END THE WEEK WITH 2 FROM BILL BUCKLER

Excerpts from investment rarities site from Privateer BOTH June 9th



BEST OF BILL BUCKLER
June 20, 2005
What passes for economic and monetary theory inside the US today is simplicity itself. It is so basic that even Lord Keynes would blush to see it were he alive today. All it consists of is the idea that when any ongoing credit expansion shows signs of faltering, the solution is to overpower the real economic consequences which are now catching up with an even BIGGER credit expansion.
They even have a "name" for this so-called economic policy. They claim that they are "growing" the economy. If fact, what they are growing is the height of US debt outstanding (internal as well as all the external). No measure is out of bounds. The tax cuts are to enable Americans to service their higher debts. The result is that the US budget deficit has exploded. On top of that, the US has a current account deficit which the OECD expects to reach $US 900 Billion next year…..
Over the week to May 27, US M3 jumped $US 23.8 Billion to $US 9.622 TRILLION.
In one week, the US credit money machine created an additional US $23.8 Billion out of thin air. Those new US Dollars are now in full circulation. If the US Federal Reserve keeps this weekly rate of money creation up for a year it will have added an additional $US 1 TRILLION 237 Billion to the already outstanding stock of money in the US monetary system. This is where the global spill-over starts.
Let The Record Show:
The wider US M3 money supply has grown from $US 7.3 TRILLION at the start of 2001 to $US 9.622 TRILLION through May 2005. Over the mere four and one-half years from the start of 2001, the US money machine has decanted this additional $US 2 TRILLION 322 Billion on top of the pre-existing $US 7.3 TRILLION, which is an increase in the total stock of money in the USA of 31.8 percent in that time!….
The spectre which haunts the world is a sudden and out of control collapse in the international value of the grotesquely politically misused US Dollar. It is, after all, the world's reserve currency! Such a collapse would place under suspicion and ultimately expose every other fiat and credit currency. It would do none of them any good to claim that they had lots of foreign reserves, these are US Dollars!
But if they could point to a huge hoard of Gold, they just might ride out such a storm. As would you, gentle reader, if you just held 15 to 20 percent of your financial assets in Gold.
Ó 2005 – The Privateer
http://www.the-privateer.com

THE SUPPLY OF MONEY - AND THE DEMAND FOR MONEY

Here are some numbers which should make for very sobering reading indeed. They involve the rate of the expansion of the US broad money supply (M3) in the period since May 2004. Don't forget, the Fed began their series of official US rate rises - from a level of 1.0% - at the end of June 2004.
In late May 2004, US M3 was running at a year-to-date expansion rate of 11.0% annualised.
In the first week of June, exactly a year ago, the US M3 rate of expansion over the previous four weeks was reported to be running at a rate of 20% annualised.
In the first week of July 2004, just after the Fed's first 0.25% rate rise, the year-to-date expansion of the US M3 was 10.1% annualised - double the rate of the corresponding period of the previous year.
At the end of 2004, US M3 was reported to have expanded over the year at a rate of 6.6%.
As of June 3, 2005, the US M3 year-to-date expansion rate (to May 23) is reported to be 3.1%.
Finally, since the beginning of 2005 - again up to May 23 (the latest data reported) - US M3 has climbed from $US 9,479.2 Billion to $US 9,599.2 Billion. That's up $US 120 Billion or 1.27%.
As you can clearly see, the rate of expansion of the US "money supply", almost all of which is borrowed into existence, has radically slowed over the past year. This has happened despite the continuing increases in government spending and trade and current account deficits and despite the ongoing real estate mania in the US.
It is an old adage of rational financial economics that once a monetary inflation has begun, it takes ever larger dollops of new inflation to keep the entire structure from imploding. Amongst many other reasons, this is true because as the debt load incurred by the inflation increases, servicing costs for this debt grow. This effect can be delayed, somewhat, by the Central Bank artificially lowering interest rates - as the Fed did in 2001-03, but the effect of this artificial lowering of rates is to accelerate the borrowing. To illustrate this, the highest year-on-year increase in US M3 since 1981 - almost exactly $US 1TRILLION or 12.54% - came in 2001, the year when the Fed cut official US rates from 6.50% to 1.75%.
In August 1982, the start of an almost two-decade stock bull market in the US, US M3 stood at $US 2,400 Billion. It doubled to $US 4,800 by June 1996, just under 14 years later. Now, in the nine years since June 1996, the US M3 has doubled again to its present level of $US 9,600 Billion. There's the acceleration. Now go back and look at the data presented about more recent M3 movements. A year ago, the year-on-year expansion of US M3 was running at an 11.1% rate. Six months ago, it was 6.6%. Today, it is 3.1%. There's the DECELERATION!
Of course, the "stock" explanation of this drastic deceleration in monetary growth is that the Fed has TRIPLED official rates from 1.0% to 3.0% over the past year. Two factors are ignored in this explanation. The first is that the Fed has been offsetting its rate cuts with ever bigger "open market operations" by which it injects new money into the system. The second and more important factor is the drastic flattening of the US "yield curve". On June 3, 2004, the spread between three-month and ten-year Treasury rates was 355 basis points or 3.55%. On June 3, 2005, this spread was down to 99 basis points or 0.99%. The three-month Treasury yield which the Fed DOES control had risen from 1.16% to 2.99%. The ten-year Treasury yield which the Fed does NOT control had FALLEN from 4.71% to 3.98%. While official rates have risen, market rates, and the cost of servicing loans in same, have fallen. Yet the acceleration of the US M3 money supply has plummeted. Why?
"Easy" Credit Versus Rising Prices:
Contrary to the most fondly held aspirations of all politicians and Central Bankers and most economists, it takes more than "low" interest rates to induce the massive borrowing necessary to sustain an inflationary credit expansion. It also takes an ever increasing DEMAND for the funds being offered to borrowers at the ever lower rates of interest. Since the short-lived recession at the beginning of the 1990s, the demand has come less and less from the productive sector of the US economy and more and more from US "consumers". What has happened over the past year in the US (and everywhere else) is a stark increase in the prices of things that consumers must consume, whether they want to or not. The US Treasury's measure of "core" price rises may exclude fuel and energy costs, but the US consumer cannot "exclude" them from their purchases. Over the past year, the cost of living in the US (and everywhere else) has been accelerating upwards. There comes a point in this process where both individuals and businesses cannot afford to borrow at ANY rate of interest, much as they might like to. The combination of the prices they must pay and the servicing costs of the debts they have already taken on have risen to the point where they are simply tapped out. They literally cannot afford to borrow any more. That precise situation is now rolling like a building tidal wave across most western economies.
Ó 2005 – The Privateer
http://www.the-privateer.com/