If the supply of dollars (e.g., M2) is growing at an unprecedented pace (25.7% annualized over the past three months) and the reserves required to support a huge increase in bank deposits are literally exploding (up at a 96% annualized pace in the past three months—see top chart above), but the value of the dollar is rising (see bottom chart above), what can we infer about the demand for dollars?
That's easy: the demand for dollars is outstripping even the exploding supply of dollars.
If the interest rate on 3-mo. T-bills (the worlds preeminent risk-free asset) is effectively zero (see above chart), and the yield on 10-yr Treasuries is at historically low levels, what does this tell us?
That's easy: the demand for safety is extreme, and the price of safety is extremely high.
If the price of gold is at all-time nominal highs, and very close to all-time inflation-adjusted highs, measured against any currency on the planet, what does this tell us?
That's easy: markets are willing to pay an extremely high price for an asset that can't be debauched by politicians or central banks. No one gets the benefit of the doubt these days.
And what does all this tell us?
One: If the supply of dollars is not rising faster than the demand for dollars, then this is not an inflation story that is unfolding. The Fed is not making a mistake. In fact, the Fed has been preemptively supplying plenty of liquidity to the banking system, and that's exactly what the banking system has needed.
Two: If the demand for dollars and the safety of T-bills and gold is huge, there must be something out there that is scaring the bejeesus out of the world's capital markets. As I've been detailing in recent posts, everything points to the Eurozone sovereign debt crisis as the proximate cause for the panic that has overtaken markets in recent weeks. Governments all over the world have grown too big, too fast, and they have squandered the proceeds of all the debt they have taken on; the Eurozone is just the first to be forced to come to terms with this reality.
Three: If there's one big thing lacking right now in the world, it is leadership. The Greeks need to shut up, grow up, and tighten their belts, or just admit that they are scoundrels and default. The ECB needs to stop trying to bail out the slackers in the eurozone, and maybe that means letting some banks fail; after all, bank failures are not the end of the world. Obama needs to channel Clinton and triangulate, and stop trying to blame the Republicans and the Tea Party for the results of his abysmal economic policies. California's Gov. Brown needs to just say NO to the unions and their demands for outrageous retirement benefits—let's have some public sector austerity, please.