Money Out Of Thin Air

Nation's economic mood darkens as more jobs vanish
NEW YORK (AP) -- This is one recession Americans aren't going to spend their way out of.
Americans are in no mood to spend their way out of this recession.

The Conference Board said Tuesday its Consumer Confidence Index edged down to 37.7 this month, a record low, from a revised 38.6 in December. It stood at about 87 just a year ago.

Americans are battered by headlines about massive job cuts, including thousands at Home Depot, Corning, General Motors and Caterpillar in just the past two days, and are still watching the values of their homes and retirement funds dwindle.

"Virtually, there is no confidence out there," said Bernard Baumohl, chief global economist at The Economic Outlook Group LLC. "Household anxiety has reached a point that we can count them out to get us out of the recession."

Economists believe Americans will remain in a financial funk until they start seeing fundamental improvements in the economy, including a turnaround in the housing and job markets. And two other reports Tuesday suggested that's unlikely to come soon.

The Labor Department announced that state unemployment rates shot up nationwide in December, with Indiana and South Carolina racking up the largest monthly increases. South Carolina's jobless rate bolted to 9.5 percent, more than 2 percentage points above the national rate.

And the Standard & Poor's/Case-Shiller 20-city housing index dropped by a record 18.2 percent in November from the same month a year earlier -- the sharpest annual rate since the index's inception in 2000.
http://biz.yahoo.com/ap/090127/consumer_confidence.html

...and so the price of Oil fell again because of "recession fears". Whatever... And of course falling Oil prices pressure commodities in general, so Gold and Silver MUST be sold. What a joke! Gold is NOT a commodity. Gold is money! When will this foolishness end? It will end when the Crimex is destroyed!

Dollar weakness which set in the middle of last week has carried into the middle of this week. With the Dollar teetering on it's 50 day moving average here, substantial gains in Gold may be imminent. With the spectre of raging inflation on the financial horizon, substantial gains in Gold, and Silver, are inevitable.

All the talk today of "Deflation" is pure bull sh*t. There is no deflation. Today's deflation is a fiction of the fundamental economist's mind and the incessant babbling of the financial media. Today's deflation "vibe" is merely a cover for a monetary inflation never before witnessed in human history.

Big Inflation Coming [MUST READ!]
Adam Hamilton
Inflation and deflation are purely monetary phenomena. Inflation is not just a rise in prices, lots of things can drive prices higher. Inflation is the very specific case of a rise in general price levels driven by an increasing money supply. If the money in an economy grows at a faster rate than the pool of goods and services on which to spend it, general prices are bid higher as a result. Only money creates inflation.

Similarly deflation is not just falling prices, but falling prices driven by a contraction in the money supply. It is true that most modern economists would add contracting credit to this definition as well, but money is very different from credit. Would you rather receive a gift of $100k cash or a new $100k credit line? While you can spend both, money is very different from credit which is short-term debt.

We witnessed a stock panic in late 2008, an exceedingly rare event. The dictionary definition of this is “a sudden widespread fear concerning financial affairs leading to credit contraction and widespread sale of securities at depressed prices in an effort to acquire cash.” Panics are bubbles in fear which drive investors to liquidate everything they can at any price. They get so scared they only want to hold cash.

When all investment assets are sold heavily in a short period of time, prices naturally collapse. But this is not deflation if it is not driven by a contraction in the money supply. For stocks, commodities, and houses, prices fell sharply in the second half of 2008 because there was a sudden huge oversupply relative to demand. Many more investors wanted out than wanted in, so prices plunged. They had to fall until a new equilibrium was reached, low enough to retard supply (investors too disgusted to sell anymore) and raise demand (from other bargain-hunting investors).

Deflationists argue these price drops are proof of deflation, and most people today believe this. But they are only deflationary if they were driven by a contraction in the money supply. Stocks and commodities are generally cash markets. Credit such as stock margin can be used, but it is trivial relative to the market sizes. And real commodities purchased for industrial uses are paid for in cash or near-cash (short-term trade loans), not multi-decade loans like houses. So the money supply during 2008’s slides is the key.

If available money to spend indeed contracted, then the deflationists are right about seeing deflation in 2008. But if the money supply fell by less than stocks and commodities plunged, was flat, or even grew, then deflationists are wrong. When prices fall simply because demand declines (too much fear to buy anything immediately), this is merely supply and demand. If money didn’t drive it, then it isn’t deflation.

The bottom line is inflation and deflation are and always have been purely monetary in nature. Supply and demand can drive prices all over the place, but it is only a changing money supply that can truly spawn inflation or deflation. And the money-supply data is crystal clear. The Fed is growing the fiat-dollar supply by frightening rates, all the way from double-digit broad-money growth down to a scary doubling of the monetary base!

This means big inflation is coming, it’s already baked into the pipeline. Too distracted by deflationists who have no dictionaries and hence don’t even know what the word “deflation” really means, Wall Street hasn’t realized the real threat is inflation yet. But when it does, capital should rapidly flood into investments that thrive in inflationary times. Of these, gold remains the king. Its bullish potential in the years ahead is vast.
http://www.zealllc.com/2009/biginf.htm

The post above is only a small snippet of an essay explaining the coming Inflation Event by the brilliant Adam Hamilton. In very easy to understand terms, Adam explains why today's Deflation scare is a lie, and tomorrows inflation potential should have all investors scared and prepared...to profit immensely from it. Please read it in it's entirety.

Below, Robert P. Murphy elaborates further on the coming Big Inflation, and the perils that come will come with it for Bumbling Ben Bernanke and the US Government.

BERNANKE PAINTS HIMSELF INTO A CORNER
by Robert P. Murphy
Normally, when the Fed wants to engage in “loose” monetary policy, it engages in open-market operations by buying assets from the public. For example, the Fed might buy $10 million worth of government securities from private-sector holders. In the transaction, the Fed acquires the $10 million worth of Treasury debt, and writes a check on itself for $10 million.

This is the precise spot where money is created “out of thin air.” When the Fed writes a check on itself, the recipient deposits it at his bank, and the bank in turn deposits it with the Fed. So the Fed bumps up that particular bank’s account balance by $10 million; in other words, that bank’s reserves with the Fed have gone up by $10 million. Yet there is no counterbalancing debit anywhere else in the system.

Because of the fractional reserve nature of our banking system, an injection of new reserves can lead to a multiple increase in the overall money stock. For example, if the reserve requirement is 10%, then the bank depositing the $10 million is able to make new loans of up to $9 million. Businesspeople may come in and win approval for loans, and receive new checking accounts with a total of $9 million in their balances. They can go out into the community and start writing checks on these balances, pushing up prices. At the same time, the original person who sold Treasurys to the Fed, still thinks he has $10 million more in his checking account too. Thus, while the monetary base has increased by $10 million (i.e. that’s how much total bank reserves have increased), M1 has increased by $19 million.

And the process continues. The merchants who receive payments from those taking out new loans will in turn deposit the checks with their own banks, and some of the “excess reserves” (i.e. the $9 million that the original bank held over and above the legal minimum needed to back up the first person’s deposit) are transferred to other banks. They in turn can now make new loans, because the 10% reserve rule applies to their new reserves as well.

In the end, if we assume a 10% reserve requirement, and that all of the banks are fully “loaned up,” then the original purchase of $10 million in Treasurys will yield an increase of $100 million in total checkbook balances in the community. Prices for goods and services will be higher than they otherwise would have been, because there is now an extra $100 million in household “cash” chasing them.

What is happening is that the Fed has allowed its balance sheet to explode during the last year, from $920 billion in December 2007 to $2.3 trillion in December 2008. (See this excellent summary article.) Yet because of general fear, as well as various gimmicks (such as paying interest on reserves held with the Fed), the banks are sitting on these huge injections of reserves, rather than granting new loans to their customers. This is why prices have been falling, even amidst this unprecedented expansion in the monetary base.

Even though increases in the demand for U.S. dollars can offset increases in its supply – so that its market value doesn’t plummet – this observation is no cause for comfort. Using back-of-the-envelope calculations, the year/year growth in demand deposits (i.e. checking account balances) was about 38% in December. In contrast, the year/year growth in reserves was more than 1,400%. If the banks became optimistic about the future of the economy and began loaning out their excess reserves, right now there is enough slack in the system for the public’s money supply to increase by a factor of 14.

Analysts simply assume that once the recovery begins, Bernanke will wisely suck the excess reserves back out of the system, in time to tame price inflation.

But is that really going to be politically feasible?

The Federal Reserve under Ben Bernanke’s leadership has painted itself into a very tight corner. He has cleverly managed to stave off utter disaster so far, but he is running out of options. Ironically, the effects of his incredible injections of new reserves have been masked simply because the financial sector is still paralyzed. If and when the economy begins to improve, Bernanke will have to decide whether to allow double-digit price inflation or instead contain prices by strangling the incipient recovery.
http://www.dailyreckoning.com/bernanke-paints-himself-into-a-corner/

Currency Manipulation?
USAGOLD VideoBrief
Pete Grant and Jonathan Kosares discuss new U.S. Treasury Secretary Timothy Geithner calling China a currency manipulator. The gold market responded almost immediately, climbing $50 in price. While domestic economic concerns in both the U.S. and China present a scenario of competitive currency devaluation, price inflation becomes the single most likely feature regardless of the exchange-rate outcome. If Asia plays its "trump card" in reversing its pattern of buying U.S. Treasuries, a worst-case inflation scenario would involve the Federal Reserve attempting to pick up the slack through its own program of purchasing those bonds -- thereby directly monetizing the U.S. Government debt.
http://www.usagold.com/video/20090126.html