Friday, October 28, 2011

The Importance of Keeping an Eye on Ben Bernanke...

...and his money printing adventures.

An EPJ Daily Alert subscriber writes:

Your work is very helpful. I made a lot of money shorting the market over '07-'08. Then, I lost 1/3rd of it by shorting the market in '09. I did not realize the foolishness of shorting in the face of Q.E. From reading your posts, I now realize what I did wrong -- I ignored the importance of money supply in the short/intermediate term on the stock market. I had focused on economic fundamentals, which, I now know, may not be important in the short/intermediate term to the performance of the stock market.
Fed money printing actually also distorts the economic fundamentals and how corporations perform, in addition to distortions of the stock market. What's more is that Bernanke tends to operate his money printing press like a roller coaster, just before the financial crisis in September 2008, he basically stopped printing. Then he ramped things up to over 20% annualized growth, for awhile. Then he slowed growth, again and is now printing at an annualized rate of 15% plus. This causes great swings in the economy. I sincerely believe he is a mad man, playing with the economy.

All that said, in addition to the money supply, the desire to hold cash balances plays and important role in exactly how Fed printing will impact the economy. Milton Friedman made some notoriously disastrous forecasts in the 1980s, warning about escalating price inflation that never came. He saw the increasing money supply of that period, but because of his tendency to aggregate, think in terms of mathematical equations and fail to understand the Austrian economic insight that newly created money does not hit all pocketbooks at the same time, he forecast higher price-inflation. But because of changes in productivity and changes in the desire to hold cash, the major price-inflation did not develop during that period.

Attempting to determine the demand for cash balances is much more art than science. There is no one number to look at to get a sense for the public mood in relation to where it has been on cash balances. Rough guages can include some early signs of price movement, changes in where cash is held, in say, money markets versus a checking account etc.

At present, it looks to me that the desire to hold cash balances is declining. This will mean that the money Bernanke is printing will be spent aggressively, which means much higher price inflation ahead.


  1. And with that we have the savings rate hitting a new low:

    I am thinking this plays into what you are saying Robert, correct me if I am wrong.

  2. @James E. Miller

    Correct. I don't think it's as much a decline in savings that is being detected, but more so, less of a desire to hold cash balances, which means people are shifting their funds to accounts where the money is more accessible.

  3. Ownership of the market, through indices:

  4. Robert, what is driving the increase in the money supply? In the posting you say that Bernanke is printing money, but in order to print money doesn't the fed have to use one of the following mechanisms:
    1. buy treasury bonds or other assets with "printed" money
    2. decrease the reserve ratio to enable banks to lend more
    3. decrease the interest paid on excess reserves to encourage banks to lend more.

    As far as I know none of these policies have been used in the past few months. Is there some other mechanism by which the fed is printing the money, or is the true cause of the money supply expansion something else (e.g. banks deciding to make more loans)?

  5. Also be aware of other changes that affect money supply. As cash manager for my employer, we used to keep only 100,000 in cash back when we could use a "sweep" investment tied to our checking account. Now that sweep only ears 0.01% interest and we don't use it. We get a 0.35% ECR (earnings credit rate rebate on bank fees) and so now keep ~40,000,000 in checking to offset most fees for our 700 accounts.

    You might say we can get much better than 0.35, but are limited to ultra low risk by state laws for public funds investing. So for everyone in my position, our incentives have us pushing up required reserves for the system significantly.