Fear of a Dollar Collapse, part II
Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.
Today, we look at a few printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.
This is simply a measure of how much cash the Fed is injecting into the system.
The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:
>
Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.
This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.
As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?" I am not sure what is was (and we've discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless.
The manifestations of this free printing press are many: Any commodity priced in plentiful dollars will cost more. Crude is now $82; and Inflation Fears Send Gold to 27-Year High.
Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less.
Or, consider it this way: Extracting Oil or Gold from the earth ain't easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car -- all for less per gallon than diet Coke or peach Snapple!
For gold, the process is not all that dissimilar.
Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value -- or instead, we will insist on more of your crappy ittle pieces of green paper.
Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices: Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.
Its easy to understand why inflation has been called The Cruelest Tax.
~~~
BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis' publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.
There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.
>
Sources:
Monetary Trends
Federal Reserve Bank of St. Louis'
October 2007
http://research.stlouisfed.org/publications/mt/20071001/mtpub.pdf
Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
MATT CHAMBERS
WSJ, September 20, 2007; Page C1
http://online.wsj.com/article/SB119019169756632291.html
Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
ALLEN SYKORA
WSJ, September 21, 2007; Page C6
http://online.wsj.com/article/SB119028926640733763.html
>
Money Supply, MZM, M1
M2
Reserves Markets, Short term Credit Flows
I honestly cannot say what the repercussions of this chart are. But man, is that a spike or what?
Friday, September 21, 2007 | 08:58 AM | Permalink
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In a sign that slower US growth and the weak US$ is having an impact overseas, European services and manufacturing PMI was less than expected and fell to its lowest level since Sept '05. The euro fell off its highs vs the $ in response. One Canadian $ is worth more than one US$ for the 1st time since 1976. US and UK LIBOR overnight and 3 month rates are modestly lower again, so from a short term rate perspective, the Fed's interest rate cut helped to thaw things out. Commercial paper rates have also ticked lower. On the flip side, the implied inflation rate in the 10 yr TIPS is at 2 month high. No economic data today but it is triple witch expiration and the quarterly S&P rebalancing. The Fed's Kohn, Plosser and Warsh all speak today but likely won't comment on monetary policy.
Posted by: Peter | Sep 21, 2007 9:05:57 AM
the only thing the fed saw was howling politicans.
Posted by: John T | Sep 21, 2007 9:09:50 AM
Incidentally, I have never definitively identified the source of the quote "Inflation is the Cruelest Tax."
Suggestions range from Keynes to Theodor V Houser (Committee for Economic Development 1958) to Pres. Gerald Ford to Ted Houser.
Milton Friedman's quote was INFLATION IS TAXATION WITHOUT LEGISLATION
Other nominees include John Anderson (1980), Henry Hazlitt, Leonard Read, William Jennings Bryan, Secretary of the Treasury William Simon (1974), Vladimir Lenin, Thomas Jefferson, Percy Shelley (Nineteenth Century), Carl Schurz.
I thought this was the earliest printed version we found was this: 1920 Nebraska Blue Book; on p.823 it reportedly reads in part: "Inflation is the cruelest tax of all.
Bu then I was referred to this: Aristophanes, The Frogs c. 405 BCE.
CAN ANYONE DEFINITIVELY ANSWER THIS QUESTION?
Posted by: Barry Ritholtz | Sep 21, 2007 9:14:35 AM
Check out this reconstructed M3 (which the gov got rid of). Annualized at 14%!
http://www.shadowstats.com/cgi-bin/sgs/data
Posted by: B. Egan | Sep 21, 2007 9:16:51 AM
"Aristophanes?" Ridiculous!
Posted by: Oscar, Oscar, Oscar... | Sep 21, 2007 9:30:30 AM
Barry does the below post by Mish contradicts your post? (sorry, i am not much savvy with monetary stuff, to see it for myself)
http://globaleconomicanalysis.blogspot.com/2007/09/is-us-printing-money-like-mad.html
Posted by: techy2468 | Sep 21, 2007 9:45:38 AM
I don't think you're going to improve on the Nebraska answer. I mean... it ain't a phrase that you can track to an historical point, nor to a word like "Xerox," or like some company called "Cruelest Tax, Inc." And nobody has likely written a book, "How I survived the Cruelest Tax."... or at least not since the NebBlueBk reference some enterprising soul has already beat the bushes and found for you.
What?... Some Neanderthal chip it out on a cave wall?
--
On to pressing matters of overall import:
http://tinyurl.com/3266xd
When did the phrase "increase information asymmetry" first hit the scene, huh?... Was it before or after proforma EBITDA found its way into the lexicon?
Karl, would you mind translating that one for us?
---
BTW, Karl,
Here's a pretty good analysis of the current situation. From Comstock Partners:
http://tinyurl.com/35n6xp
They acknowledge the more-or-less knee-jerk actions of the FOMC, but conclude, as I do, that they won't work in the event of a radical decline in asset prices.
The FOMC is trying "Hair of the Dog." However, not only will it not work, it will just sow the seeds of future failure by continuing to destabilize USD. That’s what the initial shock to the bond and commodity markets after the FOMC actions mean. What Greenspan said recently in his book and in interviews is correct. His Fed that acted to reduce rates (while he did hold them too low, too long) did so after an existing period of extremely low inflation had resulted from the late stages of the collapse of the dot com bubble, the recession during the time, and the 911 attacks. He did it in concert with bond market yields that were already reflecting that deflation. Here’s a table with historical inflation rates:
http://tinyurl.com/36ercw
Notice late 2001 and 2002 as these generally support what Greenspan has said.
You and I can philosophize until the bell-cow comes home, but it won’t change the fact that the markets themselves tell us how effective or ineffective FOMC actions are. At least until now, the markets are thumbing their noses at the FOMC. And, I don’t mean the equity markets… Equity markets are like cocaine addicts. Bond markets are like seasoned analytical accountants… but not like the big league accountants of today’s corporate world, bond markets don’t fall for EBITDA pro-forma hocus-pocus.
Karl, I appreciate your dialog. I sort of thought the count was 3 and 2 after our last little exchange… figured I’d have to slip a high and tight fastball by you. Hit it if you can.
Posted by: Eclectic | Sep 21, 2007 9:46:03 AM
From the FT, via Russ Winter's blog:
(quote)
Kroger, the largest US supermarket group, said on Tuesday that inflation in its core grocery business is running ‘at a level not seen in several years,’ underlining concerns over the broader economic impact of higher food prices. Rodney McMullen, chief financial officer, said that the prices the retailer paid for products increased 21.6 per cent during the second quarter.
(end quote)
Yes, cut the rates because inflation is tamed!! Only 21.6% in one quarter!!
Heck of a job Bennie!!
Posted by: Neal | Sep 21, 2007 10:00:20 AM
Neal, good post. Russ also nailed it square on in terms of identifying what Ben saw to address BRs original topic. Piles upon piles upon piles of fictitious capital. Trillions......
Posted by: Stuart | Sep 21, 2007 10:04:43 AM
Off Topic:
did anyone analyze goldman's earnings....seems like they made a ton in short trading.....isnt it nice to be in power and in the know and use it to beat other institution..
http://money.cnn.com/2007/09/20/magazines/fortune/eavis_goldman.fortune/index.htm?postversion=2007092017
Posted by: techy2468 | Sep 21, 2007 10:09:53 AM
Neal, it was 2.6%
Posted by: Joel McDade | Sep 21, 2007 10:28:35 AM
Barry...I think today's comments from your (ubber) smart fishing buddy, David Kotok, are worth a cut and paste:
"Rumors that the Saudi Arabian Monetary Authority (SAMA) was about to drop the peg of its currency to the US dollar triggered market reaction yesterday. There are fears that this could lead to substantial sales of dollar assets. Markets worry that SAMA and other central banks have contributed to the latest dollar slide. These rumors were sparked by SAMA’s failure to follow the Fed in cutting rates. But SAMA’s governor has indicated that high inflation in the Kingdom was the reason rates were not reduced. The Saudi-US dollar peg remains in place.
Kuwait dropped its dollar peg in May of this year. There was negligible effect on currencies. At some point the Saudis could do the same. But even if they should take this step, we consider it unlikely the Saudis would choose to move out of US dollar assets in a major way. All Saudi exports are denominated in US dollars. So are 75% of its imports. Their reserves continue to accumulate and must be invested in deep liquid markets.
Similarly, the largest central bank reserve holders in Asia are not likely to engage in major changes in their reserve allocations. They would only risk adversely affecting the value of their current holdings. Countries manage their reserves with policies that are in their best interest. Those Cassandras who predict they will inflict self injury are mistaken."
Posted by: Fred | Sep 21, 2007 10:29:20 AM
BP,
On MZM. Do the fact that repos expire not reduce the amount of liquidity the FED adds?
E.g. the effect of a 2day repo of $1bn is zero 3 days later except for temporary add to banking system
Posted by: Booker | Sep 21, 2007 10:29:37 AM
barry-
so what is the fed afraid of? i agree that they are scared "witless," but what's even more scary is *why* they are. i have no idea.
it can't be housing, b/c they've already known this is a disaster for some time.
it's not the stock market, we're near new highs.
the employment data was just one bad month, not a trend.
last quarter's GDP was 3% or something.
the banks are under some duress, but they are big enough to handle this on their own.
the only thing i can think of that would warrant such an action is the fear that the credit derivative/ABCP problems spread to the +400 trillion in off balance credit default swaps. and if it were that, they would have cut more than 50bp...
am i missing something here?
Posted by: m3 | Sep 21, 2007 10:33:48 AM
On one hand, I am happy to see my huge student loans (at 2.65%) inflate away.
On the other hand, I am horrified at the prospect of my huge savings (for a down payment)inflate away
talk about conundrum! what should savers do?
Posted by: bitter_renter | Sep 21, 2007 10:34:09 AM
Techy 2468 beat me to it as I too wonder if your post contradicts Mish Shedlock's post at Minyanville:
http://www.minyanville.com/articles/U.S.-hyperinflation-Weimar+Republic-M+Prime-printing+money/index/a/14099
Seems it does, but I'm not a monetary expert by any means either.
I would love to hear a explanation or clarification between your post and his.
Thanks!
Posted by: Bubbles | Sep 21, 2007 10:38:46 AM
Back in the day (Volcker and Friedman), money supply was headline news.
The first thing you turned to in Barrons was the money supply page.
Then with ATMS, credit cards, etc., tracking and analyzing money supply dropped out of favor. Interesting (and perhaps foreboding?) that more attention being paid to it. Regardless of how one interprets the stats and charts, that it is more in vogue is telling us something?
Memo to Ben: Please listen to Mozillo and just raise housing prices so we can all refi and enjoy home price nirvana again. Since you cut rates, cost of gas and food has really cut into my paycheck.
The Housing Ponzi scheme is falling apart. Nice try tho.
Posted by: Chris | Sep 21, 2007 10:43:34 AM
FWIW, the dollar closed last night @ 78.64, .31 cents from the low close of 78.33... Sept 1992.
Posted by: Strasser | Sep 21, 2007 10:43:52 AM
The Fed needs to let the derivative markets cave in. There has been way...WAY too much of these things created. Light needs to be shined into that area to clean it up.
Posted by: IMHO | Sep 21, 2007 10:47:28 AM
>> talk about conundrum! what should savers do?
The best way to participate in an inflationary cycle is to be in the markets that are inflating.
If you think it's oil, buy an oil stock. (Added bonus, buy a foreign oil company whose currency is appreciating against the dollar at the same time -- eg. Petrobras). Actually, in general, the stock market tends to be a good way to 'defend' against inflation.
Posted by: Eddie | Sep 21, 2007 11:00:27 AM
Mish's post is ok until you click on the chart he provides.
His article states that money supply is only growing at about 2%....the problem is that he provides a chart that shows a reconstruction of m3 with no reference to where his time frame begins or ends.
I guess there is only one way to show a parabolic rise in money supply-a sheer wall of % increase can only be seen for what it is...not how you can reconstruct it and then cherry pick where you are viewing it from.
he needs to specifically state where his 2% is in relation to.
I even emailed him about it and all he did was to drop some names that agree with him but do nothing about the obviously glaring error in the chart.
I posted this yesterday and from the looks of it I am not the only one who sees this error.
Ciao
MS
Posted by: michael schumacher | Sep 21, 2007 11:10:11 AM
Strasser.... i do not think falling dollar is all bad news for USA.
a steep drop of 20-30% in 1-3 months is bad news, but not a drop of 10%.....which is happening right now.
it will punish the currency manupulating countries....make our exports cheap.....deflate our debt.....
higher inflation...leading to higher wages....since it will also lead to higher local manufacturing...
right now GAS is priced almost 50% higher in most parts of the world than USA...we can easily live with $3.5/gal gas. (>$100 oil)
i am looking forward to slow decline in dollar....but it wont go too far....things will balance themself due to falling exports of other countries.
i do not believe that extreme things happen in the world....(even though it makes interesting reading about economic armageddon)
USA is going into recession....all data are pointing to that.....but we can come out of all that if we were given a huge discount on our current debt (40% discount will do for now)....and it is possible by deflating dollar....and inflation in wages.
Posted by: techy2468 | Sep 21, 2007 11:10:14 AM
It will adjust. With the end result, of course, being that the arabs, europeans and asians will own most of our corporate and real estate assets.
If the dollar collapses, then we are cheap indeed. And there are always buyers for US assets...
Reminds me of asia after the '97 crisis.
Posted by: jonah | Sep 21, 2007 11:22:48 AM
Eddie..
your comment makes sense....but right now there is so much speculation and volatility in all assets that one can get burned by upto 10% in a month...
i am not much of a risk taker...hence right now i will prefer a non usa government bond...(particularly a non pegged currency state like Aussie, Euro, NZ etc..)
Posted by: techy2468 | Sep 21, 2007 11:24:53 AM
Austrian Economics Barry. It used to apply, but they have thrown out reason and are now in full panic mode. Commodities will be the next bubble, and anyone who thinks they are high now hasn't seen anything yet. A generation has passed without having to confront inflation like we had in the 1970's and early 80s, but everyone will either learn or relearn what it means, and they ain't gonna like it one bit.
Posted by: SPECTRE of Deflation | Sep 21, 2007 11:39:14 AM
