Over the next two weeks, two economic and financial "anniversaries" will occur in the US. It is a safe bet to predict that neither of them will be acknowledged, let alone celebrated.
The first "anniversary" takes place next Friday - March 16. This is the first "anniversary" of the last time that the US Congress raised the US Treasury's "debt ceiling" - by $US 781 Billion to its present level of $US 8.965 TRILLION. Incidentally, as of March 8, 2007, the Treasury's "debt to the penny" stood at $US 8.833 TRILLION. That means that Treasury debt is up by $US 649 Billion since March 16, 2006. It also means that the Treasury is now 83.1 percent of the way to the new debt ceiling it received from Congress just under a year ago. It will certainly hit it before the end of the year and could well do so before Labor Day.
The second financial "anniversary" for the US, and this one is for the Federal Reserve, comes four days after the first one on Tuesday, March 20. This marks the passage of exactly one year since the Fed decided to stop publishing official data for US "broad money" numbers (or M-3). This is what we wrote about this decision when it was made just under a year ago:
"Don't forget, on March 20 ...the US "broad money" (M3) statistics are due to become an "anachronism" and cease to exist as official statistics reported by the US government. It wouldn't do to have an official trail of the havoc which would be caused if Mr Bernanke had to man his fabled helicopter. And, of course, if he had to do that, then the current eye-watering upward spiral of US government debt - both funded and unfunded - would reach escape velocity."
Gold This Week - February 17, 2006
As you know, inflation in the US (and everywhere else) is officially defined as "rising prices". Very particular rising prices, mind you. Rising stock prices are NOT inflation. Nor are rising prices on the bond markets. Nor are rising prices for real estate. Nope, inflation is officially defined in rising prices in consumer goods, and in producer goods ONLY. In this regard, it should be pointed out that real estate is in reality a consumer good but it is also a consumer good against which one can borrow large amounts of money. That makes it a financial "asset", again by official definition. Nobody borrows money against a trolley full of groceries.
A moment's thought should be enough to unearth the fact that "defining" inflation as rising prices is ridiculous. HOW DID THEY RISE? The answer is that they rose because the amount of MONEY circulating in the economy rose. The classical, correct, and only logical definition of inflation is an increase in the total stock of money. But who increases the "total stock of money"? That's right, the Fed, ably aided and abetted by the US Treasury. And because this is the case, the official definition of inflation no longer deals with the money in circulation, because to do so would be to pinpoint the actual source of that inflation.
The definition switch was made in the 1930s. Up until a year ago, all that was necessary to maintain the facade was to continually "revise" the official measures of inflation - the CPI and the PPI - whenever the numbers got uncomfortably high. But with the passing of the torch at the Fed from Mr Greenspan to Mr Bernanke in early 2006, the situation with the "total stock of money" had gotten so out of hand that it was deemed "prudent" to stop talking about it. Hence the cessation of the broad money (M-3)numbers for public consumption.
Now, let us consider what this has "accomplished". On March 8, the European Central Bank (ECB) announced that they were raising official European interest rates by another 0.25 percent to 3.75 percent and according to most of the "analysts" covering this news event, left the door wide open to more rate rises in future. At the same time, the ECB announced that in January 2007, the European broad money measure (M-3) had risen by 9.8 percent year on year in January 2007. This is the biggest such rise in seventeen years.
Apart from the fact that the ECB still chooses to publish broad money numbers while the Federal Reserve no longer does so, consider this increase in European broad money in light of the only valid and logical economic definition of inflation - an increase in the total stock of money. While the ECB was announcing its January M-3 numbers, it was also forecasting that (price) inflation would grow at a 2.0 percent rate in 2008. That's one-fifth of its current money supply growth figures. Which is the TRUE measure of European inflation?
The ECB's rate rise and the announcement of a 9.8 percent annual increase in broad money was on March 8. The next day, on March 9, the US Treasury bond market suffered its biggest one day fall in 2007 so far. The official reason was a much better than expected US January employment report and with that, a waning of Wall Street expectations for an imminent Fed rate CUT. The ECB rate rise and the BIG jump in European M-3 numbers were studiously ignored.
In Europe, and in most other major economic regions, data about money supply growth (both broad and narrow) is still available for public consumption. In the US, it is not. In just over a week, as Mr Bernanke and his Fed colleagues sit down once again to decide on official interest rates (the next FOMC meeting is on March 20-21), the non-reportage of US broad money numbers will enter its second year.
"Nobody Knows The Money I've Seen"? That could well serve as Mr Bernanke's eventual epitaph. The frantic masking of the true state of US financial affairs has "worked" for the past year. When the big stock market (and precious metals) sell off took place at the end of February, US investors did what they have always done. They stampeded into the "safe haven" of Treasury debt paper and yields plummeted.
On March 9, that was reversed with a vengeance as the Treasury market had its biggest one day fall this year with yields up sharply - especially at the longer end of the curve. The longer the US financial powers that be attempt to obscure the real situation, the more the loss of complacency that was demonstrated by the global stock market sell off will bite. The more it bites, the more hesitancy there will be to retreat into ANY paper asset. And as that hestitancy increases, the impetus to grab REAL economic goods and REAL money, precious metals, will increase. We are in for a repeat of the 1970s, on a potentially vaster bigger scale. It's just a matter of time.
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