Getting the money supply right

Steve Saville, www.speculative-investor.com, 05/16/2011  [Excerpt]
The Fed stopped reporting the M3 monetary aggregate many years ago, but it is still possible to estimate M3 using the Fed’s data. For example, the following chart shows M3 and the M3 year-over-year (YOY) rate of change as estimated by www.shadowstats.com.

The Shadowstats.com chart shows that M3’s YOY rate of change was negative from late-2009 through to March of this year. In other words, if M3 represented the US money supply then the US would have just experienced more than two years of deflation. However, M3 doesn’t represent the US money supply. M3 includes money, but it also includes credit instruments. Due to the preponderance of credit instruments in M3, this aggregate sometimes provides very misleading signals to anyone who treats it as if it were a measure of money supply. In fact, more often than not over the past 5 years the message sent by M3 has been the polar opposite of the actual monetary situation, in that M3 indicated rapid money-supply growth when the money supply was growing slowly from 2006 through to mid-2008 and then indicated slow money-supply growth when the money supply was growing rapidly from mid-2009 through to the present.

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The Hidden State Financial Crisis

My latest research into opaque state financial statements suggests taxpayers will be surprised by how much pensions are underfunded.

Meredith Whitney, online.wsj.com, 05/18/2011

Next month will be pivotal for most states, as it marks the fiscal year end and is when balanced budgets are due. The states have racked up over $1.8 trillion in taxpayer-supported obligations in large part by underfunding their pension and other post-employment benefits. Yet over the past three years, there still has been a cumulative excess of $400 billion in state budget shortfalls. States have already been forced to raise taxes and cut programs to bridge those gaps.

Next month will also mark the end of the American Recovery and Reinvestment Act’s $480 billion in federal stimulus, which has subsidized states through the economic downturn. States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

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Book Review: Adam Fergusson’s When Money Dies

John Tamny, www.realclearmarkets.com, 05/12/2011

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. – John Maynard Keynes, The Economic Consequences of the Peace, pp. 235-248.

When Money Dies, the horrifyingly true story of post-World War I Germany’s experience with hyperinflation, was first published in 1975. Largely because the world has been forcibly reacquainted with central banks, and specifically, the U.S. Federal Reserve’s “quantitative easing,” this essential book was republished and re-released in 2010. Read more»

Gold and Silver Coins Proposed as South Carolina Legal Tender

Fraendy Clervaud, www.midslandconnect.com, 05/11/2011

South Carolina lawmakers are proposing a bill that would give the state another form of legal tender.

Sen. David Thomas, a Republican from Greenville, wants to make gold and silver coins another option in the Palmetto State.  Lawmakers are calling it the Sound Money Legislation.

“I’m no financial expert but am I smart enough to know that you can’t keep printing money when it has no backing,” says SC Republican Representative Mac Toole. Read more»

Henry Simons was Right

Doug Noland, www.prudentbear.com, 04/29/2011

“The establishment of definite, stable, legislative rules of the game as to money, or in other words, the creation of a national monetary system, are of paramount importance to the survival of a system based on freedom of enterprise.”  Henry Simons, 1936

Listening to Chairman Bernanke’s Wednesday press conference, I was reminded of the long-standing but forgotten “rules vs. discretion” debate with respect to monetary policy.  Dr. Bernanke is an impressive public servant.  He is extremely intelligent and a man of integrity.  I do believe our chairman seeks to do the right thing, and he would prefer to shoot straight with people.  I appreciate all of that, although I have come to the conclusion that the system would be at less risk these days if the Fed were being governed by a less capable, less trusted and less doctrinaire official.  We’ve somehow gone from the cult of “The Maestro” to “Genius Professor.”  Federal Reserve performance is deserving of significantly less discretion. Read more»

America’s Reckless Money-printing Could Put the World back into Crisis

Last week, Ben Bernanke suggested that the US base interest rate will stay close to zero for an “extended period”. It’s been there since December 2008.

Liam Halligan, www.telegraph.co.uk, 04/30/2011

Traders took these words to mean that the Federal Reserve won’t hike rates until the first few months of 2012 at the earliest.

Bernanke also pledged to do whatever is required to keep America’s economic recovery on track – confirming that the second programme of “quantitative easing”, or QE2, would be completed. These two related announcements – the “reprieve” and the “sugar rush” – sent Wall Street into renewed spasms of synthetic joy.

In the real world, US growth is slowing sharply. Annualised GDP rose just 1.8pc during the first three months of 2011, down from 3.1pc the quarter before. America remains mired in sovereign, commercial and household debt.
Yet as the Fed chairman spoke, US stocks hit their highest level since before the sub-prime crisis. The tech-heavy Nasdaq, incredibly, closed at a 10-year peak. Read more»