Greg's Note: Inflation! No, really. Don't be fooled by falling prices. Adrian Ash explains how the Fed is seeing to it that your dollars won't be worth as much down the road. Read below for the details and send your questions and comments to greg@whiskeyandgunpowder.com. Whiskey & Gunpowder
"A country's long-run inflation is caused primarily, or perhaps exclusively, by increases in its own monetary base," wrote Richard G. Anderson — a vice-president and senior economist at the Federal Reserve Bank of St. Louis — in a 2006 paper. Which would mean America is about to get hit by a hurricane of money-blown inflation in the cost of living.
Base money, the economists tell us, means cash — notes and coins only — held outside of the central bank and outside government. It doesn't include any measure of credit, debt or near-money items (such as commercial bonds or letters of credit). The monetary base is simply the sum total of notes and coins available in the economy. That's why it's also known as "high-powered money"...the source of what then becomes credit, debt and near-money promises when it's lent, re-lent and re-lent again by the banks. ~~~~~~~~~~~~Special~~~~~~~~~~~~~~ Oil at $70 a Barrel — Gold at $500 By Christmas? With stocks as volatile as nitroglycerin, gold should be trading above $2,000 an ounce! But the dollar insurrection has shaken up the commodities markets. Some experts now put gold's downside at $500...even $400. What if they're right? TFN's options strategist Andrew Snyder has developed a gold hedge strategy that could make you money on your gold position either way. Find his Special Report on the Members Only Reports section of HotStockConfidential.com. To become an instant member, click here... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ As you can see, the steady growth in the U.S. monetary base — averaging 6% per year since the end of the First World War — just morphed into an unprecedented jump. The quantity of base money in the U.S. economy — meaning the actual volume of Uncle Sam's official cash notes and coins held in private hands — swelled by 25% during October. And what does that mean? "Prolonged inflation (and, especially hyperinflation) cannot continue without increases in the monetary base," continued Dr. Anderson — who's made something of a specialism of studying base money — in that 2006 research paper. Whereas "sharp reductions in inflation such as occurred in the United States during 1979-1980 typically are accompanied by, and likely require, sharp reductions in the monetary base." There seems little chance, however, of a "sharp reduction" in the amount of money flowing round America right now. Not with the Federal Reserve itself pumping credit into America's banks, brokers and dealers.
U.S. banks owed, on average, less than $600 million to the Federal Reserve between 1986 and the start of 2008. Their outstanding debt to the U.S. central bank hit a record high of $12 billion just after the 9/11 attacks of 2001. By the middle of last month, that outstanding debt stood above $400 billion, thanks to two developments:
Please Note: The Fed's new and fast-growing loans to the money markets — the "Term auction credit" — doesn't show in the Fed debt figures charted above. So that's another $750 billion you can add to the pile for the Oct.-to-Dec. period. The upshot? "I am worried about the deflation risk," says Stephen King, head economist at HSBC bank in London. "Deflation and stag-deflation will, in six months, become the main concern of policy authorities," agrees Nouriel Roubini, the media's credit-crunch darling, from the Stern Business School in New York. All in all, "if inflation expectations were to decline sharply," says Frederic Mishkin — a former Fed policy maker and now a professor at Columbia University — "that would greatly increase the risk of deflation." ~~~~~~~~~~~~~Special~~~~~~~~~~~~~~ Your Personal Bailout Package Is Here The greatest economic crisis ever is still gathering power…what's going on today is just a precursor. The time bomb of our national deficits is still ticking away. Don't be caught unprepared. Our offer is currently exclusive to Agora readers, but only until Dec 21 when we make it available to the general public. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Confused? You should be. Deflation as properly defined means a shrinking money supply. Inflation is its opposite. The one tends to create falling prices (and thus encourage bankruptcy and job losses) while the other is always and everywhere followed by a rise in the cost of living (but without stronger business necessarily hiring new staff). So place your bets now. Because whether you're a gambler or not, the Fed's massive monetary inflation — both in loans to banks and brokers, as well as in notes and coins — is going to force your hand. Regards, Greg's Endnote: Thanks to Adrian for tending today's Whiskey Bar. Adrian can help you store some gold offshore where the gubment can't get its greasy mitts all over it. Just click here to learn more. This inflation/deflation stuff can indeed be a little confusing. Strict definitions about the supply of money help. Calling falling prices "deflation" is a little inaccurate; I'm always careful to distinguish such "price deflation" from deflation in the money supply. I'd like to reiterate Adrian's last point: no matter what you do, you're still taking a gamble in some sense. Most folks are holding onto dollars as a store of their wealth. They don't think of themselves as gambling, but to me that's the riskiest position of them all. You can hedge your bets for a very low premium. Read more here. |
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