02/01/11 Baltimore, Maryland – “Commodities head for longest run since 2000,” says a Bloomberg headline.
What gives?
On Friday, stock markets sold off all over the world. But there was no follow-through on Monday. Instead, the Dow posted another 68-point gain.
Gold, meanwhile, lost $7.
There’s a lot of money in the world. Central banks are printing it! Particularly, the Fed.
So what happens when central banks print money? Well, prices move.
If you believe the “quantity theory of money” you have to believe that prices will rise. More money in circulation means that there is more money available for every unit of output.
So, things that can’t be easily reproduced…and things that are priced on the international auction market…go up. Like wheat. Like copper. Like oil. And, of course, like gold.
Markets are always discovering prices. Prices go up and down. But they usually find an equilibrium in a fairly narrow range. In a world of real money, prices don’t vary that much.
But with so much new, ersatz money in circulation, markets have a hard time keeping up. They get bubbly. They discover that yesterday’s price was too low…so they move it up again. And then they worry that it is too high, so it drops back again.
Generally, as central banks add money, prices move higher and higher…until the bubbles pop.
Why don’t local items react too? Like the cost of parking…or houses? Well, it’s a long story. But the Fed’s easy money doesn’t lift all prices evenly. Because the money isn’t distributed evenly. The Fed prints money, but it doesn’t give the money to us. It gives it to the banks. And the banks put it into hedge funds, trading departments, and speculative portfolios.
This is what is known as “hot” money. It never gets into consumers’ pockets. So, it never is used to buy the ordinary stuff of a domestic economy. Instead, it goes into hot markets – markets for global, auction-priced goods. Those items are soaring…even as the core inflation reading in the US is nearly flat.
Oil is at a 2-year high. And check this out. From the Telegraph:
Christies auction house has best year in 245-year history.
Christie’s has announced record sales for 2010 after the auction house enjoyed the best 12 months in its 245-year history.
Total sales rose more than 50pc to hit £3.3bn last year, as the company retained its position as the world’s largest auction house.
Christie’s was involved in two-thirds of global artwork sales worth more than $50m (£32m).
Works sold over the course of 2010 included Pablo Picasso’s Nude, Green Leaves and Bust, which sold for an auction world record £70.3m, as well as the £35.2m sale of Alberto Giacometti’s Grande tête mince, both of which were sold on the same day last May.
Impressionist and modern art sales [were] Christie’s most successful market, with sales [totaling] £767m, followed by post-war and contemporary art sales of £603m.
Europe and the US were responsible for the lion’s share of sales, but growth was fastest in the company’s Asian business, with sales more than doubling to £499m.
These price increases are not driven by consumer price inflation. People aren’t desperate to get rid of money before it loses value. This phenomenon is driven by greed, not fear.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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One thinkg I know about Money supply and money printing is thqt I don’t understand it.
Another thing I know is that, neither does anyone else seem to understand it.
Banks create money by making loans which get re-deposited back into the banks and loaned out again and redeposited. (Borrowed money when it is spent tends to get re-deposited by the vendor).
This form of money printing adds to deposits and therefore the “money supply” but not to wealth. (new loan cancels out new deposit)
What if price rises are determined not by the money supply but by rises in Total Wealth, measured in dollars, when such rise is higher than the rise in physical stuff (actual wealth).
Wealth measured in dollars counting, oil, gold, houses, land, stocks, and all goods in the world, FAR FAR FAR exceeds the amount of the money supply…
The fact that prices did not move with more printed money illustrates my point. No one really understands this stuff.
Gold “understands this stuff.”
Agreed money does not directly equate to wealth. An owner occupier of a 3 bed room house is no wealthier when the price doubles (unless he sells), as his intrinsic wealth remains a 3 bed room house.
Further, exotic financial instruments can absorb massive quantities of virtual money, as too can the stock markets. Neither of which effecting every day prices for ordinary people that much, however this does not mean that it will for ever remain thus. One day, and that day might not be so day away now, the trust in the ability for the virtual world of computer money to store wealth safely for the future will break.
For the moment though, the world of computer generated money and virtual wealth holds. Investors and fund holders still have faith, and whilst the money go round is turning they cannot bear to jump off, for they are booking too large a gain in the virtual world. But, and this is an important but, they also now know that the money go round is starting to spin too fast, and is out of control, and is not going to come to a gentle halt, rather the central spindal will snap, and when is does, any one still riding will have lost everything. The trick is going to be to jump off just before, convert all that virtual wealth into real world wealth, and then wait for the game to start again.
All this portends to a very sharp and devastating surge in inflation, a Tsunami of inflation in fact, as the riders of the money go round jump sometime in the not to distance future. At the very point the virtual world of money is detonated and collapses at the speed of gravity, just as the 9/11 twin towers collapsed squids and all.
Maybe God understands, but I doubt that Gold does…
“Christie’s has announced record sales for 2010 after the auction house enjoyed the best 12 months in its 245-year history.”
What does this tell you? That money is more and more concentrated in a few hands. People who give millions and millions in a painting, that has no intrinsic value, are people who have too much money to spend. That means that few have more and more, and they are throwing it away at stupid and frivolous stuff like artwork. Economics (and both capitalism and Marxism work the same way, however through different means) works by concentrating wealth (capitalism by “free” marke, Marxism by political power) until the gap is so absurd it leads to revolution. Ask any previous empire.
gold is god
…both capitalism and Marxism work the same way…
One works well most of the time. The other never works most of the time.
JMR Alan Greenspan said That money is more and more concentrated in a few hands. People who give millions and millions in a painting, that has no intrinsic value, are people who have too much money to spend.
But’s it’s not ONLY money that the rich have. Remember to an economist, money is only the paper in the wallet, in the safe and deposited in a bank. What the rich mostly have is wealth. A painting that can be exchanged for 1 million meals or 100 cars. A stock portfolio. Bonds.Houses.
what is of interest and Bill can enlighten us, is what is the difference between wealth and money?
No one can print wealth. But wealth can be created in various ways and has been increasing exponentially for centuries, whether measured in dollars or big macs or Gold.
I feel like I understand it pretty well. A lot of the inflation got exported, which is why you see reports about it in China, Brazil, Europe, etc. The Fed’s money creation doubled the monetary base, and in our fractional-reserve system, bank lending will multiply that. The Fed is currently paying the banks to keep their cash at the Fed instead of lending it out.
Also it takes time for these higher commodity prices to translate to higher consumer prices, but I believe they’re coming. The Federal government is broke, states are broke…I think more money printing is on the way as well. Could be wrong…time will tell.
>…both capitalism and Marxism work the same way… One works well most of the time. The other never works most of the time.
if you studied marxism, you’d learn it is scientifically absolutely correct. Popper admitted marxism is irrefutable. Feyerabend destroyed Popper’ belief this irrefutablity was anti-scientific.
The ways the world and society work are totally marxistic. Conflicts between classes, crisis, wars, this is marxism, or dialectical materialism. Capitalism and communism clash in a fight to rule the earth: if capitalism wins, we’ll get pushed back to WW3, if communism wins, mankind will conquer cancer, deserts, the outer space and so on. Gold, money, market, salaries will became remains of the past.
…both capitalism and Marxism work the same way…
One works well most of the time. The other never works most of the time.
Yes, one tries to mimic a “free” market, and for a while it actually gets close to it. That’s why it lasts longer and it’s more successful in fostering wealth creation. The other is rigged from day one, based on political power, central planning and free lunches for the masses (aka populism). And thus destined to fail faster. But both tend to concentrate wealth, since it’s human nature to want more and more. And eventually crack.
TIF, wealth is PERCEIVED value. Money is one of the units in which to EXPRESS that perceived value. Gold is another. Both money and wealth fluctuate over time, the former due to monetary base expansion, the latter due to changes in the environment that cause shifts in perceived value of goods. Money is objective, whereas wealth is intrinsically subjective.
Therefore, it’s my contention that a strict correlation between money and wealth, as you seem to suggest or demand in previous comments, is logically impossible. That’s why markets fluctuate and prices change all the time. Did that enlighten you?
Ponder this:
If you had all mthe Gold in the world you would not be able to purchase “everything” in the world, not a by a long shot.
And I believe if you had all the money in the world (as defined the way money is calculated. all money in circulation plus all bank deposits you also would not be able to purchase everythuing in the world. Not even all the financial assets.
In other words, wealth exceeds money. I am pretty sure that this is true. Bill?
the FED can cause inflation at home, but i disagree that we can “export” inflation.
the Creature From Jekyll Island (the FED) can debase our currency, in its attempt to “reflate the economy” so that the national, state and local debts can be “repaid” with “cheaper” dollars. and, as mr. bonner develops this, yes, this money goes to banks–agents and systemic dependents of the Creature, as the chairCreature and his board of yesCreatures decree thru their “monetism”.
but, this is a domestic issue, UNLESS other nations’ banksters run THEIR presses too, as far as i can tell.
if the USD weakens, something priced in USD’s (about everything), even tho it costs more DOLLARS, does NOT cost more in the other home currency(ies), b/c they can be traded for MORE USD’s.
but, THEY have print, print, printed, too, haven’t they? in spades!
they don’t want the USA to gain any ‘advantage’ in trade! since any country which DIDN’T debase could buy more stuff from the USA, our exports would increase relative to non-debasers, and they see this as a “trade disadvantage”.
oh, yeah…PLUS, the other debasers are, parenthetically, just as screwed up, fiscally, as uncle sugar, and are bailing out banks and nations, trying to “reflate”
THEIR messes, too, monetising debt, giving hot money to THEIR banksters.
i would offer norway as an exception. their are others.
a lot of other nations and central banks are broke, too! so, their top echelon bigshots use the cover of “protecting their exports” to b.s. THEIR sheep into bailing out their “poor banksters”, too, and pose and posture as saviors of their “financial systems”.
in truth, they may have imported a whole lotta fraudulently-presented “securities” from us, but rather than take the legal remedies of:
a) suing us,
b) holding our “leaders and bankers” criminally responsible, internationally, or,
c) just trying to kill us,
they all fell for it and, since they are just as over-extended in b.s. promises to THEIR citizens, there is so much “wink-wink” going on, that it is amazing that Visine isn’t more expensive than Chanel #5.
all this “hot” do-re-mi has, btw, Create-ured an Everest of nice “hot” DEBT, too. perhaps a K-2, also, eh? printed money is NOT free. it is free or almost free to the FIRST peeps who get it, but the citizens are left holding the bag—full of legally-enforceable contracts against them, DEBT.
default NOW! avoid the rush!
END THE FED!!!
default NOW! avoid the rush!
END THE FED!!!
i shoulda put it this way:
1) default NOW! avoid the rush!
2) END THE FED!!!
these are two distinct, different actions:
1)—addresses the debt & thru doing that, the promises to the various constituencies; they will have to be prioritized, re-ordered, as well as restructured, trimmed, or just abrogated, themselves, like all or most of the DEBT.
this is the fiscal “cure”. it may seem worse than the disease, but, unlike the disease, it will neither kill us, nor enslave our children.
2)—puts this privately-owned banking system out of business, forever.
and, yes, there are lotsa details here, too, such as AUDITS, investigations (hello, Justice Dept! you wanna do your JOB or just let the politicization of Justice, completed by Bush/Gonzales/”Chief Justice” Roberts stand(?), in which case you are ALL gonna hafta go), and just possibly a few prosecutions according to RICO, along with the restitution of vast proportions of national wealth to the Treasury.
nightnight.
I think this year might be a repeat of 2008.
Gold topped out in March of that year (after stocks had already topped), then oil topped in July. Then everything crashed in the fall of 2008 with the dollar (gasp) being the only place left to hide.
da bear
2011 changes everything.
…if communism wins, mankind will conquer cancer, deserts, the outer space and so on. Gold, money, market, salaries will became remains of the past…
Comrade orsobubu:
Your forgot to add “…and the State will wither away.”
I’ve seen the future and it’s a gigantic camp chock full of re-educated workers.
…if communism wins, mankind will conquer cancer, deserts, the outer space and so on. Gold, money, market, salaries will became remains of the past…
I was actually reading his post seriously before that sentence. But he lost me completely there. Communism conquer cancer and outer space? I believe it didn’t even conquer Russia! I figure he’s either joking in fine irony, or that is the most idiotic sentence I’ve ever read, and I’ve read some…
TIF, I believe if you had ALL the money in the world (as you described it) you could indeed buy all the assets for sale (some are not), in theory. But I agree that’s debatable, in a useless way.
And by the way, Bill doesn’t respond to comments in this “forum”, maybe wisely so, judging from some of the comments above.
>Your forgot to add “…and the State will wither away.”
I see you studied it well
>I’ve seen the future and it’s a gigantic camp chock full of re-educated workers.
the internationalist consciousness will be brought to the workers by the bolshevik party and also by their material experiences of crisis and wars
“the internationalist consciousness will be brought to the workers by the bolshevik party and also by their material experiences of crisis and wars”
He’s gotta be joking right? Are you a ’68 college student from a time machine who just arrived in the future?
The system is in sound condition, for now, and forever.