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Hyperinflation
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Analyst & Contributor @ The Morgan Report ( Silver-investor.com) ,
My company:
Stone Investment Group
  • Liquidity Crisis Increasing: Actions Speak Louder Than Words 5 comments
    Sep 25, 2009 8:10 PM


     The recent release of the weekly monetary aggregates by the Federal Reserve Indicate an Intensifying Liquidity Crisis & another potential round of bank failures this fall/winter. The Narrowest measure of the money supply (Base Money Supply) reached record high's as of Sept 25, surpassing that seen back in March of 2009. This constitutes an annualized growth rate of 121%! Currency in Circulation increased, but the disturbing is seen through the record reserves in the system. 



     The mainstream argument would go as follows: The dramatic spike in bank reserves is not indicative of potential crisis in the near future but rather our attempt to promote bank lending in an attempt to get commerce back to normal in all aspects of the economy. This, however, is in direct contradiction to the FED's decision to pay banks interest on the reserves they have recently injected into the system, or in other words an incentive to not lend that money. Only one logical conclusion can be drawn from this, The Fed is aware of and prepared for a combination of the following: Another substantial banking crisis (this time likely due to a spike in loan losses rather than toxic assets) , The inevitable fallout of the commercial real estate market (which again would mean substantial loan losses).

    This comes ahead of the unemployment numbers (which may show the economy crossing the threshold of double digit unemployment, but only if the temporary effects of the stimulus have faded). My intuition tells me it is either a pre-emptive move to ensure to the public that the banking system is adequately capitalized should either unemployment be higher than expected, pay-roll numbers lower than expected or the GDP revision worse than expected (all of which would spur the public to question whether the banking system could withstand more economic turbulence. In other words the FED's attempt to instill an artificial sense of confidence into the market in hopes that they will continue to increase spending, and give the illusion Big Ben has indeed saved the day. Unfortunately, as time will tell, the end-game is a currency crisis that could potentially break the USD.

    Peter Schiff made an excellent point that supports my aforementioned argument. Bernanke claims the economy is back on a path of growth ( the degree to which is not important) , yet the fed minutes say they will hold rates at 0% indefinitely! Even with the emergency rate cuts in 2001 by our former (just a reckless FED chairmen) , the short end of the curve still bottomed out at 1%. So why can't we have 1-2% rates (which are very low to begin with)? Well I think I indirectly answered that in the above paragraphs... We have only seen the tip of iceberg and the FED knows it.

    Gold & Silver Reign Supreme
    -My 2 Cents 


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  • JeffDB
    , contributor
    Comments (1462) | Send Message
     
    Howdy.

     

    Your post brings up a question I've had after reading an article on the mises.org website, and it looks like you might be just the person to answer it for me even though you are "not Austrian".

     

    The article was about the definition of "money" and in it the author stated the the Federal Reserve definition did not include funds on deposit at Federal Reserve Banks. When I saw the money supply charts similar to yours, I wasn't sure which reserves at the Federal Reserve Banks were included in their definition of the money supply and which were not.

     

    Are the funds of the banks the Fed is now paying interest on included in the money supply? I was guessing that the chart here was only currency in circulation and did not include any of those funds.
    --

     

    "This, however, is in direct contradiction to the FED's decision to pay banks interest on the reserves they have recently injected into the system, or in other words an incentive to not lend that money. Only one logical conclusion can be drawn from this, The Fed is aware of and prepared for a combination of the following: Another substantial banking crisis..."

     

    That certainly sounds plausible, but I was wondering if it might not also be that they put out more than they needed but that was using a rather large and blunt instrument and they are planning on fine tuning how much money they wanted out in the economy by tweaking the difference between the rates they were paying and the rates they were charging. If they wanted to keep the money out of circulation they could pay high enough interest rates that the banks wouldn't lend it out but would keep it on deposit at the Fed. If they wanted to boost the money supply a bit, they could lower the amount of interest they paid to encourage the banks to make more loans.

     

    and/or perhaps they are just wanting to improve the balance sheets of all the banks without having to give out TARP money. They can loan it out at low rates, and then let them redeposit it back at the Fed and earn interest on it for a riskless profit.

     

    or "all of the above". They have the funds out there ready to be deployed on virtually a moments notice without having to make a big scene about it. They can easily tweak the money supply or pour a lot into the economy whenever and however they see fit and can pump up the banks' balance sheets at the same time.

     

    Thanks for the article and any insight you might be able to provide.
    -----
    Errata?: I'm not sure but it seems like a word may be missing or misspelled in the following sentence:

     

    This constitutes an annualized growth rate of 121%! Currency in Circulation increased, but the disturbing is seen through the record reserves in the system.
    25 Sep 2009, 10:54 PM Reply Like
  • yellowhoard
    , contributor
    Comments (1507) | Send Message
     
    If I were buying now, I'd be buying silver.

     

    Short gold/long silver is a pretty conservative play.
    25 Sep 2009, 11:11 PM Reply Like
  • Hyperinflation
    , contributor
    Comments (816) | Send Message
     
    Author’s reply » There are many definitions of the money supply, you have the monetary base (above is blue while the currency is in red) , M-2 , MZM , the True Money Supply (which is the Austrian Money Supply) and M3, which was discon't in February of 2006 for obvious reasons. I have been active on mises.org trying to decide what really is money and I frankly can't come to a definitive conclusion. I have my own definition but also have heard many convincing arguments from others in the Austrian School. I personally follow M3 which I have to put together using all the components that used to be included in the measure for it is the most "broad measure". This is roughly defined as Savings deposits, large-time deposits, institutional money funds- These along with M1, small time deposits, repurchase agreements, and some other smaller categories gives more or less a rough estimation of m3 (I can give you the technical definition and where to find each component if you wish).
    As per your second question, to the best of my knowledge, The Fed is paying interest on the excess reserves or .25% of 900 Billion. You should read some brilliantly articulated and well written articles on Mises.org as he has a very good understanding of this. I used the monetary base for the sole reason is the most widely talked about, not that I think it is the best by any means, while on the other hand it paints a very ugly picture with respect to unprecedented injection by the FED of excess reserves.

     

    -Hope that was of any help

     

    On Sep 25 10:54 PM JeffDB wrote:

     

    > Howdy.
    >
    > Your post brings up a question I've had after reading an article
    > on the mises.org website, and it looks like you might be just the
    > person to answer it for me even though you are "not Austrian".<br/>
    >
    > The article was about the definition of "money" and in it the author
    > stated the the Federal Reserve definition did not include funds on
    > deposit at Federal Reserve Banks. When I saw the money supply charts
    > similar to yours, I wasn't sure which reserves at the Federal Reserve
    > Banks were included in their definition of the money supply and which
    > were not.
    >
    > Are the funds of the banks the Fed is now paying interest on included
    > in the money supply? I was guessing that the chart here was only
    > currency in circulation and did not include any of those funds.<br/>--
    >
    >
    > "This, however, is in direct contradiction to the FED's decision
    > to pay banks interest on the reserves they have recently injected
    > into the system, or in other words an incentive to not lend that
    > money. Only one logical conclusion can be drawn from this, The Fed
    > is aware of and prepared for a combination of the following: Another
    > substantial banking crisis..."
    >
    > That certainly sounds plausible, but I was wondering if it might
    > not also be that they put out more than they needed but that was
    > using a rather large and blunt instrument and they are planning on
    > fine tuning how much money they wanted out in the economy by tweaking
    > the difference between the rates they were paying and the rates they
    > were charging. If they wanted to keep the money out of circulation
    > they could pay high enough interest rates that the banks wouldn't
    > lend it out but would keep it on deposit at the Fed. If they wanted
    > to boost the money supply a bit, they could lower the amount of interest
    > they paid to encourage the banks to make more loans.
    >
    > and/or perhaps they are just wanting to improve the balance sheets
    > of all the banks without having to give out TARP money. They can
    > loan it out at low rates, and then let them redeposit it back at
    > the Fed and earn interest on it for a riskless profit.
    >
    > or "all of the above". They have the funds out there ready to be
    > deployed on virtually a moments notice without having to make a big
    > scene about it. They can easily tweak the money supply or pour a
    > lot into the economy whenever and however they see fit and can pump
    > up the banks' balance sheets at the same time.
    >
    > Thanks for the article and any insight you might be able to provide.
    >
    > -----
    > Errata?: I'm not sure but it seems like a word may be missing or
    > misspelled in the following sentence:
    >
    > This constitutes an annualized growth rate of 121%! Currency in Circulation
    > increased, but the disturbing is seen through the record reserves
    > in the system.
    25 Sep 2009, 11:40 PM Reply Like
  • Hyperinflation
    , contributor
    Comments (816) | Send Message
     
    Author’s reply » Agree completely. I think another good strategy it to short the GLD and either buy gold or silver miners or the leveraged gold or silver ETF

     

    On Sep 25 11:11 PM yellowhoard wrote:

     

    > If I were buying now, I'd be buying silver.
    >
    > Short gold/long silver is a pretty conservative play.
    25 Sep 2009, 11:41 PM Reply Like
  • JeffDB
    , contributor
    Comments (1462) | Send Message
     
    Thanks for the reply.

     

    I found the paragraph on the Mises.org website that apparently confused me:

     

    Austrian Definitions of the Supply of Money
    By Murray N. Rothbard

     

    mises.org/rothbard/aus...

     

    "One anomaly in American monetary statistics should also be cleared up:
    for a reason that remains obscure, demand deposits in commercial banks
    or in the Federal Reserve Banks owned by the Treasury are excluded
    from the total money supply. If, for example, the Treasury taxes citizens
    by $1 billion, and their demand deposits are shifted from public accounts
    to the Treasury account, the total supply of money is considered to have
    fallen by $1 billion, when what has really happened is that $1 billion
    worth of money has (temporarily) shifted from private to governmental
    hands. Clearly, Treasury deposits should be included in the national total
    of the money supply."
    ---

     

    I had remembered reading that, but upon rereading it I think I had been a little confused. It looks to me as if demand deposits owned by the Treasury are not included in the money supply. I had thought it might have meant deposits by member banks at the Fed were not to be counted in the money supply. I had tried to find a definition of the money supply on the Federal Reserve websites but only could find allusions to it in places and in one such place it said something about some deposits being "excluded for obvious reasons".

     

    So it sounds to me as if money from the proceeds of sales of Treasuries, if put on deposit at the Federal Reserve banks or commercial banks is not included in the money supply until it is actually put into circulation.

     

    But I suppose if it is given to banks and they put it on deposit in a Federal Reserve bank it *is* included in the money supply.

     

    BTW, M2 looks like it has jumped a little above the trendline it had been following but not nearly as much as M1. Which one do you think is the one to key on with respect to inflationary pressures?

     

    Also, is it fairly easy for a layman to keep track of the True Money Supply (which is the Austrian Money Supply) or does it take a lot of digging and manipulation to dig that out of the statistics publicly posted by the Federal Reserve?

     

    On Sep 25 11:40 PM Hyperinflation wrote:

     

    >
    26 Sep 2009, 02:13 AM Reply Like
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