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Monday, October 27, 2008

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:
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.


Anonymous said...

I agree on your outlook for gold if it continues to be viewed as a commodity... However, if that view changes to one that sees it as a currency, wouldn't that lead to a price increase?

Ben Bittrolff said...

Would you ever view gold as a currency in the digital age? I don't think the McDonalds drive thru takes gold...

Anonymous said...

I do think the deflationist argument holds more sway at this time. However, I've also read the argument that the US needs inflation or risk being choked by their debt. That too makes sense, and might lead the US government to take (even more) inflationary measures, whatever they might be.

Emini Addict said...

HAHA.. Mcy D's is going to start taking gold soon. They will have to put their employees through traing on how to test gold for if it is real. I can just imagine the drive though girl biting each and every one..

Anonymous said...

Yes, we clearly have deflation now.

Ben, when do you think inflation will strike back with a vengeance?

Anonymous said...

Kind of playing semantics here, because deflation is defined as a decrease in the money supply, which surely is not happening right now. What we are seeing is value destruction, and when things do finally bottom, then we will see extremely high rates of inflation due to the recent massive increase in money supply.

Anonymous said...

Ben you forget one minor detail in your analysis it is the coming default of the US Gubbermint, there is no way they can finance this mess much longer. China is already pissed at the US and ready for the nuclear dollar dump option.

Ben Bittrolff said...


"Kind of playing semantics here, because deflation is defined as a decrease in the money supply..."

You're absolutely correct. I should be more specific. Just because one measure of money supply, or a couple have increased like M1 and M2, doesn't mean broader measures are.

To be precise, I believe the broader the measure, the faster it is contracting and that it is only the most liquid and narrows measures that are increasing... creating an illusion of 'wild printing' by the Fed.

Adam said...

Mr. Ninja-

Anyone who doesn't think we are in a deflation is nuts. I agree that the gold bug community is a little (a lot?) off and always thinks hyperinflation is just around the corner.

HOWEVER, the gold bugs who buy gold stocks now are going to be right for the wrong reasons and make a shitload of money (200-400%)over the next 2-3 years.

Gold stocks do better during a deflationary environment than an inflationary one. The best performing stock sector during the 1929-1933 deflationary bear market was gold stocks, which went up 200-300% between late 1929 and 1933.

Gold itself, on the other hand, having been liquidated during the current panic we are in, will now stabilize and revert to its role as a currency "equivalent," while the cost of mining rapidly goes down (oil and labor costs, for example, will fall much faster than the gold price) and miners' profit margins expand.

If you don't think so, watch and learn as history repeats.

Anonymous said...

history repeats...........WTF? i guess horses are going to make a comeback if history repeats. gold is worthless today. back in 1930 people used gold. they dont today. how are people going to 'learn to use gold as currency'? they wont.

buy gold and horses and rotary dial phones and .............

Anonymous said...

Gold doesn't have to physically change hands to be used as a currency. 100% gold-backed digital currency would do the job just fine.

Anonymous said...

Yes I fully secnd the pst about digital currencies backed by gld..

There is already a fully flourishing market with them ..f curse a few werde raided by the feds but those in eurpe or asia d just fine..also russia has ne great systen called webmney..there are lts f different backings..but of curse ne has to do his due dilligence n them..but there are 7-8 around which work just fine..

if this is deflation environmet or inflation hell-> i've not made my bets yet..i am still waiting how the us is ging to be "lifted"

Anonymous said...

one thing you're every other currency now, gold is skyrocketing. when the dollar turns -- and it will -- goldbugs here will have their day. ....

and we are just about there....

let's face it, ben, the USD is going to implode....and given the xenophobia, which i will admit to helping foster as a marketing writer for some institutions, will help gold go far beyond what other currencies will do.....

Anonymous said...

I agree we seem to be in a deflation. I would suggest you read a excellent book about gold in relation to inflation and deflation titled:
The Golden Constant: The English and American Experience, 1560-1976 by the late Roy W. Jastram Pub. By John Wiley 1977 It is now of print and very difficult to obtain.

A summary of his findings.

“Gold is a poor hedge against major inflations.
Gold appreciates in operational wealth in major deflations.
Gold is an ineffective hedge against yearly commodity price increases.
Nevertheless, gold does maintain its purchasing power over long periods of time. The intriguing aspect of this conclusion is that it is not because gold eventually moves toward commod¬ity prices but because commodity prices return to gold.”

Only one major deflation occurred in N.A. during the last century, but when you study the major deflations that occurred in the hundreds of previous years described and displayed in graphs in this book , it appears that gold often dropped in value during the early stages of deflation but maintained its value while everything else dropped much further, hence maintained it’s purchasing power. My conclusion is that it is not a matter of gold going up, it is a matter of everything else going down.

The conclusions I have reached from this book are close to the complete opposite of the commonly held beliefs about gold.

crewman said...

The deflation is obvious right now. What happens to gold when the weight of future auctions overwhelm the demand? We rely on Russia and China to fund our debt. What if they don't want to buy any more?

Bobby and Jean the amateur world travelers said...

if china and russia don't want to buy our debt, who is going to buy their crap?

Two years of $50 oil, RUSSIA melts down... GONE bibi cya... Putin's mastermind plan is worthless just like the world currency of FIAT money which will never, ever change.

if our GDP goes down to 12, Trillion (20%) decline, china is going to sell what to who?

decoupling is gone, especially in a tight money environment.

china has 37% consumer spending, 37% exports and 37% capital spending.... during OUR depression the consumer was over 80% of the economy.
Well if they can't export crap, who is going to buy it? once the 1.9 trillion of reserves is gone, how are they going to spend? what are the consumers going to buy if they don't have the ability to earn a wage.

ASM - all same market. we go, bibi we all go...

GOLD is at a high with other currencies and it will change and go up in relative to usd once our dollar stops it tear.

FACE it what would hurt an economy more?
China dumping our bills? or we banning their imports?

China GDP 3.42 trillion of 2007... take 25% of that away.... OUCH!

Anonymous said...

you clearly do not know what y are talking about. Gold rises in an asset deflationary cycle because of rising inflation(that is monetary inflation) by CB to counter the problem.

Anonymous said...

there's a big difference between real deflation and assets coming back down to fair value. In real estate, as an example, values have not come down to the point where it makes more sense to buy vs renting. WHEN home prices overshoot to the down side and it becomes "cheap" to own rather than rent, then you can talk to us about real "deflation".

I'd also take a look at the adjusted monetary base. That tells me you're wrong, very wrong about the outlook for continued "deflation". A country just does not get away with expanding the monetary base by about 40% with no rise in prices.

As for gold, there's an extremely active market for gold above $1000 an ounce. It's called the physical market where 1 oz $20 gold pieces are trading at about $1020/0z. I don;t know or care about conspiracies, but do care about what's actually happening at the point of sale physical market. The COMEX is not the be and end all of prices. Just as the average Joe buys his Big Mac at the drive up, the ohysical market is where most get their gold (coin stores, shows, auctions, US Mint, etc) - not delivery via a Comex contract. hello?

That's what's scary about blogs: folks like you who don't know that they don't know.

Anonymous said...


Who cares what is the spot price of paper gold. The physicall gold is really important! The disconnect between physicall gold price and paper gold price is nice proof of gold price manipulation by the Central Banks. Gata is right and you are naive CLOWN!


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