Sunday, June 21, 2009


"If man will begin with certainies, he shall end in doubts; but if he will be content to begin with doubts, he shall end with certainties."

So here are my doubts:
1. Is the U.S. economy in deflation or inflation mode?
2. Is the current stock market rally a bear market rally or the start of a new bull run.
3. What is the current yield curve predicting?

Friday, June 12, 2009

Laffer: increasing Monetary base

The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money.

Banks are required to hold a certain fraction of their liabilities -- demand deposits and other checkable deposits -- in reserves held at the Fed or in vault cash. Prior to the huge increase in bank reserves, banks had been constrained from expanding loans by their reserve positions. They weren't able to inject liquidity into the economy, which had been so desperately needed in response to the liquidity crisis that began in 2007 and continued into 2008. But since last September, all of that has changed. Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans.

Wednesday, June 10, 2009

WSJ Here comes Inflation

Tuesday, June 9, 2009

Monetary Base Doubled in Four Months

For half a century prior to this bear market, the US monetary base had been expanding at an average 6% rate. No more -- over recent months the monetary base has sky-rocketed at an unprecedented rate of 110%. Within four months the Fed has doubled the monetary base. Nothing like this has ever been seen before in US history.