My Synopsis Of The US Money Supply Situation - Very Negative For Gold/Silver
Here's my synopsis of the US money supply situation. The Fed's control of the money supply (adjusted monetary base, see a few paragraphs below) is becoming basically negligible (growing less than 2% year over year), especially since the velocity (circulation) of money is in a drastic downturn (tried to find a link showing it, might post it later if I find it), due to the unraveling of the credit/debt instruments.
The drastic decline in the velocity of money means that the money supply would have to grow very fast just to MAINTAIN THE ECONOMY, let alone grow it at a considerably faster pace and get us out of the current huge mess. A severe recession, which is obviously very deflationary and very negative for gold/silver, is a definite possibility.
From John Mauldin:
"Financial innovations introduced in the early 90's like securitizations, CDOs, etc. It is financial innovation that spurs above trend growth in velocity.
The money supply is growing very slowly, alarmingly fast or just about right, depending upon which monetary measure you use.
First, let's look at the adjusted monetary base, or plain old cash plus bank reserves held at the Federal Reserve. That is the only part of the money supply the Fed has any real direct control of. And it is not growing that much (less than 2%!), and a lot of the cash goes overseas, never to come back to the US. Also note that the growth in the monetary base has been trending down until recently, see http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=AMBSL&s[1][transformation]=pc1."
"A Slowdown in Velocity
Now, why is the velocity of money slowing down? Notice the real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to rise faster than normal. Why? Primarily because of the financial innovations introduced in the early 90's like securitizations, CDOs, etc. It is financial innovation that spurs above trend growth in velocity.
And now we are watching the Great Unwind of financial innovations, as they went to excess and caused a credit crisis. In principle, a CDO or subprime asset backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in and Wall Street began to game the system. End of game.
What drove velocity to new highs is no longer part of the equation. Its absence is slowing things down. If the money supply did not rise significantly to offset that slowdown in velocity the economy would already be in a much deeper recession.
While the Fed does not have control over M2, when they lower interest rates, it is supposed to make us want to take on more risk, borrow money and boost the economy. So, they have an indirect influence.
I expect the Fed to cut another 25 basis points next week, and to give us a statement that will look neutral, with a nod toward difficult economic conditions. The latest Beige Book from the Fed was simply dreadful, so you can bet the governors will have a deteriorating economy in mind. Given the 25 plus year low in consumer confidence, they have little choice.
But the difference another 50 basis point cut (over the next few meetings) would make is not all that much. A 2% rate is already low. That would make the real rate (after inflation) negative. In one sense, 2% today is lower in real (inflation adjusted) terms than the 1% that Greenspan took it to. Back then inflation was just above 1%. We will have a negative real interest rate after this next cut. Depending upon which inflation measure you use (and there are a few with some wide differences), it could be as much as 2% negative. Now that is REAL stimulus.
And since we are on asides, let me predict that the official GDP for the first quarter will not be negative. You watch and see if the PCE deflator is below 3%. Call me cynical, but it would not surprise me, even as CPI is over 4%. Also, watch GDP get revised to negative next year. "
.......http://www.JoeFROCKS.com/ .
NEM XAU HUI
The drastic decline in the velocity of money means that the money supply would have to grow very fast just to MAINTAIN THE ECONOMY, let alone grow it at a considerably faster pace and get us out of the current huge mess. A severe recession, which is obviously very deflationary and very negative for gold/silver, is a definite possibility.
From John Mauldin:
"Financial innovations introduced in the early 90's like securitizations, CDOs, etc. It is financial innovation that spurs above trend growth in velocity.
The money supply is growing very slowly, alarmingly fast or just about right, depending upon which monetary measure you use.
First, let's look at the adjusted monetary base, or plain old cash plus bank reserves held at the Federal Reserve. That is the only part of the money supply the Fed has any real direct control of. And it is not growing that much (less than 2%!), and a lot of the cash goes overseas, never to come back to the US. Also note that the growth in the monetary base has been trending down until recently, see http://research.stlouisfed.org/fred2/fredgraph?chart_type=line&s[1][id]=AMBSL&s[1][transformation]=pc1."
"A Slowdown in Velocity
Now, why is the velocity of money slowing down? Notice the real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to rise faster than normal. Why? Primarily because of the financial innovations introduced in the early 90's like securitizations, CDOs, etc. It is financial innovation that spurs above trend growth in velocity.
And now we are watching the Great Unwind of financial innovations, as they went to excess and caused a credit crisis. In principle, a CDO or subprime asset backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in and Wall Street began to game the system. End of game.
What drove velocity to new highs is no longer part of the equation. Its absence is slowing things down. If the money supply did not rise significantly to offset that slowdown in velocity the economy would already be in a much deeper recession.
While the Fed does not have control over M2, when they lower interest rates, it is supposed to make us want to take on more risk, borrow money and boost the economy. So, they have an indirect influence.
I expect the Fed to cut another 25 basis points next week, and to give us a statement that will look neutral, with a nod toward difficult economic conditions. The latest Beige Book from the Fed was simply dreadful, so you can bet the governors will have a deteriorating economy in mind. Given the 25 plus year low in consumer confidence, they have little choice.
But the difference another 50 basis point cut (over the next few meetings) would make is not all that much. A 2% rate is already low. That would make the real rate (after inflation) negative. In one sense, 2% today is lower in real (inflation adjusted) terms than the 1% that Greenspan took it to. Back then inflation was just above 1%. We will have a negative real interest rate after this next cut. Depending upon which inflation measure you use (and there are a few with some wide differences), it could be as much as 2% negative. Now that is REAL stimulus.
And since we are on asides, let me predict that the official GDP for the first quarter will not be negative. You watch and see if the PCE deflator is below 3%. Call me cynical, but it would not surprise me, even as CPI is over 4%. Also, watch GDP get revised to negative next year. "
.......http://www.JoeFROCKS.com/ .
NEM XAU HUI
Labels: Gold, Gold Stocks, HUI, NEM, Silver, Silver Stocks, XAU
posted by Joe Ferrazzano at
4:15 PM
1 Comments:
Given the extremely deflationary factors/environment (stocks, real estate, credit/debt instruments, money market rates, etc plummeting) gold will probably bottom toward the bottom or possibly even below the Wave 2 Cyclical Bear Market cycle low target range of $500-550.
We won't know exactly where the primary multi year Secular/Generational Bull Market trendline since April 2001 is until the Wave 2 Cyclical Bear Market bottoms.
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Joe Ferrazzano, at 5:09 PM
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