Michael B. Krause

Positioning for Reflation

Remember the credit-created portion of money supply is not made of available credit, it is used credit. The whole crux of the measurement problem is that the effective credit multiplier has dropped, and conventional metrics can't really tell you how far it has fallen. It is clear if you look at M2 money that the destruction of credit money does not show through these aggregates, otherwise you would see a sharp negative spike down (I believe it is still approximately positive y/y, even if you factor out monetary base growth).

If the Fed's knew how much money had been precisely destroyed, this whole problem could be easily solved by printing and filling in the hole directly (capitalizing the banks). Instead, they are creating programs that are the equivalent of a blind man stumbling around in a china shop. Eventually, they will get it right (and even go past). Since these financial markets have self-reinforcing mechanisms, I imagine that once the trend reverses, it will reverse euphorically, and we will get large one time moves in inflation rates. Those won't be sustainable - we may get 10-20% annual inflation rates for a year or three, but eventually the move will subside. Rate of money creation is just important as actual amount created. If they achieve their goal, they can just subside the rate. The difficulty here is the lag time between all of these behaviors.

Remember, if the Fed achieves an upward revaluation of houses by altering the fundamentals (by changing the long term cost of capital), banks presently insolvent are sitting on a gold mine.

All I can say is this: imagine the credit multiplier is not 10x right now, but 5x. Simultaneously the money base doubled (and will soon have tripled). At the moment, the short run (1 year), we're barely keeping our head above water preventing deflation. In the long run (2 years out), as the supply of liquidated homes clears, we are left with the same monetary base and the fed unable to mop a majority of that liquidity up (since it primarily made up of long term MBS, treasuries, and CDOs traded for treasuries in early Fed programs). The new money base will be 3-4T while the multiplier will recover from 5x to 10x, lets say. Suddenly real aggregate money supply has the means to double once credit starts moving. By the time the recovery starts, it will probably be a lot more difficult to position.

Rhodium: The Ultimate Reflationary Trade

You can procure it from some Jewelry stores as a powder or you can obtain a position in it from Kitco via their pool accounts.

The Case for $1300/Oz Gold

Trade imbalances exist because of the undervalued yuan (and unequal labor cost). You forget one thing: US (and European) demand for Chinese goods will fall dramatically as the imbalances correct, thus the Chinese economy will slow and they will have less buying power. Why buy a Chinese DVD player for $60 (instead of $30) when I can get a higher quality Japanese one for $60?


As long as I've lived, Japan was (and still is) an export economy. The same applies to China with a much larger scale of magnitude. A strong currency will kill their GDP growth.

And then there are crude input costs. If China entirely removed the subsidies on crude (they force their refiners to run at a loss), margins on Chinese businesses would be at further pressure. The stronger currency would help offset this pressure, but at the same time would dramatically reduce demand for their goods from world consumers.

Dear Mr. Bernanke

Depression? Get over it. Intel can't even give a bust quarter.

This is going to be a long a protracted unwind, a recession with some defaults, but this is not a depression.

U.S. Dollar Paradigm Shift Underway

correction: low interest rates ARE not significantly ramping up money supply.

typed a little too quick.

U.S. Dollar Paradigm Shift Underway

Yes. This 'bail-out' just prevented, as Meredith Whitney of Oppenheimer speculated, a 2.5T forced unwind (imagine the cascade) of credit default swaps.

The err here is that of the masses blindly following the quants in the quest that greed guides. That, by the way, is capitalism. Judge for yourself the errors of capitalism.

As far as John's arguments of money supply: My point is that there has been a gigantic amount of monetary destruction going on. The reigning of credit is monetary destruction. When the reserve base falls (as it has due to these bank losses), the total money outstanding is significantly less. Its just like a multiplier reduction. Now even with a new risk assessment mentality, w/ banks being afraid to even loan to each other, low interest rates is not significantly ramping up money supply. Its just helping reduce a barrier of functionality in the system.

A deflationary environment provides no incentive to run a business. Why invest if your future returns on investment will not pay for your current investment? If you want gold standard, no fractional reserve, etc. then you want a socialist system. Capitalism vs. socialism is another argument for another place.

But certainly, a strong currency with little innovation is fundamentally sound from the point of view of the fact that no progress yields little in the way of health care tech advances. You're right: you won't need to worry about retirement with a gold standard currency because you won't live more than a few years past working age.

U.S. Dollar Paradigm Shift Underway

This is a great provoker ... I was wrong about the depth of the credit crisis. I'll admit that. But if you read further in the same article, I go on to say:

If $90+ oil is here to stay, we're only at the beginning of the food commodities rally. Watch corn go to $6.00/bu, soy to $13.00, and forced out wheat acres will repeat this past season's ascent to an even more ridiculous level. Then comes the more expensive to feed pigs, cattle, and resulting milk.


And to the first writer: The average middle class lives more comfortably (minus the servants) than Rockefeller did at the turn of the century. A move away from gold standard facilitated this.

To the last poster, you say:

" For those of you that say innovation has created economic "booms"...I guess there is a sucker born every day. Booms are created by the FED. "

You are getting it backwards. The flexibility of the money supply helps and does not hinder gigantic productivity and technological increases. It is the fuel to our innovative spirit in the US. Sure it leads to excesses and busts like this, but this cycle is necessary. Greed, fear and risk taking are inherent in capitalist mentality systems; a move to a system that removes the cyclical element takes away the capitalist 'oxygen' so to speak.

On the other hand, I'm in no way condoning the giant 'herd' screwup that subprime became (not just in the US scene, but the world scene). It is a story of collusion between i-bankers, ratings agencies, and blind faith into flawed statistical models. Perhaps the lesson here is everyone in finance should be required to take 4 semesters of statistics and econometrics to not function like the herd and think for themselves.