11/8/2011 Portland, Oregon – Pop in your mints…

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than output” – Milton Friedman

Today we came across evidence that the massive amounts of money created out of thin air may no longer be benignly parked at the Federal Reserve.  From Lee Adler at the wallstreetexaminer.com:

“The Fed was hit with withdrawals of $83.3 billion last Wednesday, the largest withdrawals from its deposit accounts that were not associated with quarterly tax payments since February of 2009…The Fed was apparently forced to take extraordinary measures to fund these withdrawals. These included the outright sale of nearly $24 billion in its Treasury note and bond holdings from the System Open Market Account. As a result, the Fed’s System Open Market Account (SOMA) fell to $2.611 trillion, some $43 billion below the Fed’s stated target of $2.654 trillion.”

Mr. Adler goes on to state that in order to meet these withdrawls, the FED had to borrow $43 billion from foreign central banks through “Reverse Repurchase Agreements (RRPs)”.  In a sense, the FED had to make the equivalent of a good old fashioned margin call that foreign central banks had to scramble to make good on.

Could this be the reason that Italian Bonds yields are surging and the ECB cut rates unexpectedly last week?

Could this be the reason that the BoJ had to expand its Yen debasement program to the tune of 5 trillion yen?

Ever since the FED opened swap lines with foreign central banks, it has generally been the FED lending money to the foreign banks to assure liquidity.  In this unexpected turn, the FED had to call in some of those loans to meet its own liquidity needs.

Could this be the first of what history will call a “Central Bank Run”?  Only time will tell, but we would expect the FED to announce another, large scale dose of QE (Quantitative Easing) of its own in the next few weeks in an attempt to meet a similar event with fresh cash instead of a disruptive firing of its RRP revolvers.

In a way, this is the moment that the FED and all of the taxing authorities on the planet have been waiting for.  Inflation is a government’s best friend.  It allows the wealth destruction that these defense and welfare agencies engage in to continue while socializing the costs in a manner that is imperceptible to the untrained eye.

Even the Deficit Super Committee is onto this fact.  They are now discussing the use of the “Chained Consumer Price Index (CPI)” in place of the current CPI calculation for everything from Social Security COLAs to tax brackets to welfare qualification thresholds.  From AP:

“Just as 55 million Social Security recipients are about to get their first benefit increase in three years, Congress is looking at reducing future raises by adopting a new measure of inflation that also would increase taxes for most families –(with) the biggest impact falling on those with low incomes.

If adopted across the government, the inflation measure would have widespread ramifications. Future increases in veterans’ benefits and pensions for federal workers and military personnel would be smaller. And over time, fewer people would qualify for Medicaid, Head Start, food stamps, school lunch programs and home heating assistance than under the current measure.

Taxes would go up by $60 billion over the next decade because annual adjustments to the tax brackets would be smaller, resulting in more people jumping into higher tax brackets because their wages rose faster than the new inflation measure. Annual increases in the standard deduction and personal exemptions would become smaller.”

Do you see how it works, fellow taxpayer?  Inflation, combined with statistical shenanigans intended to mask it, is the magic pill for broken government finances.  It is no secret that the Government’s finances are a disaster, which is why we expect to inflation in generous doses.

How exactly does “Chained CPI” differ from the current CPI calculation?  The article goes on to explain:

“Many economists argue that the chained CPI is more accurate because it assumes that as prices increase, consumers switch to lower cost alternatives, reducing the amount of inflation they experience.

For example, if the price of beef increases while the price of pork does not, people will buy more pork. Or, as opponents mockingly argue, if the price of home heating oil goes up, people will turn down their heat and wear more sweaters.”

Are you laughing yet?  Perhaps crying?  Now listen to how the Government justifies it:

“A report by the Moment of Truth Project, a group formed to promote the deficit reduction package produced by President Barack Obama’s deficit commission late last year, supports a new inflation measure. “Rather than serving to raise taxes and cut benefits, switching to the chained CPI would simply be fulfilling the mission of properly adjusting for cost of living,” it argues.”

If you are not yet laughing, crying, or laughing to avoid crying, allow us to assist you.  What they are trying to say is that in the parallel universe in which the Government operates, the need to substitute more expensive goods for cheaper ones does not constitute a real loss of the purchasing power of the currency with which those goods are purchased.

After all, you can always put on a sweater, right?

Where the Government’s logic, and ultimately society, begins to break down is at the point when all prices, beef, pork, heating oil, and sweaters begin to rise astronomically in tandem with each other.  At that point, it becomes painfully obvious that the problem lies in the currency, not with the producers. 

Unfortunately, at that point, the Government will have long since vilified and persecuted speculators and producers for alleged price gouging to the point that the productive part of society, those who grow food and produce raw materials, will have completely ceased to produce and/or fled the country.  The subsequent lack of production will result in an increasingly scarce stock of real goods being quickly priced and re-priced in a currency which is produced at an incredible surplus.

In layman’s terms, these events will be summed up in the phrase “hyperinflation.”

If the FED has to draw once again on its RRP revolvers, it will be clear that the benign growth in the M2 money supply will have become malignant, and that hyperinflation will soon be in full bloom.

Stay tuned and Trust Jesus.

Stay Fresh!

David Mint

Email: davidminteconomics@gmail.com

Key Indicators for November 8, 2011

Copper Price per Lb: $3.54
Oil Price per Barrel:  $96.44

Corn Price per Bushel:  $6.63  
10 Yr US Treasury Bond:  2.01%
FED Target Rate:  0.09%  ON AUTOPILOT, THE FED IS DEAD!

Gold Price Per Ounce:  $1,737 PERMANENT UNCERTAINTY

MINT Perceived Target Rate*:  2.00%
Unemployment Rate:  9.0%
Inflation Rate (CPI):  0.3%
Dow Jones Industrial Average:  12,040  

M1 Monetary Base:  $2,122,700,000,000 RED ALERT!!!  THE ANIMALS ARE LEAVING THE ZOO!!!

M2 Monetary Base:  $9,507,600,000,000 YIKES UP $1 Trillion in one year!!!!!!!