JasonC

Which Way for the Prices of Oil and Gold?

Petervankan - go to Fred II and look up the M1 series. That is the narrow money supply the Fed directly controls through the size of its own balance sheet - banks only have fractional reserve requirements against M1 categories, not against the broader measures that include savings rather than transactions accounts.

And it hasn't moved an inch since the spring of 2005.

That's right Virginia, this oh so accomodative Fed hasn't expanded its balance sheet since the start of its tightening cycle, that broke the real estate bubble.

The whole drop in rates over the last year only kept the money supply from contracting rapidly, as commercial paper ran off at trillion a year annual rates. Yes the Fed extended all sorts of accomodation to the banks. But it sold treasuries into the market dollar for dollar as it did so. It's total balance sheet is no bigger today than this time last year.

The dollar was oversold on financial meltdown fears, and it has been moving higher since Bear Stearns day. Up 8% vs the Yen. Gold has been falling at a double digit annual rate since then. Oil had a speculative blow off as it decoupled from the dollar, but there was no way to sustain such high prices. There aren't more dollar chasing the same amount of oil - there was just overpriced oil smashing demand to atoms. So it is coming back down.

The people who believe we are in some epic inflation are ideologues, not empirical, and looking in a rear view mirror. The banks are reining in their lending as hard as they can, forcing strong cash flows in their own direction instead of supplying the world with more cash. And that cash flow is disappearing, into loss reserves and balance sheet shrinkage. M2 has been contracting outright since March.

It's deflation, not inflation.