Money supply and inflation: „Inflation ahead, Captain“
The deflation camp is already cracking open the bubbly because both in the US and in Europe M3 growth dropped to an all-time low, into the negative area. But this time again there is one thing the deflationists hadn't reckoned with... In the following article I will tear these deflation arguments into pieces.
Let's start with the M3 chart for the Euro area (Link):
John Williams' reconstruction of US M3 looks even more dramatic:
According to the Austrian School of Economics (which, however, does not offer a unified theoretical framework) inflation is money supply expansion minus GDP growth. From a historical perspective, the broad monetary aggregates (M2, M3) and inflation have a quite high correlation. Below please find a 10-year smoothed chart (Link).
Now the crux: during the normal stage of the capitalistic system both public and private/ corporate debt rise. This causes inflation to rise, correlating both with public and private/ corporate debt. However, wave 5 of the current hyperinflation beginning in 2009 is dramatically changing the rules of the capitalistic system! The timetable for the ongoing hyperinflation wave was proposed as soon as 2006. There is absolutely no doubt that wave 5 of the hyperinflation started after a brief disinflationary wave 4 in the years 2008-9 with the expansion of US central bank money (M0) by more than +100% and government budget deficits soaring to all-time highs. The 2 biggest nations in GDP terms are splashing out:
- (1) USA: Federal debt rose from $10 trillion to almost $12 trillion, which is about 20% of true GDP (exactly as predicted in 2008)
- (2) Japan: Even according to official numbers, Japanese government in terms of GDP has risen from 173% in the year 2008 to an incredible 190% in the year 2009, which makes Greek problems looking kind of cute.
In the debitistic chain letter (Link) the very last debtor has to step in and act in order to keep the debt orgy alive (at least in the industrialized states): public authorities. That's why private and corporate debt on the one hand and public debt on the other hand are starting to diverge dramatically, so government debt becomes the main (and only) inflationary force. Please note that most of the public debt is not included in M2 or M3, but only in the broader US money supply L like liquidity: L = M3 + public debt (simplified).
Publishing L was officially discontinued in the late 1990s when (as an exception) the US had no budget deficit, so L was not important at that time, this was perfect timing... Needless to say that due to the soaring public deficits global L is currently exploding. Yet the reconstruction of L attempted by nowandfutures.com is totally wrong in my opinion, the reason being there seems to be massaged numbers (Link) as research by Eric Sprott indicates:
In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009. So who bought all the new Treasury securities to finance the massive increase in expenditures? [...] To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself. [...] We all know that the Fed has been active in the market for T-bills. As you can see from Table A, under the auspices of Quantitative Easing, they bought almost 50% of the new Treasury issues in Q2 and almost 30% in Q3.
A chart of the first-class analyst Robert Rethfeld based on AAII shows a rush into bonds in 2009 (approximately doubling in absolute terms) but certainly not by +4600% as the official statistics suggest.
Thus in the ongoing wave 3 of 5 of the hyperinflation at least 30-50% of the US federal deficit is financed with fresh money from the printing press. Meanwhile the US budget proposal 2011 is out, targeting a deficit of $1.6 trillion - which is about 10% of the official and 15% of the real-word US GDP. A very cunning fellow invented the standard number "deficit in terms of GDP" although it is not relevant. Why should you divide the deficit by the GDP? Because it is the biggest number available, so the percentage looks as small as possible, so the average citizen is calmed. This is a very clever ‘soft' statistical manipulation (Link) that is never questioned. The only relevant number for a household (no matter if it concerns a private person, a company or a state) is the balance of revenues (here: $2.2 trillion) and expenses (here: $3.8 trillion). So calculated expenses are more than 70% higher than planned revenues. This sounds a little bit more alarming than "10% deficit", doesn't it? And of course it will be interesting to see how high the deficit will really be...
Wave 5 of 5 of the hyperinflation is defined as almost 100% of the public debt being financed with the printing press. Already by today real-world USD inflation has risen to 10%, although it should fall again with and after the coming super-crash in the summer of 2010 (wave 4 of 5). Wave 5 of 5 should begin in 2011 with monetary velocity exploding as money devalues almost daily, so money is passed on as fast as possible: either it's consumed or invested (especially real assets), thus heating up the crack-up boom.
The BRIC states under Chinese leadership are lagging the industrialized nations somewhat. Their dynamics are still partly emerging from the ‘private' sector, that's why M2 is growing at a whopping +30% (Link).
Why to expect a disinflationary wave 4 in the 2nd half of 2010? In August 2010 the Bradley siderograph drops to the lowest level since 1931. The Bradley model assigns positive values to harmonic angles (60°, 120°) and negative values to tension angles (90°, 180°), then the sum is calculated. The Bradley low of the past 500 years (start of modern history) was in the 1640s, at the end of the 30-year War (1618-48) and shortly after the first speculation bubble in history had burst (1637 Tulip mania in Amsterdam). Below the siderograph, plotted from the 19th century with the "Market Trader" by Alphee Lavoie, shows:
- The most important low in 1931 was set in the middle of the biggest depression in history 1929-33.
- The 2nd lowest value in 1875 was in the middle of the crisis of the 1870s that began with the crash („Gründerzeitkrach") at the Vienna Stock Exchange in May 1873. Afterwards the European bourses experienced the sharpest bear market in the 19th century.
- The 3rd lowest Bradley index is August 2010: isn't it interesting that the two historical models for the current crisis are 1931 and 1875? The reason for the low value 2010: there are massive disharmonic angles (T-square, partly even Grand Cross). This is the mathematical specification of the ‚cardinal climax', a term coined by my appreciated (always worth reading) Ray Merriman.
The 4th lowest value in the chart in the early 1890s was not as spectacular, but in the early 1890s we saw the biggest bear market in 20 years.