Monetary Madness

Greetings from Sedona….

Let’s say you were given a check for a million dollars.  What would you do with it?  Save some?  Sure.  Spend a bunch?  You bet, but on what?  Each of you may have a unique mix of saving, spending and what you would purchase.  If only one of you were to receive this check there would be virtually no effect on the price of the things you buy with it.  However, if all of you were to receive a million dollars tomorrow, what do you think would happen to the prices of things you would buy with it?  Would they go down?  No, that idea is laughable.  Would they stay the same?  Remember, everyone got the same million dollar check!

Now you may be thinking that this exercise in fantasy has no relevance to anything.  You would be wrong.  It is entirely relevant to our economy today and to the skyrocketing prices of nearly all commodities.  The Federal Reserve is handing out billion dollar checks literally every day like they were confetti.  Unfortunately, since you were not among the connected cronies benefiting from those checks you were left at the gate unless you were an astute speculator!

Since we don’t get the big bucks doled out by the fed, we need to understand how the system works.  Everything is done indirectly.  The fed buys securities (usually treasuries, but not always) by creating new money with a few strokes on a computer keyboard.  The securities become assets on the fed’s balance sheet and make up the largest part of what is called the monetary base. This is real money folks, but before continuing take a look at the growth of the monetary base over the years:

Impressive, yes?

It was bad enough that the fed’s money machine cranked out a quadruple form 1985 – 2008, but the tripling from there is unconscionable.  How could anyone believe that creating $1.7 trillion over just two years would not have a dramatic effect on prices of all kinds of stuff?

Now the cloistered eggheads will tell you that the money went into the banking system in order to save it from collapse.  Then more was injected in order to increase lending for mortgages to buy houses and also to small businesses (QE2).  This was supposed to be noninflationary because housing prices had dropped so much and any increase would merely be a recovery.  In addition, more money in the hands of small businesses would create jobs picking up some of the sagging slack in the labor market – again not inflationary.

Unfortunately, nearly nothing worked out as planned.  Our rulers were hoping that housing prices would go back up along with stock prices.  Instead, even the connected cronies and their rich friends did not want to buy lots of houses, the banks were (and still are) in such bad shape financially they were in no hurry to lend to anybody.  The combination meant that small business entrepreneurs were squeezed out of the loop.  The crony cons and the well informed moneyed classes (and some with not so much money) did understand that they had better buy something and get rid of the fed confetti.  House prices have continued dropping to new lows, but everything else has soared!

The lame stream media is full of stories about nasty speculators causing oil and gas prices to become unbearable.  Bill O’Reilly and Lou Dobbs barf their blather on their TV shows at every opportunity.  So how would they explain the next charts showing virtually all commodities rising rapidly?  Why the fixation on oil and not the rest?  Please note that oil is still considerably below its 2008 peak as you look over the charts below.

The next chart is for a composite index of all commodities.

The plain fact is that anyone who knows anything about economics and finance is dumping dollars in favor of real stuff.  Just the other day the University of Texas took delivery of $1 billion in gold bullion.  I guess they must be added to the scurrilous speculator roster now too!

In other words, while you, who did not get any fed funds in the mail, go on about your daily business, those who did went out and bought gold, silver, copper, wheat, corn (especially for ethanol), and anything else not nailed down.  While you get crushed and the cronies get richer the dissembling talking heads (economist, journalists, politicians) try to pin the blame on anyone other than where it belongs – the Federal Reserve!

Worse yet, the public has been conditioned like dogs to believe that inflation is a necessary byproduct of prosperity in a modern economy; that if the fed did not create so much cyber cash everything would fall apart.  Japan is often cited in this regard.  Well, then how will the explain Switzerland?  Take a look at this next chart showing the skyrocketing value of the Swiss franc against the dollar.

Observe that the Swissie has about quadrupled against the dollar since 1974.  Oil is up about twelve fold during that period against the dollar.  Therefore, a barrel of oil that cost $10 in 1973 cost the Swiss about 40 francs.  Today, a barrel of oil that costs about $120 per barrel (world price) cost the Swiss only about 110 francs, or a bit less than triple the 1974 price instead of the twelve times in dollar terms.  The increase faced by the Swiss is explained by the fundamentals of world supply and demand for oil over that period (a subject for an upcoming post), not speculators!  How come those speculators missed screwing the Swiss?  The answer is the Swiss did not debase their money like we did, and nobody will conflate prosperous Switzerland with depressed Japan.

Wrapping it all up we can clearly correlate the rise and fall of commodity prices with the rise and fall of the dollar.  It has nothing to do with evil speculators.  The next chart is one of my favorites, comparing the dollar index comprising our major trading partners with gold.

It looks pretty clear to me.  At this stage we are witnessing what has a fair chance of becoming a widespread collapse in confidence in our currency unless the monetary madness (evidenced in the very first chart above) ends soon!

All the best to you all,

Stephen Reiss
[email protected]

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