Friday, April 06, 2007

Look Behind the Curtain

So you think that at 5.25% (Fed target interest rate), the Fed is being bearish about inflation, especially with all their "jaw boning" about it.

James Picerno over at Seeking Alpha submits that the M2 figures suggest an increase of money supply that may be just as important to inflation as the target interest rate, and we all know that the Fed has more than one tool its kit.

[Thanks to for the image.]

As Picerno puts it, with a nominal GDP increase of 4.1% (current dollar rate), M2's increase at a rate of 6% is almost 2% above production, implying some generosity on the part of the Fed, perhaps to help housing's soft landing. It's true that money doesn't seem to be tight in spite of the 5.25%, which historically isn't that high after all.

This is all speculative; but it's interesting and it makes sense to me. History has certainly tended to show us that a government will inflate at every opportunity, especially when they are in debt.

But as I have pointed out before, there will come a time when the wave will hit the wall, when the dollar can't take any more inflating; i.e. when the US reputation for being the "tallest dwarf" will dissolve into a mirage. After all, others are out there, and they all covet the title: Europe, Great Britain, the Aussies. We are no longer alone on this currency podium, and we had better watch out for the competition.

And when they all slide at the same speed, there's always gold.

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