by Rob Kirby, Kirby Analytics. April 7, 2008
We all read and hear from officialdom that the prospects for inflation, while elevated somewhat recently, always remain anchored and/or subdued on a forward looking basis:
"...if the public experiences a spell of inflation higher than their long-run expectation, but their long-run expectation of inflation changes little as a result, then inflation expectations are well anchored. If, on the other hand, the public reacts to a short period of higher-than-expected inflation by marking up their long-run expectation considerably, then expectations are poorly anchored." – FED Chairman, Ben Bernanke, July 10, 2007
In this speech titled, Inflation Expectations and Inflation Forecasting, Mr. Bernanke goes on at length about the influence that "expectations" have on inflation but he fails [intentionally, perhaps?] to mention its true cause:
"Inflation is a phenomenon caused by the increase of money supply relative to the growth of production capacity for goods and services."
As regular readers of this site should be aware and as Jim Puplava has pointed out, time-and-time again, inflation is and always has been "a monetary phenomena." So, while Mr. Bernanke speaks volumes about the containment of inflation expectations, here is what the Federal Reserve has empirically done to M3 – the broadest measure of MONEY SUPPLY [M3 privately calculated by John Williams, Shadow Government Statistics, since March 26, 2006]:
Money supply growth is now approaching 20% per annum. As an entity whose primary mandate is to "controll inflation," it’s no wonder the FED has lots of time to discuss "expectations" and zero interest in discussing inflation's real cause. Heck, these "revisionists" even had the gall to claim that broad money growth was "irrelevant" to heightened inflation as a further explanation for their discontinuing reporting of M3 data [their original claims being that compiling M3 data was too costly]:
"True to form, the conspiracy minded were inspired to vent after last week's announcement that the Federal Reserve would cease publishing its broadest measure of money supply numbers, otherwise known as the M3 series. The official reason is that M3 is a dud. That is, M3 offers little information above and beyond M2. Dave Skidmore, a spokesperson for the Fed, told CS today [Nov., 2005]. M3 adds sparse, if any insight to monetary trends that's not available in M2, a narrower definition of money supply, he continued."
Not surprisingly, as the growth of the broadest measure of money supply took its "upward bend" immediately after March 26, 2006 – the nominal prices of many commodities, as represented by the CRB Index, began trending upward:
It took the entry of J.P. Morgan into the Natural Gas derivatives arena along with a "re-weighting" of the Goldman Sachs Commodities Index [GSCI] to create a broad derivative induced [read: Hedge Fund] sell-off in the energy complex to put the brakes – near term – on this reaction to monetary stimulus.
We see further evidence of how derivatives are being employed in other bellwether commodities to stifle nominal price increases:
Unfortunately for those going hungry in Asia, there is no derivatives or futures market for rice:
THE ASSOCIATED PRESS
posted 6:38 a.m. Friday
March 28, 2008
MANILA, Philippines – A sharp rise in the price of rice is hitting consumer pocketbooks and raising fears of public turmoil in the many parts of Asia where rice is a staple.
Money supply growth is rampant. Problems created by already excessive money supply growth [read: sub-prime mortgage debacle – Bear Stearns] are being met by the Federal Reserve with solutions which [not surprisingly] require still more money growth.
This is why the dollar is declining against other currencies and why nominal prices for so many staple goods is increasing.
To protect oneself from the ongoing severe debasement of the currency through money growth, folks need to ensure that they have adequate assets allocated to tangibles, namely, precious metals.
Overseas equities began the week on a positive note with Japan's Nikkei Index gaining 157 points to 13,450. North American markets began the week mixed with the DOW ahead 3 points to 12,612.40, the NASDAQ losing 6.15 to 2,364.83 and the S & P adding 2.10 to 1,372.50. NYMEX crude oil futures gained 2.69 to close at 108.92 per barrel.
Interest rates were 9 – 12 basis points higher with the benchmark 5 yr. note ending the day at 2.74% while the 10 yr. finished the day at 3.56%.
On foreign exchange markets, the U.S. Dollar Index added .24 to finish the day at 72.20.
The precious metals complex began the day very strong but ended the day mixed with COMEX gold futures adding 7.80 to 922.30 per ounce, while COMEX silver futures gained .32 to close at 18.08 per ounce. The XAU Index managed a small gain of .03 to 184.71 and the HUI added 1.23 to finish at 451.79.
On tap for tomorrow, at 10:00 a.m. Feb. Pending Home Sales data is due – expected -1.0% vs. prior 0% [unch.]. Then at 2:00 p.m., minutes from the Mar. 18 FOMC meeting are due to be released.
Wishing you all a pleasant April evening and happy investing!
© 2008 Rob Kirby