Money supply, BOJ, China & Gold, Ice Cream

[powayseller]

If the increasing money supply is causing inflation, why don’t they just cut back on the money supply, instead of raising interest rates?

BOJ is cutting back its money supply by $200billion between march and june 2006. This is expected to reduce the demand for Treasury notes, lowering their price and increasing the yield. Investors were borrowing yen at 0% and buying Treasury notes yielding 4%. Now that BOJ is asking for the money back, those Treasury positions will be unwound, and we will see a slight price hike.

What’s up with China telling us they’re buying several hundred thousand tons of gold? Way to make the price go up, right before you’re ready to buy! Obviously, they said it to get someone’s attention. Whose? Maybe they want the US to know their interest in the dollar is short lived.

I think the Fed will keep raising interest rates not to control inflation (bec. if they really wanted to do that, they would reduce the money supply), but to keep the dollar from losing any more value. But hey, gold still climbed higher on pure speculation. If Ben stops raising, the dollar will go on its own downhill slide. The dollar’s end is near, isn’t it? What’s left, another 2 years?

[powayseller]

Oh, the ice cream part was just to lighten up the topic a little. As in, if you answer this post, also include the name of your favorite ice cream.

[superfly19]

Doesn’t it have something to do with the unprecedented trade imbalance and with balancing the Financial and current accounts? Has anyone out there read “The Dollar Crisis” by Richard Duncan?

[SDbear]

This month’s PIMCO comentary ‘Fed focus’ explains it well.
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2006/FF+May+2006.htm

[pencilneck]

The end is near. Pistachio.

[sdduuuude]

OK. I have a question about this gold/inflation/fiat currency issue. Now, I agree that a gold standard is better. I’m always a fan of taking the government out of the loop and I understand the importance of a free currency market. But …

I have heard for 10 years that the dollar will collapse and gold will rule.

I realize this is much like those who say “we’ve been hearing about the housing bubble for years and it hasn’t happened.” To answer those skeptics, we can point to many important factors that are becoming saturated to the point where they must break: ARM resets, price-to-income ratios, %of neg-am loans, the dependence of the economy on RE & Construction jobs, etc.

My question is – why now? What key economic conditions make the dollar so suceptible that everyone is discussing massive inflation, declaring the end of the dollar and proclaiming gold as long-term play?

We have been off the gold standard for so long – why now? What is becoming saturated? What variables are hitting multi-decade highs that are causing people like poway seller and themessthatgreenspanmade.com to claim the end of the dollar?

And please remember: succinct = good

[Anonymous]

The one aspect that I have not seen anything written about is the number of products that are derivatives of oil. Nylon, for carpet is directly extruded from oil. Has anyone by chance in here bought any carpet lately? The prices have risen astronomically in the last 2 years.

I mention this only to illustrate that there is widespread inflation. The Fed will keep raising rates to try and stop this. I have been of the opinion for awhile that they were going past 5%. The unwind of the carry trade as poway mentions in the thread has already begun. If you are not sure, just look at a 10 yr or 30 yr bond chart. I will post these in my blog tommorrow.

I think at this point everyone has had the ad nauseum on the COT folks and their timing for commodities. They are just for timing and general direction. However, from my research, the one primary historical factor that CAUSES gold prices to rise, is inflation. I have found no other strong correlations that have direct causation. I have not found direct relationships that are consistent, between gold and the us dollar in my research.

What this tells me aside from anecdotal evidence of inflation, is that we have a ton of underlying inflation as well.

[sdappraiser]

Bush, George W.

[Anonymous]

The Japan yen carry has caused a lot of money flows into the USA.
The BOJ has ordered its commercial banks to reduce its reserves in commercial banks and unwind lending practices that has contributed to the real estate boom to the US. The questions now is will the Chinese pick up where the Japanese left off and or a portion of the funding of all these IOU the USA keeps signing. Recently the BOC will allow a few qualified investors in china to purchase other assets and currency outside china. It is yet to be seen if those funds will be targeted for the US assets. The future weakness of the dollar and a real-estate bubble would in my guess make the Chinese investor look elsewhere to invest the yuan. The only way to attract foreign money to continue this credit expansion would be a higher interest rate. We are in a borrowing credit growth economy and not one based on a savings growth economy.

[sdduuuude]

National Geographic ran some articles about what happens when we run out of oil. There was a photo of a family with all the items taken out of their house that were made from petrolium derivatives. It was quite remarkable. Worth checking out. The articles were spread out through more than one issue, I think. Had some good info on alternative energy and their relative costs.

[lewman]

Re: inflation. The actual inflation is indeed higher than the headline CPI figure reported by the government. The Bureau of Labor Statistics has been doctoring this number to artifically suppress inflation numbers since Clinton by changing the the CPI’s calculation methodlogy.

Re: Gold price increase. In addition to the Yen carry trade, I suspsect the accelerating increase in gold price this year also has to do with the carry trade of gold itself. For years, traders could borrow gold from central bank for next to nothing, sell them in the market then reinvest the money for a quick buck. As gold prices rebound, there ought to be a lot of short covering.

Re: USD decline and why now. Not now; it’s been happending for years. Take a look at the chart of the USD and you’ll see that it’s been losing value for decades. It’s just that most of us don’t remember things more than a few years ago that you think it’s just happening now. It’s simply a resumption of a long term trend, nothing special about it.

Re: money supply. Turn off the spigot while we’re all enjoying a nice long hot shower ? Who’s got the guts to do that ? Greenspan’s the one that gave us more. How about Ben ?

Chris J: could you post link to your blog ?

[powayseller]

Why now sduuuude asks. Perhaps I’m overresponding to the headlines. Read the Bloomberg headlines. Here’s another one about yesterday’s dollar selloff.

Each day, I read the dollar fell again against the euro and the yen, gold is up. Then China’s high officials (cleverly never the government itself) and economists drop hints they will diversify out of the US $ and buy other currencies and gold. A Chinese economist, just this week, recommended that China buys 1900 tons of gold, which is as much as is mined in 9 months globally. Why were they saying this? It will surely drive up the price of gold. They want to notify the US they are diversifying.

Look, China is holding something like $600 bil (?) of Treasury debt. They don’t get interest on it. You only get interest when the term expires. So they are holding worthless IOUs. The problem is that we NEED them to buy this. We need $2 bil daily of cash infusion from foreigners. If we really ARE the richest country in the world, why do we need foreigners to give us $2 bil per day just to keep our economy going?

I see that we are no longer the richest and most productive country. We are dependent on foreigners to fund our daily operation. The rise in our debt is unprecedented, as is our dependency. Our exports are down and have no hope of recovery.

Also consider that every fiat currency has a useful life of 50-70 years. Once, the British pound was a fiat currency. Why do we think the USD must be forever the fiat currency, just because we are in USA, and don’t want it to stop being the world reserve currency? Someone should study what made the other fiat currencies falter. I think it was what we’re doing now: too much debt.

Of course, this could go on another 1-5 years before it collapses. Just like the housing bubble. But collapse it will unless we pay of the national debt and balance the trade deficit. I see no resolve in Congress or in the White House for either measure. That’s why I see the decline of the US $. Time to diversify, but where?

What stunned me what when the Chinese President came to the US. He went first to visit Bill Gates, and to the White House last. He spent only 30 min. with our President. Wasn’t that a sign of utter disrespect from one statesman to another?

Another problem is what I see corporations doing with the huge amount of cash on hand. (Everyone is awash in liquidity these days, except wage earners.) Instead of investing it in research, development, expansion, it is utterly wasted in stock buybacks and mergers. Both acts use large amounts of cash, but don’t add any economic value. The only people who make money during M&A is the financial advisors and lawyers putting the deal together. It’s wasteful activity. (Isn’t it true that whenever M&A rises, the stock market has peaked – is there a correlation like that?)

[Anonymous]

My blog which has a few of the charts I have discussed is http://iamafuturestrader.blogspot.com/. I put up a chart of the 30 yr bond in there this morning. I also sent that to you in an email. Your comments about the dollar are correct. I will be posting a chart on the dollar next week in the blog that will show a different picture than what most people think about it.

I have always believed the govt manipulates the numbers in the reports simply because of the revisions that follow the next month. This is especially true in the non-farm payrolls report.

There was a time when I had a strategy just based on trading the revision of the prior month of the non-farm payrolls report. Often the trade lasted less than one minute! Often the bond prices would have a huge reaction when the revisions were announced, and I found a pattern to it. Alas, that reaction does not occur any more to the degree it used to.

[lostkitty]

TIMELINE OF Great Depression copied from websites (with current-day parallels in parenthesis)

1920s:

During World War I, federal spending grows three times larger than tax collections. When the government cuts back spending to balance the budget in 1920, a severe recession results. However, the war economy invested heavily in the manufacturing sector, and the next decade will see an explosion of productivity… although only for certain sectors of the economy. (Iraq War spending and current record deficits)

An average of 600 banks fail each year. (possible, soon to be banking/mortgage collapse)

Agricultural, energy and coal mining sectors are continually depressed. Textiles, shoes, shipbuilding and railroads continually decline.

The value of farmland falls 30 to 40 percent between 1920 and 1929.

Organized labor declines throughout the decade. The United Mine Workers Union will see its membership fall from 500,000 in 1920 to 75,000 in 1928. The American Federation of Labor would fall from 5.1 million in 1920 to 3.4 million in 1929.

“Technological unemployment” enters the nation’s vocabulary; as many as 200,000 workers a year are replaced by automatic or semi-automatic machinery.
Over the decade, about 1,200 mergers will swallow up more than 6,000 previously independent companies; by 1929, only 200 corporations will control over half of all American industry. (out-sourcing labor abroad)

By the end of the decade, the bottom 80 percent of all income-earners will be removed from the tax rolls completely. Taxes on the rich will fall throughout the decade.

By 1929, the richest 1 percent will own 40 percent of the nation’s wealth. The bottom 93 percent will have experienced a 4 percent drop in real disposable per-capita income between 1923 and 1929.
The middle class comprises only 15 to 20 percent of all Americans.

Individual worker productivity rises an astonishing 43 percent from 1919 to 1929. But the rewards are being funneled to the top: the number of people reporting half-million dollar incomes grows from 156 to 1,489 between 1920 and 1929, a phenomenal rise compared to other decades. But that is still less than 1 percent of all income-earners.

(Yikes.)

[powayseller]

The worker productivity statistic is interesting. Economists say that although our manufacturing employment is down, our productivity is continuing to grow. Likewise, wages are flat since we are competing w/ underdeveloped nations.

Why isn’t this stuff in the headlines? It’s happening slowly, imperceptibly.

Lostkitty, where have you guys put your money?

[Author]

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