In recent weeks and months, there’s been much public debate in the financial press whether we’re going to hyper-inflate or suffer a deflationary collapse? I know this to be the case because I field many questions about this topic from readers around the world on a regular basis.
To better understand which of these two competing forces will ultimately win the day, let’s consider the following observable basics:
- In a hyper-inflation, the value of currency [in this case, fiat money] is driven toward zero as prices rise.
- In a deflationary collapse, the value of currency increases as prices collapse.
But above all, folks need to understand that inflation and deflation are BOTH monetary events which manifest themselves as a result of changes in the SUPPLY OF MONEY.
When we speak of MONEY SUPPLY, we might want to differentiate between the narrow money supply or Monetary Base [M0] and the broader measures of Money [M1, M2, and M3 – which the Fed no longer reports].
M0 - Notes and coins (currency) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). Remember, Governments and Central Banks exclusively set reserves and determine the amount of currency in circulation.
M1 - Includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Demonstrably, we can see that the broader measures of money are influenced by private commercial activity.
In this regard, we can say that broad monetary aggregates primarily track private activities, while the monetary base M0 is reflects the growth government / Central Bank activities.
Here’s what’s been happening to the Monetary Base according to the St. Louis Federal Reserve:
History tells us that hyperinflation is always and without exception caused by the government [acting in concert with a Central Bank] and never by consumers, unions or companies, which is apparently understood only by few people.
The effect of the one TRILLION increase in the monetary base depicted above, was recently analyzed by Mike Whitney in his article, Bernanke's Shell Game, where he explained,
…Former hedge fund manager Andy Kessler sums it up in a recent Wall Street Journal article, "The Bernanke Market". Here's a clip:
"By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market."
And here’s what this really means,
“It means the revered professor Bernanke figured out a way to circumvent Congress and dump more than a trillion dollars into the stock market by laundering the money through the big banks and other failing financial institutions. As Kessler suggests, Bernanke knew the liquidity would pop up in the equities market, thus, building the equity position of the banks so they wouldn't have to grovel to Congress for another TARP-like bailout. Bernanke's actions demonstrate his contempt for the democratic process. The Fed sees itself as a government-unto-itself.
Over at Zero Hedge, Tyler Durden did the math and figured that the recent 45 per cent surge in the S&P 500 had nothing to do with the fictional economic "recovery", but was just more of the Fed's hanky panky. Durden noticed that the money that's been sluicing into stocks hasn't (correspondingly) depleted the money markets. That's the clue that led him to the truth about Bernanke's 6 month stock rally.
Zero Hedge: "Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!”
Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31, could regain some semblance of confidence and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more."
So, you see folks, all the talk we’ve heard of “green-shoots” and “recovery” are little more than high-stakes sleight of hand on the part of Mr. Bernanke’s Federal Reserve and his captive, agent-banks.
Dishonesty Begets More Dishonesty
The deceptive sleight-of-hand being practiced by the Federal Reserve has been increasing in recent weeks and months. Here’s why:
The following chart is excerpted from chapter 3 of an audio visual presentation in Chris Martenson's Crash Course.
Explanation: Fiat currencies are all lent into existence - but only in a manner that provides for re-payment of principal, not interest. Thus fiat systems require that the money supply grow at a minimum rate known as usury or interest, in order to pay back the earlier loans plus the interest.
In effect, fiat money or in the vernacular, the US dollar (but really all fiat currencies) is "THE BIGEST PONZI GAME" on the planet. As Martenson points out; the geometric growth curve eventually results in a parabolic "up" phase no matter how low the growth rate is the only determinant before this outcome results is - TIME.
The premeditated financial fraud and economic tom-foolery we've witnessed in recent years; rigging of the price of strategic commodities particularly gold, falsification of inflation data together with obscene amounts of interest rate derivatives has rendered the discipline normally enforced by usury ‘ineffective’. This perverse financial engineering lowered interest rates to un-natural levels, buying time, giving the false appearance that service of necessary parabolic fiat money [debt] growth was sustainable.
Usury Has Been Neutered
This neutering of usury which has enabled spiraling government debt growth has had its most deleterious impact in the very places one would logically expect: pensions and the fixed income nest eggs of savers. Nowhere is the harmful effect of monetary debasement more evident than here; where incomes are “anchored” to false, contrived inflation benchmarks while real costs [e.g. Healthcare, food etc.] are borne in the real world.
But the negative effects do not stop there.
The mis-pricing of capital through interest rate suppression accompanied by unchecked money creation has created a false sense of security regarding the affordability of finite, global natural resources. So you see folks, in a world where capital has zero costs, marginal business pursuits and outright speculation activities thrive creating a positive feedback loop reinforcing more unchecked money creation at zero cost [bubbles].
The pursuit of these unsustainable practices has now placed us squarely on the more advanced upper levels of the Martenson chart above:
These realities have led to further monetary debauchery on the part of the Federal Reserve as Chris Martenson revealed last week in an investigative article showing how the U.S. Fed actually bought [monetized] a large percentage of 7 year U.S. government bonds issued days earlier:
The Fed Buys Last Week's Treasury Notes
... Here's a recent example illustrating that the Fed's actions are more consistent with financial desperation than economic health.
In concert with the claims I made in the prior Martenson Insider post, The Fed bought $7 billion in Treasuries today and even more yesterday.
...If things are so rosy that every single dip is being bought in the stock market with a vengeance, I wonder why these printing operations are really necessary?
This $14 billion plus buying activity by the Fed represents fresh money created out of this air that was exchanged for the sovereign debt of the US. However, since the Fed has, for all practical purposes, never undone its permanent operations (hey, that's why they are called "POMOs") we can consider these additions of money as good as permanent themselves.
Looking at the maturity range we can see that these are all long-dated bonds with the one today specifically offering us a tantalizing clue as to how the shell game is being played.
Here's the Treasury announcement for the 7-year auction that came out on July 30 (last Thursday). Please note the specific CUSIP number circled. Every bond in this auction carries this specific identifying number.
And now let's look at the detail for this most recent POMO:
Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was "more than sufficient" bid-to-cover, "strong demand" and all the rest.
And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.
A Shell Game Indeed
The upshot of the high-stakes shell game the U.S. Federal Reserve is playing has UNDERMINED foreign confidence in the U.S. Dollar. This is why, despite false claims to the contrary, foreigners are becoming unwilling participants at U.S. government bond auctions.
Remember folks, at least 70 percent of all U.S. currency is held outside the country. If [or when, perhaps?] foreigners decide to “throw in the towel,” these dollars will all come home to a hyper-inflationary homecoming.
Today’s Market
Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 112 points to 10,524. North American markets didn’t fare as well with the DOW off 32.10 to 9,338.00, the NASDAQ falling 8.01 to 1,992.24 and the S & P giving up 3.40 to 1,007.10. NYMEX crude oil futures gained .02 to end the day at 70.95 per barrel.
In the interest rate complex the benchmark 5 yr. government bond ended the day at 2.73% while the 10 yr. bond finished at 3.76%.
On foreign exchange markets the U.S. Dollar Index gained .35 to 79.24.
Precious metals were hit hard with COMEX gold futures falling 9.80 to 946.60 while COMEX silver futures fell .24 to 14.40. The XAU Index dropped 3.18 to 145.76 while the HUI Index gave up 9.08 to 357.19.
On tap for tomorrow, at 8:30 a.m. Preliminary Q2 Productivity data is due, expected 5.2% vs. prior 1.6%. Also at 8:30 a.m. Q2 Unit Labor Cost data is due, expected -2.2% vs. prior +3.0%. At 10:00 a.m. June Wholesale Inventory data is due, expected -0.9% vs. prior -0.8%.
Wishing you all a pleasant evening!
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