They Are Printing Too Much Money

There is too much money being printed. No rocket science is needed to reach that conclusion. The markets are giving us a clear message. For example, gold is trading at a record high, while silver has reached a 30-year high. Those new high prices are happening for a reason. The precious metals are sensitive to changes in inflation, both actual as well as future expectations. Rising precious metal prices tell us that there is a lot of inflation in the pipeline, but they are not alone in giving us this message. More generally, look at the trend in commodity prices over the past few months in the following chart of the CRB Continuing Commodity Index, which is based on the price of 19 different commodities. On June 4th the CRB Index closed at 450.24. Here we are just 3-1/2 months later, and the CRB Index closed Friday at 530.24, up 17.7%. That is a HUGE jump in prices in such a short period of time. To put this price rise into perspective, it is a 61.8% annual rate of “appreciation” — though we should call it by what it really is, namely, “price inflation.” Commodity prices are not rising because of good economic activity, which remains in the doldrums with high unemployment throughout most of the world. Commodity prices are rising because too much money is being printed. But the Federal Reserve reports that M1, a narrow measure of the total quantity of dollars in circulation, rose only by a 9.1% annualized rate in the three months from May 2010 to August 2010, and M2 rose by even less. So why are commodity prices rising by an even faster rate than money growth? There are two reasons. 1) Because too much money has been printed for years, not just over the past three months, which can be illustrated by comparing M3 to the total US population. In 2000 there were $26,977 in circulation, as measured by M3, for every man, woman and child in the United States. That amount has ballooned to $46,538, a 7.1% annual rate of growth, which is more than 7-times the 0.9% annual rate of population growth during this period. 2) Demand for money is usually ignored, but it is an important part of the equation. Unfortunately, demand cannot be measured, so we again need to rely on observations of market prices to determine the prevailing trend in the demand for dollars at any moment. So, for example, …

Excerpt from:
They Are Printing Too Much Money

Tags: , , , , , , ,

About the Author ()

Leave a Reply

Your email address will not be published. Required fields are marked *