

I agree completely.

In this day & age that people have discovered most "consp. theories" are actually true and the government and others use that label to discredit cold hard proof - so anytime you mention that word, you loose ALL respect and credibility and sound as if you are "one of them."

HOLD PHYSICAL GOLD & SILVER!

SILVER WILL % MUCH MORE LOOK WHAT IT HAS DONE PAST FEW DAYS:

19th - 1.~~%
20th - 4.07%
21st 1.93%
22nd 0.~~%
23rd 1.34%

Depending on the times I checked they could have closer higher/lower.

Buy 20-30 times more silver in weight than gold.

But buy PLENTY of gold.

And food!

And ammo!

For the coming Martial Law in the USA!

PLEASE LOOK IT UP GOD DAMNIT EVEN IF IT FOR THE SAKE OF PROFITING FROM THE PLANNED DOLLAR COLLAPSE (FOR THE AMERO) and the end of the U.S. (for the NAU - North American Union - Canada/Mex/US).

Don't listen to disinfo agents like this writer & don't for one minute think those peaks were silver & golds highest price.

Silvers real value in terms of dollars is higher than $200 and gold is $2500 if you factor in inflation for those highs.

Also taking into consideration the manipulation by the Rothschilds and other people who hold most of the metals - you can bet your last ounce that their true value is much higher than cash can ever measured (they've admitted this publicly).

After all once the U.S. dollar is dropped... not even $1,000,000,000,000,000... will buy you my ounce of silver. Even if you came to me right now with the dollar still "running" - although not well - with double the value I would still not sell.

Unless I sold for double price then put all that money back in silver therefore doubling my stash (or gold).

Silver+ Gold = THE ONLY REAL MONEY THAT HAS EXISTED FOR 5000 YEARS!

Paper Money = Monopoly money = Toilet Paper

Credit = Numbers on a screen.

Use that monopoly money and digits on a screen to buy whatever REAL MONEY YOU CAN BEFORE IT'S TOO LATE

2008 May 23 03:58 PM

[User 198722:]

No website, no name - I don't want your money or anything.

I want you to use your head.

WAKE UP!

Research research research from 30+ media sources (NOT MAINSTREAM tv radio or yahoo/msn (unless for searching) and come to your own conclusion.

But by then you will have wasted the time I'm trying to save you!

believe it, fellow sheep :)

WAKE UP GOD DAMNIT IT WAKE UP!

OPEN YOUR EYES!

SEE WHAT IS GOING ON!

YOU ARE HEADED FOR THE SLAUGHTERHOUSE AND YOUR FELLOW SHEEP ARE WARNING YOU ABOUT IT AND YOU CONTINUE TO BLINDLY WALK TOWARDS THE GILLOTINE WHILE BUSH CLAIMS IT IS INFACT A "neck massager" LOL!

2008 May 23 03:59 PM

[User 198722:]

U.S. dollars will be NO MORE VALUABLE than Disney Land dollars in the outside world soon!

Shame we have Mickey Mouse as president :(

2008 May 23 04:01 PM

[User 198722:]

I had a dream the other night I didn’t understand,

A figure walking through the mist with a flintlock in his hand.

His clothes were torn, and dirty, as he stood there by my bed,

He took off his three-cornered hat, and speaking low he said:

We fought a revolution to secure our liberty,

We wrote the Constitution, as a shield from tyranny.

For future generations, this legacy we gave,

In this, the land of the free and the home of the brave.

The freedom we secured for you, we hoped you’d always keep,

But tyrants labored endlessly while your parents were asleep.

Your freedom gone - your courage lost - you’re no more than a slave,

In this, the land of the free and the home of the brave.

You buy permits to travel, and permits to own a gun,

Permits to start a business, or to build a place for one.

On land that you believe you own, you pay a yearly rent,

Although you have no choice in choosing how the money’s spent.

Your children must attend a school that doesn’t educate,

Your moral values can’t be taught, according to the state.

You read about the current “news” in a regulated press,

You pay a tax you do not owe, to please the IRS.

Your money is no longer made of silver or of gold,

You trade your wealth for paper, so your life can be controlled.

You pay for crimes that make our Nation turn from God to shame,

You’ve taken Satan’s number, as you’ve traded in your name.

You’ve given government control to those who do you harm,

So they can padlock churches, and steal the family farm.

And keep our country deep in debt, put men of God in jail,

Harass your fellow countrymen while corrupted courts prevail.

Your public servants don’t uphold the solemn oath they’re sworn,

Your daughters visit doctors so children won’t be born.

Your leaders ship artillery and guns to foreign shores,

And send your sons to slaughter, fighting other people’s wars!

Can you regain your freedom for which we fought and died?

Or don’t you have the courage, or the faith to stand with pride?

Are there no more values for which you’ll fight to save?

…Or do you wish your children live in fear, and be a slave?

Sons of the Republic, arise, and take a stand!

Defend the Constitution, the Supreme Law of the Land!

Preserve our Republic, and each God-given right!

And pray to God to keep the torch of freedom burning bright!

As I awoke he vanished, in the mist from whence he came,

His words were true, we are not free, we have ourselves to blame.

For even now as tyrants trample each God-given right,

We only watch and tremble, too afraid to stand and fight.

If he stood by your bedside in a dream while you were asleep,

And wonder what remains of your rights he fought to keep;

What would be your answer if he called out from the grave?

Is this still the land of the free, and the home of the brave?

2008 May 23 04:46 PM

[rob in madrid:]

the problem with gold is that you have to exchange it for dollars for it to be of any use. So once your gold is all gone what do you do?

the best portfollio is one that is well diversified.

2008 Jun 29 01:14 PM

[tashkerra:]

Many of the employees of Bear Sterns and Enron had well-diversified portfolios. So once all of their dollars ran out, what did they do?

The best portfolio is the one that has real money in it-- gold and silver.

2008 Jun 29 06:33 PM

[Rene Cohrt:]

However if you tried out a bying spray with goldcoins your kind of money would not be accepted, because people are so indoctrinated that noone know what to do with gold and silver.

A miracle in disguise, which show how long those metals still have to go, when verity sinks in.

2008 Jun 30 02:04 AM

[tashkerra:]

The only reason that the ' buying spree ' with gold coins would not be accepted is because the face value of those coins (which represent legal tender in the US) is too low compared to the value of the metal.

If the Treasury ever allows redemption based on the value of the metal, gold and silver would make fiat currency obsolete-- quickly

2008 Jun 30 03:37 PM