Sunday, September 12, 2010

Inflation, Deflation, Where is the Money?

There are two interesting statistics we look at and ask, where is the money.

A year ago we wrote a study about the monetary base. It took the FED six more months to discover this issue. They finally did but so far so bad.

Now look at the Monetary Base, the excess reserves held in banks for a simple term.

When we wrote the analysis we saw the first pop up and since then it has popped again another trillion. So why is all the money being held in the banks?

Next we look at the velocity of M2. We present below our calculation and that of the St Louis FED. Not that despite what ever economics text says it is NOT constant! This of course should be no surprise to our readers given out view of the competence of economists, especially academic ones.

Note that our calculation and that of the FED are close. Note also we have shown the most recent which dips again. Money is just not circulating! It is staying in banks, not circulating, not generating GDP. Surprise, not really, the FED is causing this with its monetary policy. They are taking assets, giving money and then having the banks buy Treasuries to finance the debt, the deadly cycle. Unlike classic inflationary cycles we have inflation in the back room of the economy, the Government-FED-Bank complex. When will this explode outwards? Good question but it is clear the current Administration and FED appear to be clueless.