Big Money Leave A Mighty Wake/Big Money Leave a Bruise

Don't worry, things are looking up up up! If, that is, your well-being is somehow connected with an increase in the money supply. (Which is hardly the case for most of us.) See this somewhat alarming graph of data from the St. Louis Fed, showing a one-month monetary base increase of 11.6 percent in this magical month of September 2008, a month that I hope turns out to be less historically significant than it seems stuck here in the middle of it.

And while we are musing on growth figures, let's contemplate what must be a wild coincidence in a world of absolutely rock solid, nothing-to-worry-about, government-managed paper currency, how's the price of gold gone this month? Since Sept 11, up nearly 19 percent.

Comments

Heinrick | September 30, 2008, 7:50pm | #

"St. Louis Fed, showing a one-month monetary base increase of 11.6 percent in this magical month of September 2008"

More money...Yeaaaa!!!!!

some fed | September 30, 2008, 7:58pm | #

Chairman Bernanke is nothing if not true to his word:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.

"Deflation: Making Sure "It" Doesn't Happen Here"
Remarks delivered to the National Economists Club, November 21, 2002

John C. Randolph | September 30, 2008, 8:00pm | #

So, the little dust-up in the congress yesterday was just for show, and the Fed can issue as much credit as they want?

Gee, who ever would have guessed?

-jcr

some fed | September 30, 2008, 8:05pm | #

What I want to know is whether the Fed was hoping the bailout would be a substitute for continuing its inflationary policy.

If the tradeoff is huge government borrowing spent ruining the economy versus Fed-instigated stagflation, I could make a more educated decision.

Mark | September 30, 2008, 8:11pm | #

jcr, congress was debating whether to turn on the printing presses for wall street. they decided not to.

And why the statistical distortions? The real picture is already dire, no need to exaggerate. The "alarming" graph linked does not have a baseline of 0 and the gold price hit a low on 9/11/08, so why use that as a reference point? Gold is up the same amount over the past year.

shrike | September 30, 2008, 8:21pm | #

Very interesting.

Listening to Bloomberg early this morning, I heard that 30 day LIBOR rates were 7%. (cooled off later) This kind of disconnect is troublesome x 100.

I can hear it later from a Bush plebe, "No one could have seen this coming".

Brian Doherty | September 30, 2008, 8:24pm | #

Mark---I don't see what difference it makes what the baseline of that graph I linked to is---the figure I wrote, the important and alarming part, is the same, a one-month rise of over 11 percent.
And why use Sept 11? Seems to me that that's when the market started reacting to dire signs of a monetary meltdown. Is it possible that the huge rise in the past 18 days has nothing to do with this month's economic brouhaha? I suppose it is. And yes, gold about a year ago was where it was on Sept 11---so both the one year and approx three week rises in gold are the same, around 19 percent---neither much of a vote of confidence in the monetary system.

Adam S | September 30, 2008, 8:26pm | #

Nice Rush reference BTW

SIV | September 30, 2008, 8:26pm | #

Isn't credit destruction greatly outpacing the increase in money supply?

A | September 30, 2008, 8:27pm | #

Ron Paul might not be able to find the political strategy wedged between his own butt cheeks if he had a map, but the man knows his stuff on policy matters. Even though I come down firmly on the Austrian side of the libertarian split on monetary policy, during the campaign I always thought Paul was a bit too apocalyptic with his economic talk. But goddamn if he didn't see this whole mess coming a mile away.

I will say I'm not so sure I'd be too glib about gold prices. The market in gold as it exists now isn't really equatable with the market as it would exist in Ron Paul's world. Gold is subject to wild swings specifically because people rush into/out of the gold market as fiat currencies fluctuate.

shrike | September 30, 2008, 8:33pm | #

You're exactly right, 'A'.

Ron Paul correctly pegs all of our fiscal problems - but his gold solution has now been deemed unworkable by massive debt and a mismatch in gold supply/demand.

Pulling in our vast military is reason enough for him to be president though.

sage | September 30, 2008, 8:33pm | #

Gold is up the same amount over the past year.

Uh, wha? Not according to Kitco. It's up 17%, or $127 in the last year.

Steven Horwitz | September 30, 2008, 8:45pm | #

Props for the Rush reference. Hope all the H&R Rush fans enjoyed Rush Hashanah on VH1-classic.

Steven Horwitz | September 30, 2008, 8:48pm | #

More seriously... that increase in the money supply might not be a problem at all if it's meeting demands for liquidity. Inflation is ultimately caused by an *excess* supply of money. So if the demand to hold money is rising, perhaps as a consequences of the financial uncertainty, that increase in the supply will not be inflationary.

The trick will be to start reducing it when the demand for money starts to fall.

Mad Max | September 30, 2008, 8:51pm | #

Don't get all upset over this, it's probably a coincidence. "We taught inflation a lesson in [1980], and it's hardly bothered us since then." (Apologies to Tom Lehrer).

Speaking of popular-song references, I'll go check out some Rush.

shrike | September 30, 2008, 8:51pm | #

I heard that the Fed injected $240 billion of liquidity into the system since the Lehman fallout. I don't know if it corresponds to the graph or not....

Kolohe | September 30, 2008, 9:02pm | #

how's the price of gold gone this month? Since Sept 11, up nearly 19 percent.

My out of the money LEAP put option on the GLD ETF is also up about 20%, so I wouldn't be too hasty.

Kolohe | September 30, 2008, 9:08pm | #

See this somewhat alarming graph of data from the St. Louis Fed, showing a one-month monetary base increase of 11.6 percent in this magical month of September 2008,

The cause of this was the shift of the Fed's balance sheet from T-Bills only, to all those other 'liquidity instruments.'

So I think most of the uptick is a change in what is being measured. The hazard is of course, is that now the fed is taking unprecendented (but maybe (hopefully?) not unreasonable) risks.

Regis Carnifex | September 30, 2008, 9:57pm | #

Thank heaven the Fed's decided to do something other than roll the bones in the dangerous free market! After all, big money [doesn't] make mistakes.

OK, now I'm embarassed

Patrick | September 30, 2008, 10:13pm | #

While money supply is up, money velocity is down. Supposedly, whatever inflationary pressure the former brings is wiped out and then some by the deflationary pressure of the latter. Sorry for that last sentence ;-)

Bernake has taken the Fed into seriously uncharted waters.

The Angry Optimist | September 30, 2008, 10:17pm | #

Looking at kitco's gold charts for the year make me realize that it's only good as a short-term hedge. Were it me (at least based on 2008 charts), I'd never do a long-term investment with gold (well, unless you made it a small part of your portfolio as a hedge or bet).

Eeyore the Donkey | September 30, 2008, 11:08pm | #

It's great that blogs like this keep an eye on the Vital Signs of the economy...

Mike Laursen | October 1, 2008, 12:24am | #

The cause of this was the shift of the Fed's balance sheet from T-Bills only, to all those other 'liquidity instruments.'

Isn't the linked chart of the M0 money supply? Does M0 include T-Bills?

By the way, if you look at the M2 chart on the same site, it doesn't show the same alarming hockey stick.

James Anderson Merritt | October 1, 2008, 4:37am | #

# Steven Horwitz | September 30, 2008, 8:48pm | #

# More seriously... that increase in the money
# supply might not be a problem at all if it's
# meeting demands for liquidity. Inflation is
# ultimately caused by an *excess* supply of
# money. ...

# The trick will be to start reducing it when
# the demand for money starts to fall.

This is an excellent point. But one's hope is shortlived after consideration of the alarming evaporation of the dollar's value since the Fed became its custodian in 1913, and since the last ties to the gold standard were cut in the 1970s. In a nutshell: The Fed's central planning consistently overestimates (or ignores?) the true demand for dollars, and has flooded the world with dollars over the last 95 years, never sufficiently throttling back when such correction is required. At this point, I don't expect the Fed to improve or change its ways to any significant degree, much less to be effective as anything but a facilitator of continued inflation.

Tommy_Grand | October 1, 2008, 5:30am | #

roll the bones = g a y

Max | October 1, 2008, 5:57am | #

The TIPS/nominal breakeven spread is down, however (signaling low expected inflation, maybe).

cjk | October 1, 2008, 6:04am | #

Brian Doherty, I generally love your stuff. That's why this quote is so disappointing.

And while we are musing on growth figures, let's contemplate what must be a wild coincidence in a world of absolutely rock solid, nothing-to-worry-about, government-managed paper currency, how's the price of gold gone this month? Since Sept 11, up nearly 19 percent.

This is a textbook example of cherry-picking.

Why did you pick Sep. 11th as a start date? The first trading day (e.g., non-weekend day) of the month was Sep. 2nd.

Between Sep. 2nd and Sep. 30th, the AMEX-listed Gold "spider
"--which tracks the commodity price--rose from 79 to 85. That's under 10%

Your point stands: gold is a good hedge against inflation (which is just the deteriorating value of the dollar).

But cherry-picking is a terrible intellectual habit, akin to picking at your teeth with a screwdriver blade.

Also, everyone should look at Steve Horwitz's important point above.

The problem is that central planning can't determine the "right" price of currency--not that it is always and everywhere inflationary (although that's a trend in democracies...)

Russ 2000 | October 1, 2008, 10:21am | #

Ron Paul was a distant early warning.

someoneanonymous | October 1, 2008, 11:05am | #

With derivatives, the gold market isn't exactly free (or silver, for that matter!) and there's a tremendous incentive for those with the financial might to hold precious metals prices down. Doing that, in effect, delays the effects of irresponsible spending & inflation to the next administration. If GATA is right, Clinton's did it and Bush's is doing it, and I believe GATA. The evidence has piled-up too much, and now the physical market is diverging from the paper (futures) market, it's becoming obvious. The mint shouldn't be running out of gold & silver just at this convenient moment, but it IS. Go to your local coin shop, and see if you can get rolls/bags of pre-1964 US silver coins at a reasonable price near today's spot, which at the moment is around $12.50 or so.

Brian Doherty | October 1, 2008, 12:51pm | #

CJK--If you look at the monetary base chart, you'll see that rise didn't start precisely on Sept 1 either, but further into the month---but the chart isn't detailed enough to date it to the day. While you can certainly question the theory that the gold price rise has any connection to the monetary base rise, to hew to Sept 1 as the appropriate starting point is cherry-picking itself. I don't think any of these reactions are mechanical, but if it's the case that what has been happening with gold is in any way related to money (or the slowly growing sense of crisis in the markets and govt as Sept progressed, not something that hit all at once on Sept 1) then tracking it from the point where---IF the theory holds--the gold market started reacting seems perfectly fair.

Regis Carnifex | October 1, 2008, 2:33pm | #

Tommy_Grand

Whether you're referring to the album or the song, You Bet Your Life you're full of crap.