Archive for the ‘Money Supply’ Category


China Has the Most Valuable Money Supply in the World.

In Money Supply on 十二月 12, 2011 by CQCA

While no one seemed to be watching, the money supply of China snuck past the U.S. Dollar, the Japanese Yen, and the Euro to become the most valuable money supply in the world. According to each central banks’ official statistics, it reached first place in September, 2011. The Chinese money supply reached US$12.3 trillion, followed by the Eurozone at US$11.8, then Japan at US$10.4 trillion. Is this good news or bad news?

While the U.S. dollar and Euro are taking a beating in international financial markets, China and Japan have quietly gotten into a much worse monetary situation. The Yen seems to be extremely overvalued. Over the last few years it has been appreciating despite massive government debt and low interest rates supporting it. China seems to be a case of hot money driving up asset prices. If most of that new money is foreign currency, it will at some point leave the country and deflate one of the largest asset bubbles in history. If most of that new money is Renminbi, it will have to devalue sharply against other major currencies.

Either way, China seems to be doomed in the very near future. The U.S. dollar has a few more years before it reaches its intrinsic value, which is also zero.

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Tobacco Stocks.

In Investment Returns,Money Supply on 八月 21, 2011 by CQCA

I don’t usually talk about specific stocks on this site, as I prefer to focus on money supplies and interest rates. But, for September’s newsletter, I have been looking at oil and tobacco stocks as commodity/inflation investments. I thought I would share this graph comparing the S&P 500, Altria (MO), and the money supply. Dividends were re-invested.

Between January, 1970 and August, 2011, the S&P returned 1,221.49%. The money supply increased 1,472.87% over the same time, so S&P investors actually lost wealth. Altria’s stock, by comparison, increased 118,550%. Not all tobacco stocks do well over the long term (Japan Tobacco, I’m looking at you), but some of them have outperformed gold.

I especially look forward to sending out September’s newsletter. Contact me ( if you are interested in receiving a copy.

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Japan’s Historical Money Supply.

In Money Supply on 七月 23, 2011 by CQCA

The graph above shows Japan’s money supply between 1868 and 2010. This data came from a lot of different sources, and the Bank of Japan has not been consistent in its record keeping, so I am not as confident about this data as I am about my research on the U.S. money supply. However, I am certain that the Yen has been inflated at an incredible rate.

Isn’t it interesting how quantitative easing in Japan hasn’t re-inflated asset prices to their pre-bubble level?

Data for 1868 to 1893 comes from “Economic Fluctuations in Japan, 1868-1893,” by Shigeto Tsuru (1941). Data for 1914 to 1919 is based on “Debts, Revenues and Expenditures and Note Circulation of the Principal Belligerents,” by Louis Ross Gottlieb (1919). Data for 1920 to 1928 is estimated from “Economic Developments and Monetary Policy Responses in Interwar Japan: Evaluation Based on the Taylor Rule,” by Masato Shizume (2002). Data for 1929 to 1939 is based on estimates from “Effects on Japan of Depreciation of the Yen,” by the Institute of Pacific Affairs and Shizume’s work. 1946 to 2010 data is from the Bank of Japan, although the money supply was not uniformly calculated thought the years.


On A Long Enough Timeline, Everything Goes Parabolic.

In Money Supply on 七月 17, 2011 by CQCA

The above chart shows the growth of the different types of the U.S. money supply back to 1892. The Federal Reserve only provides online data back to 1959. The Federal Reserve Bulletins, published since 1914, and Comptroller of the Currency reports are available on the Federal Reserve Bank of St. Louis’ website. They provide enough data on currency in circulation, demand deposits, time deposits, and non-financial institution deposits to recreate the series back to 1892.

Between 1892 and 1912, the money supply expanded at about 3.71% per year. All U.S. Dollars were redeemable for gold. Between 1913 and 2003, the money supply expanded at about 6.84% per year. All U.S. Dollars are redeemable for other U.S. Dollars.

The thing that stood out about this graph is that the monetary base jumped from just above M0 to surpassing M1, meaning banks now have more money in reserve than Americans have in deposit. Once new money flows from the monetary base into the different levels of the money supply, it begins to multiply. We’ve got a long way left to climb!


Which Currencies are the Most Overvalued Against Gold?

In Currency,Inflation,Money Supply on 七月 15, 2011 by CQCA

Ever wonder what the price of gold would have to be if governments wanted to back up the full money supply? It is really only a simple matter of division, the hard part is finding the data.

The World Gold Council provides data on gold reserves by country. (Free registration is required to see their data.) I took the gold reserves of each country, and then matched them up with the data I used to calculate the money supply growth of most countries’ currencies between 2005 and 2010. I then used the current price of gold in each currency to calculate how much each currency would have to be devalued in order for that government to establish par between its money supply and gold reserve. The results are below.

The IMF issues SDRs, or Special Drawing Rights, which are magical receipts for something—no one is quite sure. The IMF has issued 182 billion SDRs, and has 90 million ounces of gold, which means the price at par would be about 2,000 SDRs per ounce. The current price in SDRs (.6343 SDRs to US$1) is about 995 SDRs per ounce. This means that the IMF would need to devalue the SDR by 50% in order to establish a par price.

Venezuela came in second because it recently devalued its currency by half against the U.S. Dollar.

The United States Dollar came in 24th place, at 95.3658% devaluation. Put another way, $100 in the future could possibly only buy $4.63 worth of goods today.

China came in 69th place, at 99.5262% devaluation. Put another way, 100 Yuan in the future could possibly only buy 0.47 Yuan worth of goods today.

Hong Kong is the biggest loser, at 99.9885% devaluation. Put another way, 1,000,000 HKD in the future could possibly only buy 115 HKD worth of goods today. I also wrote earlier about how the money supply of the Hong Kong Dollar has grown much faster than the U.S. Dollar’s, meaning the fixed price of 7.8 HKD to 1 USD over the last 14 years is nowhere near reality.

There are a few things that need to be said about these results. The first is this only considered gold. Most of these countries have foreign exchange (like Hong Kong), so if the U.S. Dollar were tied to gold, and other countries held U.S. Dollars, their “gold holdings” would increase, and therefore change the results.

Another problem is that gold has almost never been par to the entire money supply of a country. A full devaluation of this magnitude would indicate a complete collapse of humanity’s confidence in the monetary system. A much more likely scenario is that currency is completely devalued and we then go back to bartering chickens. Decades later we can start to rebuild the gold standard. Ever seen the movie Water World? If you watch it backwards, you will see that “water” is a metaphor for “inflated currency.”

The biggest problem, though, is that the data I used relies on the assumption that governments of the world are honest about their gold holdings. Ha.


Silver Is Also Very Undervalued Compared to the Monetary Base.

In Investment Returns,Money Supply on 七月 13, 2011 by CQCA

I few days ago I wrote that the high nominal price of gold is actually relatively inexpensive if we compare it to the U.S. monetary base. I was also curious about the price of silver. The results are below.

The blue line shows how many billions of ounces of silver it takes to equal the monetary base. The lower the line is, the more expensive silver is; the higher the line is, the less expensive it is. In 1979, the average price of silver was $21.79 per ounce, and the monetary base stood at $133 billion, so the monetary base was worth 6.12 billion ounces of silver. In 2002, the average price of silver was $4.60 per ounce, and the monetary base stood at $639 billion, so the monetary base was worth 149 billion ounces of silver.

The bi-weekly ratio is shown below. Similar to gold, the real price of silver is actually decreasing.

On June 29, 2011, the U.S. monetary base was worth 76 billion ounces. This is only slightly lower than the 1993 ratio of 78 billion ounces. Even though the Dollar price of silver has increased almost 500% between 2000 and 2010, in terms of credit expansion, silver is essentially as cheap today as it was when the average Dollar price was $4.97.

Now for the exciting part. How high would silver have to rise before it reached a 1980’s style bubble?
(1980 high point)/(1980 monetary base) = (equivalent high point)/(current monetary base)
(49.45)/($133,436,000,000) = (X) / ($2,645,989,000,000)
X = $980.57

The price of silver would have to reach $980.57 before it is in 1980 bubble territory. The closing price yesterday was $36.90.


Marc Faber is Right About the Price of Gold in 2011.

In Investment Returns,Money Supply on 七月 5, 2011 by CQCA

In a recent interview, Marc Faber, a well known investor and author of the Gloom, Boom, and Doom Report, stated:

“My view is, yes, I have been positive for gold for the past 10 or 12 years and I could make a case that gold today is cheaper than it was in 1999 when it was at $252. Cheaper in the sense that if I compare gold to international reserves or to the increase in the credit markets in the world, I don’t think it’s expensive.”

I did the math on the monetary base and the price of gold. The results are shown below.

The blue line shows how many billions of ounces of gold it takes to equal the U.S. monetary base. The monetary base is made up of currency in circulation and bank reserves. One Dollar placed in the monetary base will usually multiply into more Dollars as it moves higher up in the money supply, so it is a better indicator of future inflation than the overall money supply.

The lower the line on this graph goes, the more expensive gold is; and the higher the line on this graph goes, the less expensive it is. In 1980, the price of gold averaged $612.56, and the monetary base stood at $144 billion, so the monetary base was worth 235 million ounces. In 2001, the price of gold averaged $271.04, and the monetary base stood at $639 billion, so the monetary base was worth 2.36 billion ounces.

Below is the bi-weekly ratio of the monetary base to the price of gold in 2011.

On June 29, 2011, the U.S. monetary base was worth 1.75 billion ounces. This is only slightly lower than the 1998 ratio of 1.76 billion ounces. Even though the Dollar price of gold has increased over 400% between 2000 and 2010, in terms of credit expansion, gold is essentially as cheap today as it was when the average Dollar price was $294.24. Marc Faber is correct.

Also, if we wanted to calculate how high the price of gold would have to go before it reached a 1980 style bubble, we could set the ratio’s equal to each other. Or, in equation form:
(1980 high point)/(1980 monetary base) = (equivalent high point)/(current monetary base)
($850)/$133,436,000,000) = (X)/($2,645,989,000,000)
X = $16,855

Meaning, the current price of gold would have to reach $16,855 before it is anywhere near the bubble territory it reached in 1980. The closing price yesterday was $1,511.

Update July 14, 2011: Gold is not money.


Currency and Population Growth.

In Money Supply on 七月 3, 2011 by CQCA

Supporters of a fiat currency system believe a gold standard is too rigid, but always seem to point to some other indicator, such as productivity or population growth, as a metric for expanding the money supply.

The supply of gold in the world is limited. It does not change much in quantity from year to year. One ounce of gold will always be worth one ounce of gold. The only way to increase the money supply in a gold standard is to extract more from the earth or find alternatives to what is already consumed.

Increases or decreases in productivity cannot be objectively measured. It can be observed, such as the fact that it now takes hours to travel around the world, instead of years. But, there is no way to objectively measure it. Whether the money supply should be increased by 4.3% or 4.4% after the development of the iPad 2 would be up to the opinions of the central planners. The productivity argument also overlooks the fact that increased productivity in any industry would most likely find its way into the mining and metal processing sectors, which would increase the quantity of money in a gold standard. So in essence, a gold standard would accomplish the same goal, but without a central bank.

Population growth is more objective, considering population is much more easy to measure. The question, though, is how much money we should allocate per person. I used data from the top 20 economies by GDP and divided their most recent M2 money supply data by their total population. The results were then converted into U.S. Dollars using December 31, 2010 exchange rates.

Each country has a vastly different amount. If there were some objective, natural amount of money that should circulate per person, there would probably be more consistency in the numbers.

The other problem for both systems is distributing the money. Under a gold standard, mined gold would be used to buy other goods required for mining (such as food, water, clothing, housing, etc.) This would allow wealth to flow directly to the wealth creators (be they directly involved with mining or not). If a central bank increases the money supply to reflect their opinion of productivity, that money would be unevenly distributed to whomever borrowed the money first. If population were used as a metric, the only logical way would be to give inflated dollars to newborns and confiscate money from dead people and destroy it. This would create a society I do not want to live in.

Most central bankers claim to rely on some form of productivity to increase the money supply. This has never succeeded. All fiat currencies have ended in hyper inflation, all the way back to the first real fiat currency, issued by the Mongolian empire. Population measures, to my knowledge, have never been used. Gold has been currency for thousands of years. It still is.

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Chinese M2 Rose 15% Between May, 2010 and May 2011.

In Investment Returns,Money Supply on 六月 15, 2011 by CQCA

Chinese M2 increased from RMB 66.3 trillion in May, 2010 to RMB 76.3 trillion in May, 2011, or 15% annually.

I got back to China four days ago, and from a few observations, I can see that this new money is flowing mostly into housing. I went down to the convenience store yesterday, and the price of a large bottle of water and a cup of yogurt are the same as they were two years ago, when I first came to China. Meaning that the increase in the money supply is not being reflected in basic consumer goods.

Housing prices are another story. A friend of mine told me that when she went to meet the new people that had moved in above her, she found out they had paid double what she had paid two years ago. (And this was on the fifth floor of a building with no elevator.)

Another friend’s house has increased four times over the 2005 purchase price. That is much higher than that the 160% increase in China’s currency over that time. I believe China will most likely experience what the U.S. is going through in that housing prices crash while the price of every day goods continue to rise.

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Is the U.S. Resorting to Old Fashion Inflation?

In Money Supply on 六月 5, 2011 by CQCA

Since the start of the 2007 financial crisis, the Federal Reserve has reacted by printing money on a scale that has never been seen before. Most of that, though, has been digital inflation. The bailouts, TARP, the deficits, and quantitative easing have all just been numbers on a screen, mostly flowing into bank reserves held at the Federal Reserve, which are not calculated in the money supply. That is a sign of our digital age, but it seems like the Federal Reserve is also taking us back to the kind of inflation in a horse and buggy era.

M2, the broadest money supply indicator that the Federal Reserve publishes, increased 27% between January, 2007 and April, 2011. The monetary base, which represents digital inflation, has increased 213.8% over the same period. M0, which represents bills and coins in circulation and is an indicator of printing-press inflation, increased 26.5% over the same period. (It is a coincidence that they expanded at about the same rate, and an increase in M0 does not directly lead to a proportional increase in M2. M0 is only 10% of M2, so a 26.5% increase in M0 should have been a 2.65% increase in M2, all other things being equal.)

A quick look at the U.S. Bureau of Engraving and Printing’s annual production figures shows that more $100 bills were produced in 2010 than ever before.

In 2002, Ben Bernanke gave a speech titled “Deflation – Making Sure ‘It’ Doesn’t Happen Here.” He stated: “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

It looks like the Federal Reserve has been using both its printing press and its electronic equivalent.

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