Proof That We Are Heading Into Deflation - Its all about M3 not M1

Below is a chart of the money supply.

You will note that even M1 is declining which shows the bankruptcy of Keynesian economics. With the trillions added to the national debt to stimulate and bailout the "good old boys" and well connected losers of the two administrations, it has not been enough to repeal the laws of gravity. Although, I suspect the administration will continue to flapp its arms wildly, especially as they get closer to the ground (reality).

* http://www.shadowstats.com/alternate_data/money-supply-charts 

* http://www.shadowstats.com/charts/monetary-base-money-supply

Next, look at the below link:

* http://www.shadowstats.com/charts/monetary-base-money-supply 

Remember that what we use for money today is not just cash (M1), its cash and credit (M3). If you look at the bottom left two charts of M1 and M3 money supply, the shaded area shows the dollar amounts which are listed to the right of the charts. M3 is essentially M1 plus credit. Now compare the amounts. M1 currently stands at about 1.7 trillion while M3 currently stands at about 13.9 trillion (chart is logrithmic) or nearly 10 times M1. In other words M3 is composed of 88% credit and 12% cash. The administration manipulates M1 through its stimulus programs, which has an immediate inflationary effect and which also means that they are trying to avoid deflation by pumping up 12% of the problem while the 88% is currently defaulting and melting down. Deflation accounts for 88% of the final outcome and governmental inflation accounts for only 12%, which one do you think will win?

Helpful Terms

* http://www.investopedia.com/terms/f/fiatmoney.asp

* http://www.investopedia.com/terms/f/fiscalpolicy.asp

Finally, below are two articles well worth reading and understanding: 

* http://www.marketoracle.co.uk/Article19843.html

* http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

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Do You See Inflation Followed By Deflation and If So When?

Question: 

Do you see inflation followed by deflation and if so when?

Answer: 

That's a tough call to make. It will probably happen after foreigners stop buying Treasury bonds unless they get double digit interest rates. At that point the Government will not be able to "borrow their way into prosperity" any longer and will either have to raise taxes to draconian levels (politically unpopular) or they will begin to attack the Federal Reserve for causing all the economic problems and begin to investigate them for crimes (politically popular). 

This will be sort of like the pot calling the kettle black. The real motive will be to eliminate the Federal Reserve so that congress can begin printing money without borrowing it from anyone. That is when inflation would be likely to ignite. I would guess 3-5 years but it could be sooner. 

Just keep your eye on long term treasury interest rates and any "Righteous Indignation" towards the Fed that begins to come out of Washington. That will be a strong signal that it is time to exchange your worthless paper dollars in for anything that is real and tangible. (Gold, Silver, Real-estate, etc)

As a quick recap, during deflation you want to move your assets into cash and during inflation you want to move your assets out of cash and into commodities.

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The Warburgs and The Federal Reserve - Whats the Big Deal Anyway?

I was watching the Glenn Beck show (by the way I really like his show) on June 26th but I didn't remember the deflation discussion because I tuned out the speaker (actually fast forwarded the recording). In reviewing it I remembered why I had tuned it out.

I agree with him obviously on his deflationary scenario but what made me tune him out was his eulogizing of S.G. Warburg. The Warburgs are and interesting family. Paul Warburg came to the United States and became the mastermind behind tuning our money supply over to the private banking firm we now call the Federal Reserve (That's right its not a government entity) and eventually the income tax. Both of which were passed by stealth. (Sound familiar)

Without the Federal Reserve, there would be no national debt or income tax. Thanks Paul. So Paul was in charge of the US financial system during WWI when we were fighting the Germans. What was his brother James doing at the time? Well he was in charge of the German economy as the head of their central bank. Of course this posed no conflict of interest did it? James' policies were responsible for the hyperinflation that occurred in Germany during the Wiemar Republic, while a few years later his brother Paul was responsible for the US policies that gave us the Great Depression.

So eulogizing his Son who fled Germany and relocated to England after his dad's policies destroyed his home country so that he could do to England what his brother and uncle did to Germany and the US, to me is a bit much. After the Warburgs fled Germany, that economy was able to become the strongest in Europe. And what became of the UK, the Warburgs new home?

The UK is now broke but the good news is that the Warburgs have become uber rich.

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