Thursday, April 7, 2011

Adjusted Monetary Base as of April 7, 2011

The adjusted monetary base is on fire.  You can view it here:
http://research.stlouisfed.org/publications/usfd/page3.pdf

Sometimes it is important to take a step back and get some context.  The longer term chart is here:
http://research.stlouisfed.org/fred2/series/BASE

The money supply has approximately tripled in the last 2 and a half years.  Nothing like this has ever happened in modern day America.  It really is unprecedented.  Oftentimes, I think libertarians get carried away with their predictions of doom and gloom.  People that believe strongly in the free market do not give enough credit to the free market's ability to overcome government obstacles.  But this explosion in the money supply really is something to worry about.

Quantitative easing is the new term that refers to money creation.  QE1 happened after the fall of 2008.  We are now in QE2 mode which is supposed to continue until June.  You will hear some say that the economy is bad because banks aren't lending.  What these people don't realize is that the lack of bank lending is what is keeping this economy from completely falling apart.  If the banks were lending out all of this new money being created, we would be facing the possibility of hyperinflation.

I am not sure if the Federal Reserve has any idea as to what it is doing.  This crazy money creation is causing great damage that we will see in the future.  It is misallocating resources on a grand scale.  It is preventing previous malinvestment from correcting.  It is setting the stage for what could be the Greatest Depression, even worse than what we saw in the 1930's.  I hope I am wrong and that the Fed slowly starts to pull this new money out of the system.  I hope we go through a recession like we did in the early 1980's.  Bernanke and the Fed are playing with fire right now.

Expect for price inflation to slowly pick up throughout the year.  I don't expect QE3 any time soon, but you never can tell with the morons that are running the Fed.  If you haven't already done so, prepare yourself for price inflation like we saw in the 1970's or worse.  Buy essentials that you need.  Buy extra and don't wait.  You obviously can't buy extra gasoline and most food now, but there is a lot you can stock up on.

For your investments, you should have at least 25% of your portfolio in investments that do well during times of high inflation.  This is the minimum.  You should invest in things like gold and gold related investments, silver and silver related investments, oil stocks, oil mutual funds, oil ETFs, other commodities, etc.  You should prepare for interest rates to go much higher, but I wouldn't necessarily speculate on it right now.

I have a lot of faith in the free market, but the Fed and the government are doing too much damage right now for us not to feel some major pain in the near future.  Prepare yourself and don't wait.

1 comment:

Scott said...

Somewhat unrelated question...

If I'm currently putting say 6% into a company-sponsored 401k (which is the point at which they'll match 50%) and am not making any other investments, what would be the best next step? I'm thinking of maxing out my 401k contribution, but I've also read recommendations that I should *first* max out a Roth IRA, and *then* (if I still have available money), bump up my 401k contribution. Both of these (401k and Roth IRA) have tax advantages, but if you feel that other types of investments (e.g., Gold) would be even more important before opening a Roth IRA or bumping up my 401k, I'd appreciate that info.