A paralyzing rise in money supply
By The Mogambo Guru
Adam Hamilton of ZealLLC.com reminds us that "Inflation is purely and
exclusively a monetary phenomenon", which doesn't mean all that much by itself,
but becomes much more horrifying when he adds that Money of Zero Maturity has
been zooming. In case you were wondering, Money of Zero Maturity (MZM) is
considered to be a reasonable proxy for watching the movement of M3, which is
the broadest measure of the money supply, which is important because inflation
in the money supply means that inflation in consumer prices is coming.
Now that we have the academic stuff out of the way, the truly horrifying part
of it all is when Mr Hamilton says, "Absolute annual MZM growth peaked at a
staggering 16.7% in March 2008", and
that "Bernanke's Fed has been ramping money-supply growth so fast that actual
MZM is starting to look parabolic even on a short-term chart. In just over two
years under him, MZM has ballooned 25.1% unchecked!"
Apparently, he mistook the look of sheer, paralyzing horror on my face at this
revelation of such a massive expansion of the money supply (because it will
lead directly to inflation in consumer prices), to be mere confusion on my
part. Helpfully, he reiterated for my benefit, "You read that right. There were
16.7% more US dollars available for spending this March than last! Sooner or
later all this excess money will eventually bid up prices. Some of this
inflation will be perceived as good, primarily the part that flows into stocks.
But the part bidding up scarce food and energy is not going to make Americans
He goes on to say that these rates of growth in the money supply "defy the
imagination. At 12% growth compounded annually, it only takes six years for
something to double. At 16%, this drops to well under five years. If the Fed
doesn't stop this madness, there could be twice as many dollars floating around
in five or six years as there are today. Even with modest economic growth, this
means general price levels would probably almost double."
Prices that are doubled in five years? Yow! "And," he adds, "this inflation is
totally above and beyond all the supply-and-demand-driven global commodities
And it is all because (as I never seem to tire of saying) of the over-creation
of money by the Federal Reserve. Martin Hutchinson of The Bear's Lair figures
that I am too narrow and provincial, and writes that apparently I am too stupid
to realize that there is monetary insanity everywhere, and that "other
countries have also been expanding their money supplies excessively. The
European Central bank has allowed euro M3 to expand by 11.1% in the three
months to March 2008, following an increase of 11.5% during 2007."
He goes on, "As in the United States, this increase is much faster than that of
nominal GDP, and it had been continuing for several years, with annual growth
rates of 7.4% in 2005 and 10.0% in 2006. Of the major emerging markets, China
and India have both been operating expansionary monetary policies and now have
considerable inflation problems. Vietnam, too, has been surprised in spite of
its rapid growth by inflation surging towards 25%." Yikes!
Even more bad news is that "the Reuters CRB commodity price index is up 24%
since September 18 last year", which means that prices are rising alarmingly,
while this is at the same time as incomes are falling, as evidenced by
"earnings in the financial sector, representing more than 40% of total US
earnings before the crisis hit, have essentially disappeared in the last two
I know firsthand what it means to have income disappear, mostly as a result of
my pathetic "cry for help" of stupidly cashing my paycheck and somehow spending
it all on drinking and gambling during one short weekend that is now mostly a
big blank in my mind. When I got home and discovered that we had no food or
money to buy any, the crap I had to take from my family over the next few
months - and occasionally reminisced about to this day - was memorable, to say
the least, and so I can only imagine the screaming and yelling and crying when
"40% of total US earnings" disappears! Yow!
And I can only imagine the screaming, yelling and crying in the retirement
sector, as all retirement funds take huge, huge freaking whacks and people
learn, once again for the zillionth time in history, that investing in the
stock market over the long-term is, at best, a loser for the majority of
investors, and a loser for everybody at the worst, and all because of inflation
in the money supply and the inflation in prices, which is the reason for my
Mr Hutchinson ignores my crying and blubbering about the horror of inflation
that is starting to devour us, and callously increases my horror by saying, "In
the United States, the producer price index increased 6.9% in the year to
March, while that for crude goods increased more than 30%. Like a bowling ball
swallowed by a python, that inflation will move through the economic system and
eventually be reflected in consumer prices. Indeed, it may already be showing
up there; the seasonally unadjusted consumer price index for March was up 0.9%
(an annual rate of around 11%) and only a heroic seasonal adjustment of 0.6%,
double the next largest seasonal adjustment for any month in the last 10 years,
brought the figure down to an acceptable 0.3%."
The biggest "seasonal adjustment" in the last 10 years? And the best it can do
is bring March's annualized inflation to almost 4%? We're freaking doomed!
Except, as I will add for the zillionth time, for the people who buy gold and
silver ... (hint, hint, hint).
The Mogambo Sez: Each time that gold or silver go down, buy more until you have
the stuff stacked all over the house and you are tripping over all the piles of
silver and gold, bruising your shins, which hurts like hell.
If you don't, you will spend the rest of your life living in the dirt and
wishing you had, begging for money and table scraps from those who did. At
least, that is how it has worked out in history! Hahahaha! Hey! This economics
stuff is easy!
Richard Daughty is general partner and COO for Smith Consultant Group,
serving the financial and medical communities, and the editor of The Mogambo
Guru economic newsletter - an avocational exercise to heap disrespect on those
who desperately deserve it.