To the author: thank you for this article it helps illuminate some of the obfuscation by the Fed.

One question I have is whether anyone has determined some sort of relationship between either MB or M1 and gold.

The 1,6 include the currency part of M1 in addition to the deposit part. So it is correct to double only the 740, and then add it to the total 1,6.

In the may to may calculation, Katz forgot to double the deposit part wich is about 600, for a new total of 1,97 instead of 1,37. The increase for the year is thus of the order of 18% instead of 16% and 70% !

http://www.federalreserve.gov/releases/h6/Current/h6.txt

http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt

I have no idea why this sweeping activity is allowed, however, Katz’s arithmetic is a big problem. He makes two serious errors. Katz states that the St. Louis Fed told him that almost half the transaction balances (actual M1) are excluded from measured M1 by retail deposit sweeping. This figure was also reported by the St. Louis Fed in 2003. Since the current measured M1 is $1.6 trillion, the correct estimate for the actual M1 would be double this figure or $3.2 trillion (not the $2.34 trillion Katz estimates). Also, the estimated figure for the actual M1 a year ago would be double the then reported figure of $1.38 trillion (which figure I read off Katz graph)-in other words, $2.76 trillion. As a consequence, the estimated increase in the actual (unswept) M1 over the past year would be from $2.76 trillion to $3.2 trillion, an increase of 16%, as the Fed reports.

Thanks, I didn’t know about that guy, Steve Saville. In fact, I wasn’t following links to him in the past because I had misread them as Steve Sailor.

He’s certainly has a clearer understanding of Austrian theory than Mish. I do like the graphs Mish posts but sometimes he gives them the wrong spin.

http://safehaven.com/showarticle.cfm?id=10804
http://safehaven.com/showarticle.cfm?id=12844

What in the world makes you think that foreigners are going to continue purchasing our debt at a “frenzied pace”?

China was a net seller of U.S. Government debt in April. On top of that, they have been swapping out long term treasuries for short term notes (this is not a vote of confidence). Chinese officials have openly expressed concern about the strength of the U.S. Dollar. Russian President Medvedev announced plans to discuss the creation of an alternative to the U.S. dollar with Brazil, India, and China.

You need to relearn your history. The U.S. was on a gold standard during the 1930′s, Inflation was limited by the international specie flow price mechanism. Your historical arguments are meaningless.

You dodged my primary question: Explain to me how the FED can pull the staggering amount of new reserves out of the system without causing serious problems?

Mish is only partially correct. I posted a comment on his blog that was utterly devastating of his claims. He moderated it out of existence before anyone could see it. It was in response to his criticism of Gary North’s article. It had two main points: 1) Mish’s belief that gold should go up during a deflationary credit crisis is ridiculous because the metal has been demonetized “de jure”. We aren’t on a gold standard.

It’s clear that gold is going up because of a belief that the current deleveraging will force political action to inflate. Which will result in future inflation. If we do get deflation as Mish says then this speculative increase will collapse.

Mish claims that gold goes up during credit crisises because of security. In fact, when the crisis was hot and heavy back in fall of 2008 and people were scrambling for liquidity gold moved in exactly the opposite direction from what Mish claims should happen.

2) He made an incredible blunder with these claims in the article:
“Thus, if banks had to pay interest on reserves, rather than causing mass inflation, the Fed would cause mass panic.

Indeed, the likely result would be banks scrambling for dollars to repay the Fed as opposed to a mad dash to lend dollars.”

The blunder is his belief that bank reserves held at the fed are money owed to the Fed by the banks. That’s got things completely in reverse.

Mish’s behavior with regard to my comment puts him in the same company as Brad Delong as to his allowing honest and open debate on his blog. That is, he suppresses critical comments that have bite and lets through weaker arguments he can deal with to make himself look good.

Sure we are in a period of deleverage but government will be sure to pump money in order to prevent price deflation (and to reward friends). This situation is in no way similar to Japan on many other factors.

BTW, Mish’s chart on what is associated with deflation/inflation is totally bogus also.

Thanks for your insights. You are correct in that the poor global investment environment is contributing to the strength of the US treasury.

But buyers aren’t going to take on that kind of risk (of a treasury bubble collapsing) for such a low return. As a result, buyers have either priced upcoming inflation at a low enough level that their real return is acceptable, or they see the risk of the dollar losing its position as the reserve currency as very low — or both.

The 10-year bottomed out in December at 2.04% — BEFORE the Fed announced their plan to buy $300B in treasuries. When they announced their plan, treasuries dropped from 3% to 2.5% — then rose back up. The Fed has not acted on their pledge to buy $300B in Treasuries and probably won’t. That’s a clear act of monetizing the debt and the last thing they want to do is cause systemic collapse.

Treasury yields reflect supply and demand pressures as well as inflationary expectations – -the TIPS spread is one of the more reliable measures of inflationary expectations out there.

Speculators? Please. Foreigners are continuing to buy up treasuries at a frenzied pace and I don’t see it slowing down.

And we most cetrainly DID have a fiat monetary regime during the 1930s — it would be absurd to say otherwise.

Neither can I, but if you read the article you’ll find that it was showing that the monetary base was increased past the money supply. Unnecessarily forcing a zero axis would have doubled the size of the graphs, or shrunk the useful portion of each by half. Admittedly, a single graph with both plots would have been best.

I take you’re genuinely interested in treasuries *shudder*… It’s a dark world my friend. (this is a bit of a read, so you might want to get a cup of tea or coffee)

You see treasuries are like any other commodity, it’s current value doesn’t necessarily represent its future value. If commodity values are going down, then a reasonable person would switch their position from the commodity to cash. (The old buy low, sell high stratagem)

In comes the U.S. treasury. Ideally, when the government borrows, it would like to borrow at 0% interest, or even better, get paid to borrow -% interest (btw, this actually happens). But if they can’t sell debt at 0% they gradually start increasing rates, 1%, 2%, 3% ect… until they find enough buyers, or until they reach a interest rate that is unreasonable.

Now, if you knew that you could buy one of these things and sell it for more you probably would (speculation). Or, maybe you bought one of these things because the dollar is worth more vs. a commodity than it used to be (hedging). Or maybe you’re China, and buying these things because it’s a better alternative than other options right now (self preservation). All of these things kind of coalesced and drove interest rates down. Combined with decreased demand for other goods, and an increased demand for the dollar, the U.S. has been able to sell debt cheaply.

And now back to your original contention. If people knew that these things were poison, then why take it? Why wouldn’t interest rates go up even more than they are right now?

Because at this very moment, the dollar is the only choice a lot people have. It sucks, but what are you gonna do, right? It’s the global reserve currency and practically guaranteed to not totally evaporate so long as it remains the global reserve currency. In essence, this is all short term activity. Already, according to the WSJ, the U.S. is having to increase interest rates.

But no one wants to hold onto physical cash and just sit on it (it doesn’t make any money), consequently people buy treasuries and sell them when the opportunity presents itself. Treasuries produce interest, and can increase in (cash)value. It’s perfectly legal to resell treasuries, and a great many people do.

Interest rates are down because there are buyers for the here-and-now (esp. China), but as soon something better comes up you’ll see the U.S. treasuries market tank, and interest rates WILL skyrocket. Big time. Marc Faber says this will be the short of the century. When this happens exactly is uncertain; it’s hard to pinpoint.

So, yes, interest rates are low right now, but the same people that are buying huge swathes of U.S. will be the same people selling huge swathes of U.S. debt when the time comes. The U.S. is printing money 24/7, and due to the current global economic downturn they’re getting away with it without having to increase interest rates by very much.

However, when the U.S. can’t afford to borrow anymore, and the world switches in part or as a whole to another reserve currency, the U.S. will have no other choice than to default on its debt, or increase the money supply. According to this mises.org article, the U.S. has taken the domestic monetary suicide path, and the author is providing evidence via graphs to prove it.

As a side note, this reply is a bit of a mash up of the following articles:

http://seekingalpha.com/instablog/201983-contrarian-profits/7120-how-to-make-20-to-30-times-your-money-on-the-coming-inflation

http://www.bloomberg.com/apps/news?pid=20603037&sid=avgZDYM6mTFA

http://www.chinaeconomicreview.com/dailybriefing/2009_02_13/CBRC:_Beijing_to_keep_buying_US_Treasuries.html

http://online.wsj.com/article/SB124351873663062545.html

If a person is fooled because they don’t know how to read graphs, then that’s another matter entirely.

Yields fall when the FED buys treasuries. Furthermore, yields are depressed if speculators expect the FED to continue purchasing treasuries in the future. The current treasury bubble is driven by short term speculators. Do you really believe anyone is purchasing bonds with the intention of clipping coupons for the next ten years?

Your historical arguments are meaningless. We did not have a fiat money system during the Great Depression. We were not the largest debtor nation in the world. During the 1990′s, Japan had a high savings rate and they were not a debtor nation.

Excess Reserves have increased by 1,400% over the last year. This means demand deposits can increase by 1,400%. Explain to me how the FED can pull these reserves out of the system without making a huge mess?

1. Yes — the money has to be loaned into circulation in order to effect inflation.

2. I think the CPI captures some of that data.

3. From my understanding, the Fed can increase the rate they charge to withdraw money from the banks.