Friday, January 29, 2010
A Wee Little Bit of Deflation
M1 has ticked downwards in recent weeks. In addition, the Adjusted Monetary Base (AMB) has also turned down, indicating that the monetary contraction is being engineered by the FED: Yes, that's right, I said it -- deflation. The charts don't lie. But note that this is a deliberate policy of the FED, not some spontaneous, out-of-control money-destroying spiral envisioned by the deflationists. It is also a small event, and might easily be reversed in coming weeks. Note also that this does not negate the inflationist hypothesis. It is entirely consistent. The inflationary process inevitably creates inconvenient price distortions that must periodically be squelched by monetary tightening. I do not know what particular effect disturbs the FED at this time, but it appears to be taking action. If the trend continues, expect a major recessionary event, followed by a reinvigorated policy of monetary inflation. But in the short run, bulls -- beware the matador's cape! Pay no attention to the FedFunds rate, for it only serves to conceal and distract attention from the deadly prick. It is meaningless. Bernanke is playing the same game he played in 2007. He claims to keep the rate "low" while refusing to add to the money supply. But the astute will know what this means -- Bernanke does not drive the rate lower. The market itself does. The FED is deflating, but Bernanke claims to keep the rate low and gets to play innocent bystander while the market crashes. Or rather, to be somewhat more precise, the market distortions which have already occurred are finally revealed upon stabilization of the money supply. The whole ruse works, of course, because the public believes in the interest rate narrative and the legitimacy of fiat currency regimes. I think even the FED believes it. It doesn't seem to occur to them that fraudulent accounting is just that -- fraudulent. It doesn't reflect reality. "Low" and "high" are relative terms. Relative to what? The Austrian school knows -- market rates! It doesn't matter all that much whether interest rates are low or high, or rising or falling. What matters is whether money is being created or destroyed to influence the interest rate away from its market value. Right now, this very instant, the FED is destroying money while pretending to be "accomodating." Bernanke is behaving perfectly in character in doing this, as it is exactly what he has done in the past. He is being as tight as he can be, attempting to extricate himself from the FED's bloated balance sheet without visibly impacting markets. He won't be able to. The assets he bought cannot be sold in any meaningful volume without triggering a financial backlash and recession. The money supply is falling very slightly, and the rate is what it is. The FED is not supporting financial markets. If it keeps to its present course, expect them to fall. When the free market assigns an interest rate of near zero, things are really, really bad. So long as the public believes in this illegitimate system, it will never grasp the fact that virtually all financial calculations made under the monetary pretenses of a central bank are incorrect. Just a little bit of common sense should reveal this to even a mediocre intellect. Yet the delusion persists. Why does the public believe this charade? A few days ago, I would have called it a conspiracy. But it seems that is not the proper term. Maybe I'll address the issue, at least to the best of my abilities, some other time.