Thursday, November 11, 2010

One Word Comes to Mind

Had dinner with a great friend who is a local business owner who is in the trenches on the front line with the consumer and his spending habits. Our discussion eventually turned to the Fed, QE 2, and  inflation/deflation. It spurred me to share some charts that I came across while doing my regular chart surfing that might shed some light on the subject. Note: for those suffering from perpetual insomnia the St. Louis Fed website has some excellent resources you can utilize as a remedy.


Below we find  the St. Louis Fed adjusted monetary base percentage change from a year ago. 
For the uninitiated and directly from the St. Louis Fed website the Adjusted Monetary Base is defined as :

The sum of currency in circulation outside Federal Reserve Banks and the U.S. Treasury, deposits of depository financial institutions at Federal Reserve Banks, and an adjustment for the effects of changes in statutory reserve requirements on the quantity of base money held by depositories.



Next up we have a closeup view of the same chart. Are you kidding me ! Wow ! Outside of a CNBC anchor or resident shill, one would be hard pressed to not notice the absolute collapse here.


Lastly we have a chart of  the M1 money multiplier which is the relationship of M1 to the adjusted monetary base. Think fractional reserve lending and you're on track. Again tanking like a dot com stock post the keg party. 



I do not know about you but the action of late in these charts above leaves me at a loss to explain how any of this could be inflationary.  One word comes to mind with the above charts. Can anyone spell collapse? 

Could it be that the run up in commodities is not inflation expectations but rather a direct result of the Fed's current policies inducing yet another speculative bubble? 


Below we have a chart, again via the St. Louis Fed of Excess Reserves of Depository Institutions. There seems to be a leak in this boat somewhere.



I shall repeat, yet again, for the likes of Bill O'Reilly and other armchair, weekend pontificators and experts on our financial malaise as it were, what money the banks do have they want to lend to QUALIFIED borrowers. This little item seems to be conveniently left out of the discussion. I pick on O'Reilly as I like him but his understanding of this mess needs some enlightening. The problem facing the system now is finding qualified borrowers who actually want to borrow. The vast majority of commercial and retail customers walking in a branch for a loan CANNOT QUALIFY period !  I cannot stress this enough. Please let me know when this concept has sunk in. Once it has you will start to understand why the Fed is impotent and all its fancy machinations are flushing money down the drain. It is called pushing on a string for a reason. 
Modifications,  refi's, moratoriums, principle reductions, et al. are all simply a stay of execution in my opinion as the debtor cannot afford to service the loan.

The Fed has been advised or so thinks that buying time will cure all. Unfortunately the debt simply rots like the body of a mob informant in the trunk of a Bonneville on the Jersey turnpike. 

The individuals and corporations who have a pristine credit rating have it for good reason. Sound, responsible financial decision making. 

I have said it before and will repeat it here again. Those who need money don't have a hope in hell of qualifying for it and those who qualify are not dumb enough to borrow. Why? Well, for starters deflation rewards savers rather than debtors. Deflation rewards savings as a dollar today will let said saver buy more goods with the same amount of money in the future as prices fall. Deflation results in lower prices in general, barring disruptions in supply and demand.


Inflation, on the other hand, rewards profligate borrowing, it rewards spending beyond your means as a dollar borrowed or spent today can be then repaid with a dollar worth less years down the road. I remember hearing an economics professor I had who had, who once worked with the World Bank, call inflation "a little grease for the engine". Are you shocked he worked for the World Bank? I am shocked he didn't end up running it with that view.



Anyway enjoy the above charts and take away from them what you will. As for Mr. O'Reilly who I singled out, my bill is in the mail.


Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

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