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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: Real Man who wrote (51462)	4/25/2013 9:47:41 PM
From: Real Man	Read Replies (1) \| Respond to of 71445

Speaking of which ... -bg- Message 28853071

To: Real Man who wrote (51462)	4/26/2013 9:55:24 AM
From: carranza2	Read Replies (3) \| Respond to of 71445

Chuck Butler's Daily Pfennig picked up on Hoisington's latest. My belief FWIW is that the huge amounts of excess reserves which are not moving, i.e., not contributing to velocity, account for M2's slow growth. Excess reserves=inflation in a can if deflation doesn't bite first. I am surprised that the Fed hasn't done something to get these excess reserves to move around a bit. They seem to be frustrating the Fed's QE plan. The relevant excerpt: OK. I promised you this, and it's long so stay with me on this. Well. I had to do a lot of soul searching earlier this week, after reading the letter from Van Hoisington that my friend John Mauldin posted and sent out. I had long believed that Money Supply had the "potential" of being inflated as the Monetary Base grew. Last week, I showed you a graph of the Monetary Base in the U.S. which showed the Monetary Base exploding higher and higher. But those beliefs were built on one word. "potential". and in the case of Money Supply following Monetary Base higher, the potential doesn't currently exist. According to the Van Hoisington letter, "the Fed began its massive balance sheet expansion near the end of 2008. It was then that the Fed expanded the monetary base from $840 billion to $1.7 trillion in a matter of months. Further, from the initiation of this misguided program to the end of March 2013, the Fed has expanded the monetary base from $840 billion to $2.93 trillion. The money supply indeed went up (35%) but not in proportion to the increase in the monetary base (249%). Presently, the year- over- year expansion of M2 is only 6.8%, which is nearly identical to its year-over-year growth rate in March of 2008 before the Fed decided to "help out the economy." So. from that data and info, you might figure out why inflation hasn't gone to the moon. Yes, as I've reported to you, it is much higher than what the BLS prints each month. But nothing like a lot of people thought it would be by now given the explosion of the Monetary Base, the near zero interest rates, and stimulus times 3. The "potential" that's missing is this thing called the "money multiplier". So the funds go to the banks, and the banks do something with it, right? That's where the money multiplier comes into play. In talks with my friend, and Big Boss, Frank Trotter, we talked about how the money multiplier used to be around 10. But in today's world it's around 3. And therefore, the actual money supply isn't growing like the Monetary Base. So, the claims that the Fed is printing truck loads of money are incorrect. But they are expanding the Monetary Base like there's no tomorrow! And The thing that I come back to though, is that this "potential" still exists. And should banks begin to put all that money to work in the economy, interest rates will rise very quickly. So, the "potential" for much stronger inflation is still there. Now the Fed Heads believe that when that happens, they will quickly get inflation under control by selling some of their bonds, and reducing that Monetary Base. And interest rates will rise immediately. Who will be right? The inflation wins people, or the Fed wins people? I told Frank that I had long ago pinned my colors to the mast of inflation, and there was no way I could change horses in the middle of the stream now, even if I wanted to. And I don't want to! But no one knows who will win. This is all unchartered waters for us. We can look to Japan, as they're a decade ahead of us, but the American consumer is completely different than the Japanese consumer, so our comparison only goes so far. So, you have to choose which mast you'll pin your colors to, now. and find out later how you did. OK. that was Monetary Base and Money Supply 101.