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Economy in Brief

Global Money Supply Remain Tame Still Gold Bugs Flourish Like Bed Bugs
by Robert Brusca   September 27, 2010

Money growth is largely tame - With the Federal Reserve pondering doing more and the case for further monetary stimulus being argued in the UK and with Japan trying to put a number on a new fiscal stimulus plan the path of money supply growth is sending a strong message of continued price stability that might also raise some question marks about sustainable growth - except in the UK.

UK - UK monetary stimulus continues to run strong and so despite on going economic weakness the Bank of England is not in a strong position to initiate any new monetary stimulus program. However, the UK also has initiated a deeply restrictive fiscal program. Those facts put policy-making in the UK in a really tight spot. Money growth has been enormous. Inflation is still relatively well behaved though not fully tamed. Economic growth remains in the touch-and-go range in the UK while fiscal policy is definitely pulling things back. The UK is in the most complex policy position of any of the major economies.

EMU - EMU despite concerns about fiscal contraction is seeing the most pronounced improvement in money growth as its money supply which has still only expanded 2.4% Yr/Yr is now up at a 6% annualized rate over three-months. The Zone already has multiple contractive fiscal policies at work in its various member states. Economic data for the Zone have been helter-skelter with some evidence of still strong growth mixed with some ominous signs of potential backtracking. Recently the euro has begun to shake off its lethargy and it has been rising.

The US - In the US money growth remains anemic and stuck in a low growth track. Money growth is weaker than what it had averaged over the past three or five years but it is on a par with where it has been over the last year for the past six-months and three-months: not acceleration or deceleration. But with 2% growth in money supply if velocity does not shift up there is not enough room for GDP growth if inflation stays in a 1% to 2% range. .The Fed is now so concerned it has deemed inflation as potentially too low for the Fed to fulfill its mandate which is a complex one that includes price stability along side maximum sustainable growth. The last time that the Fed saw a threat to sustainable growth it was Alan Greenspan who saw huge fiscal surpluses as a looming threat and backed a tax cut that remains controversial even today. While there have been no wild swings, the dollar has begun to edge lower.

Japan - In Japan the economy remains weak. A new fiscal stimulus jolt of about $55bln is being pondered. The latest price index showed deflation is still looming. The Japanese have at long last taken to intervening in the currency markets to halt the rise of the yen. The economy is under pressure and its trading relationships are so important that Japan has backtracked in its fishing boat controversy with China.

GOLD- Money growth globally gives little fuel to the rise in gold prices but they continue to rise nonetheless. One reason might be that central banks have cut back on their sales of gold essentially cutting back on a source of supply of gold to the private market. Total central bank sales of gold were 94.5 tons in 2009-10, which is the first year under a new agreement, it’s the third five-year agreement that runs between September 2009 to 2014. In 2008-09, the final year of the second agreement, central bank gold sales were 157 tons. The story on central bank gold sales can be found here.

Fiction future and fact: While wild gold bugs continue to tell a tale of expected monetization of debt in the worlds currency reserve countries, nothing of the sort could be further from the truth as our data above show. The rise of gold remains a mystery that has roots in the cynicism toward fiat money as well as a cynical outlook on the ongoing and now-official economic expansion. Realization that the world economic order is in flux with China rising and Japan still an exporter of great prowess but with an economy under great pressure has given gold a new outlet. It is now more than just a hedge against inflation. Gold’s rise in clearly is built on a number of fears and while some may have legitimate concerns about inflation in the future, for the moment these must be relegated to the lands of fiction and future and not to the land of fact.

Look At Global And Euro Liquidity Trends
Saar-all Euro Measures (E13): Money & Credit G-10 Major Markets: Money Memo
  €-Supply M2 Credit:Resid Loans $US M2 £UK M4 ¥Jpn M2+Cds OIL:WTI
3-MO 6.1% 8.1% 5.3% 3.7% -0.6% 1.6% 11.3%
6-MO 4.4% 3.7% 3.8% 2.5% -0.3% 3.2% 2.2%
12-MO 2.4% 2.2% 2.2% 2.8% 9.6% 2.8% 8.1%
2Yr 3.8% 1.8% 1.2% 5.4% 10.5% 2.8% -19.0%
3Yr 5.7% 5.1% 3.7% 5.5% 10.4% 2.7% 1.9%
Real Balances: Deflated By Own CPI. Oil Deflated By US CPI
3-MO 4.6% 6.5% 3.8% 1.9% -2.3% 2.9% 9.4%
6-MO 2.6% 1.9% 2.0% 2.0% -2.5% 4.7% 1.6%
12-MO 0.8% 0.6% 0.5% 1.6% 6.2% 3.5% 6.8%
2Yr 3.1% 1.1% 0.5% 5.6% 8.0% 4.3% -18.8%
3Yr 3.9% 3.3% 2.0% 3.8% 7.0% 3.0% 0.3%
Japan's Latest CPI is estimated to complete this table
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