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US Money Supply and the Bond Market Blackhole

Interest-Rates / Money Supply Aug 19, 2008 - 04:41 PM GMT

By: Rob_Kirby

Interest-Rates

Best Financial Markets Analysis ArticleWith a show of hands, how many people really believe the U.S. Bureau of Labor Statistics when they report that inflation is running at 2 – 4 %? 

I'm not seeing very many hands. 


As GoldMoney's James Turk recently reported,
“To give you a true picture of just how bad inflation has become, here is what John Williams of Shadow Government Statistics reports in his latest newsletter : "The SGS-Alternate Consumer Inflation Measure, which reverses gimmicked changes to official CPI reporting methodologies back to 1980, rose to a 28-year high of roughly 13.4% in July, up from 12.6% in June." It's no wonder that the demand for precious metal coins and small bars is so strong.”

Of course, if we are being falsehoods on inflation – it necessarily goes that we are also being fed lies about the Bureau of Economic Analysis' [BEA] reports of Real GDP [Gross Domestic Product].   The “deflator” used by the BEA is derived from the BLS's officially reported inflation; and it is backed-out of gross GDP to achieve “net” or real GDP.

The implication here, folks, is that western economies have already been experiencing “real negative growth” for a number of years.

Birth / Death Model and Hedonics Used in Reporting the Unemployment Rate

Chart of Unemployment Rate. U-3, U-6, SGS

Borrowing the above chart from Shadawstats.com, we can see clearly how John Williams has re-constituted the unemployment rate [in bold blue above] to be consistent with how it was measured back in 1980.  Our current unemployment rate [in 1980 terms] is running north of 14%.

In conclusion, we are fed lies about the true rate of inflation, economic output as defined by GDP and the official unemployment rate is perhaps as much as 900 basis points too light.

M3 Reporting and the Monetary Base

Recent research I've conducted and presented has led me to the inescapable conclusion that there are some SERIOUS macro incongruities in the Fixed Income [Bond] complex:

  • I first broached this subject in Pirates of the Caribbean , where I dispelled the [then] popular myth that Caribbean based Hedge Funds were gobbling up unexplainable amounts of U.S. Government Debt.  The reality is they couldn't have.
  • In The Elephant In the Room , presented at GATA's Washington conference in the spring of 08, I documented how J.P. Morgan was seen to be conducting ‘massive' trade in U.S. Government Securities that legally cannot exist.
  • In Dead and Buried, But Not Forgotten , I highlighted the reporting of Daniel Gros showing, “The global financial system seems to have a black hole at its centre. Over the last two decades, US residents have sold a total of about $5,500bn worth of IOUs to foreigners, yet the officially recorded net investment position of the US has deteriorated only by a little more than half of this amount ($2,800bn). The US capital market seems to have acted like a black hole for investors from the rest of world in which $2,700bn vanished from sight - or at least from the official statistics.”
  • In Dead and Buried, I then connected the dots between the possibility of securities and collateral fraud and 9-11.

The revelations in the Gros article are highly suggestive that some SERIOUS MONKEY BUSINESS has occurred with the monetary base; namely, that a stack of bonds have been/were bought [result of foreign revulsion of U.S. debt in the wake of LTCM perhaps?], or monetized if you prefer [likely through J.P. Morgan's absurd 93 Trillion derivatives book], and the fiat money that was printed out of thin air to ‘redeem them'.  These newly created balances were NEVER recorded in official statistics or M3 reporting [as the Gros article suggests] – because acknowledging their existence would be akin to admitting that foreigners had lost faith in U.S. Government Bonds. 

Ladies and gentlemen, bonds DO NOT DISAPPEAR , get misplaced, or otherwise get lost in black holes - period.      

This view, coincidentally, would go a long way to explaining why the Fed stopped reporting M3 Money Supply Aggregates on March 26, 2006.  Could it be that the Fed was really concerned that continued reporting of M3 would have been reverse engineered by someone like John Williams revealing that bonds or debt outstanding does not equal money in circulation?

Making the amount of money in circulation look smaller – in the face of deliberate, wholesale money printing – would make fiat money appear relatively more attractive.

Who would benefit from such an act?

Published monetary aggregate data is perhaps more laughable than bogus published reports that inflation is running at 2 – 4 % levels.
For those of you naïve enough to think that a Central Bank would not commit such an act, please
consider the words of Dallas Fed President Richard Fisher ,
" The Federal Reserve will do what it takes to maintain its credibility, which is central to preserving the integrity of the US dollar ," Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.

This report, from Reuters, continues: " We seek to get it right. And the answer to your question is we will do what gets it right ," said Fisher.

Answering audience questions after a speech to the Dallas Friday Group, Fisher said the US dollar is a " faith-based currency " dependent on the credibility of a central bank.

"In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity..."

Well……………..have they?

By Rob Kirby
http://www.kirbyanalytics.com/

Rob Kirby is the editor of the Kirby Analytics Bi-weekly Online Newsletter, which provides proprietry Macroeconomic Research.

Many of Rob's published articles are archived at http://www.financialsense.com/fsu/editorials/kirby/archive.html , and edited by Mary Puplava of http://www.financialsense.com

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