Tuesday, March 21, 2006

The Bubble Index: How Much Excess Purchasing Media is Actually in Circulation?

Fed watchers had fun trying to interpret Bernanke's speech last evening, looking for a sign of coming interest rate movement. Of course, he didn't reveal anything. But he did say that "a number of forces could be behind the low long-term [mortgage] rates, including an excess of savings in other countries looking for returns, strong demand from pension funds for longer-term bonds, a shortage of longer-term bonds or confidence in the Fed's ability to keep a lid on inflation."

I don't know about the last three. The first one sort of makes sense, although "excess" seems a poor choice of word when it comes to savings. Is there such as thing as "excess" savings? He should be kissing the ground those savers walk on, because they are funding the overspending that is maintaining our economy and war spending in high gear. I would call it "manna from heaven" savings, not "excess" savings. And secondly, when you think about it, what are they sending us? Not just their hard-earned cash. They are sending us the dollars we spent on their exports like petroleum or clothing from China.

Sniff sniff. I smell a rat. We've touched on something Professor Bernanke missed, the real source of all of those dollars making that gurgling sound as they flow into our treasury bonds.

Where are we getting all those dollars we're spending in Canada, Mexico, China, the Middle East? Some of them we earned. Some we are borrowing from our house equity, or from our credit card companies. And where are the credit card companies and mortgage refinance companies getting their money? From people who invest in such instruments; but only in part, because some of it comes from credit supplied by the treasury and Federal Reserve through treasury bond issuance. Even more comes from our banks and other semi-federal financial institutions like Freddie Mac and Fannie Mae.

How do the Fed and the banking system know how much of this credit is too much for our monetary system? They don't; however, I'll rely on the statistics of the American Institute for Economic Research. (See their website here.) They publish (only in print) a graph called the Harwood Index of Inflating. This is not a chart about inflation, per se. "Inflation" as commonly used means the increase in general prices, for example as defined by the CPI. "Inflating" as they use it, on the other hand, is the rate at which the Federal Reserve and the banking system are "printing money," or advancing credit, to excess. Click on these charts to see a larger image.


Now, why would the Fed "print" extra money and hand it out for public use? They say they do it to insure that the economy doesn't falter, as it was doing in 2000 during the dot com crash. The problem is, this is a chicken or egg conundrum. Which came first, the crash, or the credit? The burst, or the bubble? The Fed has been pumping the system with credit since the First World War, well before the 1929 depression. According to the AIER, it is the credit bubble that comes first and then bursts, every time. Not only that, it is this very credit creation inflating that causes our CPI inflation and is destroying our dollar. A dollar today only buys as much as 2 cents bought in 1900.

The chart is not precise and doesn't pretend to calculate the excess money down to the penny. On the other hand, it is the only effort of its kind that I know of, and I believe it is as accurate as it can get, giving the dearth of statistical information available.

So, according to this chart, we do about half of our spending with credit the Fed has given the public over the years, and it's been taking our very productive economy about 15 to 20 years to catch up with the money supply. I believe this is what has supported our present real estate bubble. It is what created the dot com bubble. And it also explains why we don't save money. Think a minute: Is it any wonder that we are adverse to saving when we can get money so easily from our banks, central bankers, and government, and when the rate of interest on money we might put aside is inferior to the inflation rate? (The CPI rate, that is.)

And is it any wonder that the Chinese and Arabs are buying our treasuries and other assets like our oil companies and our ports, when they are awash in dollars that our government advanced to us on our good credit rating, and that we turned around and gave to them for their exports, and which they accepted in good faith?

And do you really think we can continue to borrow money from the printers of cash without ever paying the piper? History would say otherwise.

(if you're interested to read an article about Bernanke' speech, it's here.)


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