The Printing Presses Are in Overdrive

Thursday night the Fed reported $103.6 billion in reserve funds were added to the system in the week ended October 8th. This boosted the balance to $1,547 billion, a 7.2% increase in just one week. Over the past 12 months, an increasingly desperate Fed has presided over a 69.9% expansion of reserve funds to stimulate the economy.

So far there has been little discernable effect in the equity market from this pump priming. Ditto for the frozen credit markets and dormant consumer spending. Financial and auto stocks continue to be hammered as the Treasury hurries to implement the recently passed $725 billion in aggregate bailouts.

With hundreds of billions in private wealth disappearing daily, Helicopter Ben needs a C-5 jumbo jet to spread his money. Compounding the problem, the newly issued currency fails to multiply efficiently due to the collapse of money velocity due to the freeze up in the credit market. The cornerstone of the fractional reserve system, the money multiplier effect, has been rendered nearly impotent.

The latest Fed money supply data demonstrate the point. For the 13 weeks ended Sep 29, annualized seasonally adjusted 13-week growth in M1 was 11.7%, but M2 growth trailed well behind at just 3.5%. However, both growth rates represent a large increase from the prior week's 8.8% growth in M1 and 2.4% growth in M2. The real action is in the past two weeks where the seasonally adjusted M1 soared by 6.7% (440% annualized) and M2 increased by just 2.4% (85% annualized).

Inflation is in the pipeline, but it's a long pipe. Milton Friedman linked inflation to the growth of M2. While M2 growth is currently stifled, it certainly exceeds the growth rate of the U.S. economy. The market is reacting rationally to this threat. Gold, silver and long bond rates have been trending higher, but significant inflation is probably not around the next corner. As the M2 money supply expands reluctantly, near term inflation is likely to be subdued as the money multiplier fails in a contracting economy.

Stock position: None.

Comments

[Scott Snively:]

The Fed data was from last night, Thursday, not Wednesday. Sorry for the typo.

2008 Oct 10 07:45 AM

[kurt walter:]

How do you invest in the printing presses? I do know the dollar will be worth much less in the next 10 years. Inflation will run wild. Too many dollars will be the reason.

2008 Oct 10 10:45 AM

[marine41:]

What happens to the Savings bonds (the money seniors lent to the goverment)????

2008 Oct 10 02:05 PM

[Scott Snively:]

Savings bonds will pay as promised. The only issue is what value the return will have when inflation kicks off. Since inflation tends to be a slow starter, it is unlikely to be a major issue before 2010.

2008 Oct 10 04:27 PM

[CLH:]

We are in deflation. Forget inflation. Japan had no inflation in the 1990s and US had no inflation in the 1930s. A debt pay off causes fewer dollars not more. I see the above mistake made over and over as people buy gold which has done nothing.

I will continue to short gold and commodities as prices continue to come down.

2008 Oct 10 10:47 PM

[Scott Snively:]

CLH - I agree inflation is not imminent, but there is one big difference between now and the 30's. Money supply contracted then it is growing at what must be a record pace right now. If the Fed runs out of ammo you will be correct, but I am not sure there is a limit to their ammo.
Finally, recessions and deflation do not always go hand in hand. Example: The hyperinflation in Germany's ravaged economy of the early 20's.

2008 Oct 11 07:56 AM