US Money Supply is Headed Higher
RICHARD RUSSELL
October 9, 2007
I've gone over this before, but I want to emphasize it. The extremely competitive exports of Asia and particularly China has exerted deflationary pressure over many, if not most, of the goods that are purchased in the US. Wal-Mart became literally an outlet for Chinese merchandise. Wal-Mart's competitive prices proved a revelation to US consumers. With almost no inflation, this allowed the central banks of the world to let loose with the greatest flood of fiat currency ever seen.
In the meantime, with the standard of living rising in China, India and much of Asia, two trends occurred. Asia started eating more and eating better than ever before. And at the same time, the price of labor in China, India and the rest of Asia started to rise. These twin forces proved to be a double-whammy as far as inflation was concerned. The price of goods imported from China and the rest of Asia began to rise. And a chronic shortage developed in many basic foods -- mainly the grains and the meats.
Under the seemingly endless flood of fiat money, a series of bubbles was created. First we had the tech bubble and its collapse. In response, the Greenspan Fed drove rates to the floor and kept them there, which gave rise to the next bubble -- housing. As I write, the air is coming out of the housing bubble -- and a new bubble is being created. The new global bubble is in food.
Huge shortages are now seen in wheat and the grains. Soybeans are in short supply. The price of a bushel of wheat a year ago was just over four dollars. The price now is over nine dollars. Therefore, we can be sure that the price of bread, bagels, tortillas, cakes, crackers, and a long list of food for both man and for livestock are all headed higher. Costs to restaurants are also rising. At the same time the dollar is weakening. Simultaneously, oil exporters, who are paid in dollars, want more dollars for their oil.
Ironically, the US government produces a ridiculous statistic which they call "core inflation." This measure eliminates food and energy, the two items that are surging. Since Social Security and many government pension funds are tied to US inflation figures, core inflation figures suit the US government beautifully. But it hardly suits US consumers who are squeezed on one side by rising costs, and on the other side by lagging wages.
The pressure is on and the Fed has been forced to choose between
addressing inflation or addressing the possibility of recession. The
Bernanke Fed, fearful of anything even hinting of deflation, has chosen to
fight recessionary forces while allowing the dollar go where it will. The
result is wide uncertainty, with the only certainty being that Fed Funds are
headed lower and the money supply is headed higher.