Tuesday, August 08, 2006

Questions about market manipulation, missing M3 figures

Freemarket Gold & Money Report's James Turk, who wrestles in his latest piece with the Fed's very peculiar decision to stop reporting M3 (cast in even stranger light by, as I understand it, their having eliminated the M3 archives from their Web site). Turk for many years maintained a "Fear Index", which was a ratio of M3 and the U.S. gold price.

When last calculable, the chart of this was ominous: Turk not unreasonably comments: "Why does the Fed no longer want to report the total quantity of dollars in circulation? They know what's coming - massive amounts of dollar creation to fund the worsening trade and federal government budget deficits."

But Turk goes onto assert that an implicit Fear Index he has constructed gives him the data to solve for the gold price, which equates to $900 per ounce ... even though the Fear Index has climbed a long way, it is still below levels reached at other key low points in the gold market, specifically, in 1971, 1976, 1982, and 1993. This low level means that gold is still way undervalued.

Many people hold cash in the belief that it is the safest and most liquid asset. However, current geopolitical developments mean that the security of "money in the bank" is facing strong challenges.

In the words of George Bernard Shaw: "you have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold".

Now, it is the modern financial world that faces ruin. Having inflated the money supply, the Bernanke Fed attends rising consumer prices like Joan of Arc waiting for a match.

But what can they do about it? The Fed has stopped reporting increases in broad money supply, M3, and has redefined the word 'inflation' so as to exclude prices that are going up. It has also increased short rates by 450 basis points - the sharpest increase since the '60s. But while it publicly fights inflation, its real enemy is deflation. So, while M3 goes unreported, M2 tells us that the money supply has exploded at a 10% rate over the last 10 weeks. The Fed is desperately trying to avoid deflation by making more money and credit available.

Previous posts on the M3 money supply


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