Saturday, August 14, 2010

Monetary Gloom…Storms Ahead!

As can be noted from the graph below, in absolute terms the adjusted monetary base has stabilized. However, it is still hovering above the $2 trillion mark. From a historical perspective this is amount is almost 2.5 times higher than what was experienced before the 2008 financial crash.

In relative terms, that is, taking into account the year-over-year change in absolute amounts, it is hovering close to 20%. It appears to have initially hit bottom in early 2010.

As I previously noted, when the trough in this measure is reached, we are basically in the countdown phase before a major market correction occurs.

The FED edict this week that they will reinvest the proceeds from the coupon rate and other maturing MBS to purchase US Treasuries is nothing but a drop in the bucket. The move was concocted with the intention of managing market expectations. In other words, it gives the impression to market participants that the FED is willing and able to continue to manipulate capital allocation.

However, as a former central banker and neo-Keynesian supporter, Alan Beattie, currently writing for the Financial Times put it:

One of the peculiar challenges that confront central bankers – and I used to be one – is countering the perception that they are privy to large amounts of private information. True, central banks talk to a lot of practitioners in the financial markets and the real economy and have a good insight into the short-term money markets from their own operations. But beyond that, they are usually working off the same numbers as everyone else. Yet in times of great uncertainty, investors will cling on to anything they can to form a view about the economy, including assuming the Fed knows more than they do.

Of course, like most mainstream economists, Mr. Beattie insists in more spending to cure our economic malice. Conveniently however, like most mainstream economists, he fails to mention—let alone explain—the evidence refuting his opinion: Namely, since 2008 US GDP has increased about $100 billion; total debt, on the other hand, has increased $2.5 trillion (this is not even counting all the government guarantees). In other words, every $25 dollars of additional debt has generated $1 of additional GDP. All these folks with Ivy League and other elite school degrees fail to comprehend simple arithmetic. Their solutions are always more of the same. Therefore, it doesn’t require a high level of intelligence to recognize that, as Marc Faber says, the FED will print and print until the system finally collapses. This will be sooner that you think!

1 comment:

Alejandro Rosales said...

scary but needs to be stated. well said Cesar.