us money supply set to double!!, page-28

Hi paladin,

As requested, here's the link discussed above.

BTW, don't get too taken in by SkipperX's so-called "lesson" in Econ 101. It shows that he knows enough that he should know better. However, his basic theory does not seem to proceed beyond that - basic.

In previous posts, it's apparent that he has not read about gold's historic currency role (or simply disregards it as "archaic"). A hoary argument, which any gold follower has heard ad naseum. [The facts speak differently to the rhetoric - look at central bank holdings; look at individual behaviour in swapping fiat for bullion all around the world in times of crisis. The next step will be the wealthy taking 400oz/US$300,000 bars out of COMEX warehouses.]

What his posts on this thread show more than anything, however, is that he has no more than a passing interest and education in economics. He does not understand the personalities in play and what they have said they will do (and what they are, in fact, doing), faced with a crisis like this one.

Anyone interested in what is presently happening in official circles need go no further than Bernanke's "Helicopter" speech. That sets out Big Ben's Grand Plan. And, surprise, surpise, he's executing it play by play, just as he telegraphed it. (If you don't wish to read the entire thing, you can skip to the "Preventing Deflation" section, which outlines what he's done to date, then read the "Curing Deflation" section, which outlines what he will do next.)

SkipperX is patently a died-in-the-wool deflationista. He taunts and denigrates anyone who disagrees with him - treats them like children. He confuses battles and wars. He conflates deleveraging and deflation, believing them to be one and the same. He underestimates Bernanke, because he has not read Bernanke's playbook. Bernanke hasn't even gotten started, yet!

And, he's not the only one. There's a whole raft of economists (serious ones) who believe that the Fed can prevent deflation, if they are frightened enough about it. Of course, the cure is not (yet) advocated by many, because such policies would cause a wee bit of inflation. However, don't doubt for a second that, faced with the inevitable collapse of the US real economy during 2009, the Fed will resort to Bernanke's deflation "cure" (cheered on by virtually every neo-Keynsian & monetarist economist in the world).

What we have at the moment is called "disinflation" - a falling (but still positive) rate of inflation. The Fed is a bee's probiscus away from zero-bound (effective Fed Funds Rate as low as 0.23%), but is not yet there. The reason why we have not had the explosion in the money supply, the reason for falling velocity of money is, superficially, as SkipperX describes it. However, the real reason is that Bernanke still believes that he can let the economy down easy. That is, cause a bit of pain, but gradually deflate the bubble.

You need to distinguish between Fed balance sheet expansion and money supply expansion. The deflationists conflate the two. Pure Fed balance sheet expansion is, theoretically, sterilizable and temporary additions to the money supply. That is, additions in the form of overnight, 7 day, 28 day, etc. loans and bills, which will either be paid back or rolled over, but which are considered "temporary" in nature. The market views them as temporary, as well, because markets are regularly duped by officialdom for long periods of time.

There are two problems, here: first, is the problem which Jim Sinclair raises - the Fed balance sheet ballooning is now so big, it can never be practically shrunk, without imploding the entire economy. Therefore, it is the same as if it were a permanent monetization. However, as I said, the market can be (and often wants to be) duped, especially when believing the alternative is too awful to contemplate.

The second problem is that the collateral which the Fed has accepted in exchange for its loans is unknown, both in type and amount. We don't know the value they accepted it at, versus its present value. That is the subject of Bloomberg's present action. If we find that out, we find out what amount of the Fed's present balance sheet expansion is actually a permanent addition to the money supply.

Finally, what the deflationists fail to recognize is that Bernanke's "Curing Deflation" is not just an academic theory, nor something he would blink at implementing. He'll do it, because he'll have no choice and because he has "form" in following his formula. Not only does attempting to "delever" the economy require it, but Treasury's own forward fiscal commitments require it, now that foreigners are pulling back from funding US debt. At that point, we will have monetization, en masse. At the first inkling of that occurring, it will also occur to people that the Fed's existing "temporary" balance sheet expansion is, in reality, permananent. The jig will be up. Even if a relatively small amount of debt is monetized in the first instance, the markets will add the $1.2tn (and counting) of existing Fed stimulation to the equation.

The US dollar will fall off a cliff. If you want to see what will happen to it, take a look at the $A exchange rate over the past couple of months. CPI inflation in the US will soar, due to exchange rate effects. That will impact the real economy, leading Bernanke to monetize faster and harder than ever.

There is one hope: that Obama appoints (and listens to) someone with brains, guts and a magic wand, as head of Treasury. We will see, but I'm not counting on it.