Drop is Here
...and it's Good for Gold
Nov 25, 2008
This is a graph to take your
St Louis Adjusted Monetary
This is what the start of hyperinflation
would look like.
This is the US money base -
the total of all currency and reserves of commercial banks in
the central bank itself. It's the narrowest form of monetary
aggregate (but getting fatter fast). Banks create loans from
base money, so in theory this recent expansion should turn up
in broader monetary aggregates in the future.
Ben Bernanke earned the nickname
'Helicopter Ben' in 2002 when he repeated Milton Freidman's comment
that money could be "dropped from helicopters" if needed,
to avert a deflationary depression. As a student of the great
depression Bernanke has also been outspoken about his desire
to avoid repeating the mistakes of that era, meaning he'd strongly
prefer inflation to deflation.
Because the gold standard was
dropped in 1971, money can be effectively created out of thin
air. So it is no surprise to find that since September, newly
created money has been raining from the sky. (Apparently this
rain falls only on banks and a few large financials.)
The scale is unlike anything
seen since the US Federal Reserve was formed in 1913. As the
weeks progress on, all previous giant distortions shrink to goosebumps
as the scale of the graph is redrawn.
In the two months after September
24th, over 550 billion new dollars were made from thin air and
added to the US money base. That translates to 58% growth of
the total US money base in just two months. (Annualized, that
would be 350%. Watch out Zimbabwe.)
Most years, base money grows
at around 1-2% per month and has only grown faster than 5% per
month a few times. But the graph line 'went vertical' in September,
(then got worse in November). The growth in money supply since
then was larger than the total money base that existed in 1999,
and it was twice as fast as the worst single month during the
depths of the depression or the height of World War II.
St Louis Adjusted Monetary
Base (AMBNS) 1918-2008
It's not often you can see
one month changes that dominate a 100-year graph.
The potential rapid inflation
in the US dollar that is likely to come from such a massive dilution
of the currency can only be good for gold and silver - the only
currencies that can't be easily diluted.
There are now potentially
100% more US dollars for each gold ounce than there were in total
in 2003, and here's the scariest part: there are now 50% more
US dollars in the monetary base than there were seven weeks ago.
Nov 24, 2008
Joanne Nova is from GoldNerds,
a service for investors to compare the fundamentals of all 300
ASX precious metals stocks. Joanne is science based, a trader,
and a Professional Speaker on radio, TV and conferences. www.goldnerds.com.au. Feedback is welcome,
This is not
investment advice. It does not represent a recommendation to buy,
sell or hold any security.