Money Supply, Hoarding, Gold, Deflation: Tin Foil Hats

“Forget about inflation. There has never been in the history of the world an inflationary run while land prices were declining. The amount of debt being destroyed as the monster of a debt bubbles implodes will suck down all asset prices and just absolutely collapse the velocity of money.” -TheFinancialNinja, 09/10/08

It would appear the institutions AND individuals are hoarding cash and cash equivalents. The percent change for M1 over the last 3 months (June 2008 to Sep 2008) has spiked to 19.5%. The six and twelve month percentage change is 11.4% and 6.4% respectively. Clearly this hoarding behavior is quite sudden and recent. M2 for example isn’t increasing nearly as fast at 6.8%, 4.0% and 6.2% over the last three, six and twelve months. (Data: Money Stock Measures)

I mentioned recent hoarding behavior in the post Bernanke Bailouts Not Working, Banks Hoarding.

For the hyperinflationists out there, a massive increase in money supply IF IT IS HOARDED would still result in deflation.

Recent world equity market declines have wiped $10 trillion of wealth clean off the planet. That amount alone, without factoring in the secondary and tertiary effects, is so deflationary as to make the inflationary and hyperinflationary arguments a hilarious little joke.

In the post Inflation, Deflation, Money Velocity and Gold I argued that we cannot avoid deflation. Regular readers know that I’m firmly in the deflationist camp.

I repeat: “As soon as the fear and panic subsides, the easy money will be made SMASHING gold short as people finally realize that inflation is what we HAD and that deflation is what we will HAVE.”

$1000 was the high. Since then the last to major 'lifts' failed, with each successive lift failing to meet or exceed the previous high... and that is despite some of the greatest panic EVER. De-leveraging forces or not, if Gold was meant to go, surely it should have gone now of all times...

Over at Afraid To Trade Corey acknowledges the technical damage to the daily and weekly charts for Gold but is more constructive on the monthly chart in A Monthly View of Gold Prices.

The Tinfoil Hat crowd can't figure this out of course and turns to 'it must be a giant global consipracy theory' arguement. My personal favorite are the clowns over at GATA, where they postulate the greatest, most complex manipulation theory and cover up ever as the only explanation for the failure of gold to go to infinity and beyond.

Money Stock Measures Definitions:

Federal Reserve Statistical Release:
H.6
Money Stock Measures

1. M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, traveler's checks, demand deposits, and OCDs, each seasonally adjusted separately.

2. M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.