THE CONTRARIAN TAKE is moving over to the Forbes Blog.  The URL for my new site is here…

http://blogs.forbes.com/michaelpollaro/

There will be a bit of a transition, as logistically it will take some time to move over my complete data series history but I am already well on my way.

Hope you follow me to Forbes

Regards,

Michael

As discussed in THE CONTRARIAN TAKE’s September Monetary Watch, as scripted by Bernanke at Jackson Hole, the FOMC, citing deteriorating economic conditions and subdued price inflation, put one of their three QE tools into action.  The FOMC modified its communiqué,  guaranteeing whatever amount of money necessary to stimulate economic growth should economic and/or financial market conditions continue to deteriorate. And for all those who might be concerned about the impact that flood of money will have on prices, the FOMC says not to worry.  True to form, it made crystal clear that price inflation is simply nowhere in sight.  In fact, it is patently too low.  And given all the resource slack in the economy, the Federal Reserve should be able to print all the money it wants.

Here’s the FOMC statement, bold italics are THE CONTRARIAN TAKE:

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

In the opinion of the THE CONTRARIAN TAKE, Bernanke and the FOMC have played their hand.  If  economic conditions worsen, its checkmate for the Bernanke led FOMC – they have to act.  As discussed in September’s Monetary Watch, the CONTRARIAN TAKE fully expects economic conditions to worsen, perhaps quite soon. And, as Bernanke told us at Jackson Hole, that means another round of asset monetization and/or a cut in the interest rate that the Federal Reserve pays on excess reserves.  And that means the money supply, on THE CONTRARIAN TAKE’s TMS2 metric growing at an already robust 1o.7% rate, is about to get a steroid injection courtesy of the Federal Reserve.

Before ending this brief missive, a word on Ben Bernanke, the economist.  If ever there was a deflation hawk, this man is it.  This is an economist that is absolutely convinced that it was the Federal Reserve and its tight monetary policy before and after the 1929 stock market crash that gave us the Great Depression, that the correct policy response by the Federal Reserve post the stock market crash was to print money and to continue printing money until economic recovery was assured.  As discussed in September’s Monetary Watch, Austrians know the opposite to be true – that it is easy money policies that create artificial booms, that sooner or later those booms require busts, and that fighting busts with more easy money policies only adds insult to injury and creates even bigger busts down the line.

But be that as it may, it is why a Bernanke led Federal Reserve virtually guarantees more monetary inflation.  Bernanke, in his mind, is not about to repeat the supposed mistakes of his predecessors at the Federal Reserve.  Indeed, having been scared to death by the credit implosion of 2008-2009, Bernanke can be expected to move and move fast, with a printing press under each arm when the economy takes another negative turn.

By the looks of it, that move may be only a few bad economic reports away.

Based on the monetary insights of the Austrian school of economics, THE CONTRARIAN TAKE offers up the latest monthly money supply metrics for the U.S., Eurozone and Japan currency blocks.

To see the entire monthly series offering – the latest money supply data for all three currency blocks, with full historical data and chart work, as well as supporting definitions, sources, notes and references – click here on Austrian Money Supply.

For a quick link to money supply definitions, sources, notes and references, click here on Austrian Money Supply Definitions, Sources, Notes and References.

For the logic behind the formulation of Austrian money supply, read Money Supply Metrics, the Austrian Take.

Where We Are

The money supply aggregates based on the Austrian definition of the money supply (TMS) surged in August, with broad TMS2, THE CONTRARIAN TAKE’s preferred money supply metric, up an annualized 9.5%.  The more important year over year growth rate on TMS2 was once again sporting a double digit rate, posting a rate of 10.7% in August, up from July’s 10.3% rate.  This makes the 20th consecutive month that TMS2 has posted double digit year over year growth, a cumulative increase of 19% over those 20 months.  To put those figures into perspective, the run-up to the now infamous housing bubble turn credit implosion turn Great Recession saw a string of 36 months of double digit growth for a cumulative increase of 48%.  So yes, today’s inflationary largesse may be only 40% of that which brought on the Great Recession, but this one’s still in process.

As has been the case throughout 2010, M2, the mainstream’s favorite monetary aggregate, continues to show anemic growth, in July posting a year over year growth of just 2.7%.  As readers of this column are aware, in the opinion of THE CONTRARIAN TAKE, M2 is a grossly misleading measure of the money supply, meaning the gap between the true and the perceived rate of monetary inflation is a hefty 8 percentage points.

Combine this anemic rate of monetary inflation as measured by M2 with the widespread aghast over historically low “core” rates of price inflation as measured by mainstream price level aggregates such as CPI,  PPI and PCE and, contrary to the facts, you can see why deflationary concerns are currently all the rage.

To an Austrian though, inflation is the increase in the supply of money.  One of its consequences, though not nearly the most important, is the lagged impact an increase in the supply of money has on the general level of goods and services prices.  Indeed, far more important are the distortions and dislocations such monetary largesse wrecks on the economy and financial markets – in Austrian terms, the boom turn inevitable bust – the latest one being the housing bubble turn credit implosion turn Great Recession.

So, to the FOMC and mainstream economists and investors alike, deflation remains right around the corner.  To an Austrian, inflation is alive and well.

A Look at TMS2 Internals

In THE CONTRARIAN TAKE’s August Monetary Watch, we had a look at the source of today’s monetary inflation, making the case that it’s the Federal Reserve via the issuance of base money, namely currency plus bank reserves (the bulk of which springs directly from the Federal Reserve’s power to monetize assets by writing checks on itself), that has provided the majority of the monetary largesse over the past 2 years.  Private banks, historically responsible for the lion’s share of inflation via the issuance of uncovered money substitutes (which springs from the ability of those banks to pyramid deposits on top of base money when making loans or purchasing assets), have largely stood aside.

Well, recent trends suggest that while private banks may not yet be ready to reassert their more dominant role in the monetary inflation process, they are certainly beginning to make a contribution.  Uncovered money substitutes increased an annualized 13.4% in August and are now up 8.6% annualized over the last three months and 8.3% over the last twelve.  There relative size in TMS2 is shown below:

Note the recent trend, with uncovered money substitutes rising from a low of 68% of TMS2 in February to August’s 71%.

To repeat, this is not to say that private banks are about to turn on the monetary spigots and let it rip.  Indeed, while bank loan and investment aggregates have seen some life of late, recent trends in the credit aggregates suggest that the growth in uncovered money substitutes is more the result of depositors liquidating time deposits and other term bank deposits in favor of instantly redeemable demand deposits, other checkable deposits and savings accounts.  In Austrian speak, bank creditors are liquidating credit claims, raising cash, then depositing and holding that cash in money substitute form with those same banks.

That said, if in fact these currently risk averse private banks, that sit on top of $1 trillion plus in reserves, are ready to multiply those reserves into credit and deposits, that plus another round of quantitative easing could create one heck of an inflation party, possibly to the tune of trillions of dollars.  Certainly no guarantee, but something clearly worth watching, especially if a deflation wary Federal Reserve is prepared to give the banks a bit of a “push.”  Say, by reducing the rate it pays those banks on their excess reserves?  As discussed below, not mere speculation, but by the Federal Reserve’s own admission something that could very well be at hand.

What’s Next

In a word, QE II.

Let’s begin with Chairman Bernanke’s speech at Jackson Hole on August 27^th:

… the pace of recovery in output and employment has slowed somewhat in recent months, in part because of slower-than-expected growth in consumer spending, as well as continued weakness in residential and nonresidential construction. Despite this recent slowing, however, it is reasonable to expect some pickup in growth in 2011 and in subsequent years… And as the expansion strengthens, firms should become more willing to hire. Inflation should remain subdued for some time, with low risks of either a significant increase or decrease from current levels.

Although what I have just described is, I believe, the most plausible outcome, macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments. The Federal Reserve is already supporting the economic recovery by maintaining an extraordinarily accommodative monetary policy, using multiple tools. Should further action prove necessary, policy options are available to provide additional stimulus…

Indeed, as Chairman Bernanke continually reminds us, the Federal Reserve is compelled to provide that stimulus, for it is not only charged with providing stable prices but with promoting economic growth and full employment.  And as luck would have it, it appears, at least in Bernanke’s mind, that the current setup for that said stimulus couldn’t be better:

First, the FOMC will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation. It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable.

Second, regardless of the risks of deflation, the FOMC will do all that it can to ensure continuation of the economic recovery. Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.

In other words, if the economy continues to weaken, Bernanke will be a man on a mission.  With price inflation expected to be of no concern, its Katy bar the door – the Federal Reserve will be free to roll out whatever tools necessary to pump the money supply and save the economy.

So, what are those tools?  Back to Bernanke’s Jackson Hole speech:

Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves.

The first tool – conducting additional purchases of longer-term securities means another round of asset monetization, another round of base money and therefore a guaranteed dollar for dollar expansion in the money supply.

The second tool – modifying the Committee’s communication is simply, when all is said it done, the FOMC telling the market it plans on implementing the first tool – asset monetization – whenever and for however long it deems appropriate.

The third and final tool - reducing the interest paid on excess reserves, that’s the mother load, and “liquidity trap” concerns notwithstanding, perhaps all that is needed to push private banks into liquidating their $1 trillion plus reserve stash and pyramiding up the money supply through a multiple expansion of loans and investments.  You see, if private banks, the same banks that have been hoarding reserves in fear of their solvency (at 25 bps, 15bps over one-month Treasuries and about the same as one-year Treasuries, thank you very much), choose not to impair their liquidity position by making risky loans or purchasing risky assets, or if private borrowers, those same borrowers many of whom are currently up to their necks in debt, choose not to borrow, there’s always that swelling supply of “super safe” U.S. Treasury and agency securities to fill the bill.  For the U.S. government is currently more than willing to be both the borrower and spender of first and last resort.  And what better way to push banks in that direction than to pay little to nothing on excess reserves.

So there’s the QE II playbook.  The only questions remaining are – if and when.

Well, in the opinion of THE CONTRARIAN TAKE, there is no if.  It’s simply a matter of when.  Here’s why…

To an Austrian, easy money and managed interest rates are the source of, not the solution to the things Chairman Bernanke fears most – a weak economy, high rate of unemployment and yes, even deflation.  Such monetary interventions in the economy always and everywhere create artificial booms, bubbles in popular parlance, with their inevitable consequence always and everywhere being busts – credit crises, recessions and depressions.  You see, by artificially lowering interest rates and creating money and credit out of thin air, a central bank, aided and embedded by its too big too fail private bank partners, create economic and financial distortions – malinvestments, which eventually must be liquidated.  And once the central bank ceases its easy money policies, by halting the further issuance of money and money substitutes, or even slowing its rate of increase, the boom soon comes to an end and the bust ensues.  Sooner or later, free market forces prevail.  Sooner or later, the central bank induced boom REQUIRES a bust.

So then, what has Chairman Bernanke given us, so far?  Double digit money supply growth and zero interest rates, right.  He’s given us a boom (an anemic one at that) that at some point MUST give us a bust.  Combine this certainty with the repeal of the Bush tax cuts, the likely crippling impact of Obamacare and Fin Reg, and what seems a never ending parade of intrusive government programs as far as the eye can see, all against a still debt-laden private sector, and it’s easy to see why the economy is in a heap of trouble.

And in time, and by extension, it’s equally easy to see the near certain implementation of Bernanke’s QE II tool set.

Now, while a 10.7% year over year rate of growth in TMS2 is highly inflationary, it is down from the high of 16.5% posted back in November of 2009.  That fact plus the economically debilitating effects of the pending tax increases, as well as the plethora of forthcoming government interventions into the economy, suggest that our current anemic boom could very well be close to turning bust.  And with that, it should go without saying that with Ben Bernanke at the helm of the Federal Reserve, another round of Federal Reserve engineered inflation could be right around the corner.

Based on the monetary insights of the Austrian school of economics, THE CONTRARIAN TAKE offers up the latest monthly money supply metrics for the U.S., Eurozone and Japan currency blocks.

To see the entire monthly series offering – the latest money supply data for all three currency blocks, with full historical data and chart work, as well as supporting definitions, sources, notes and references – click here on Austrian Money Supply.

For a quick link to money supply definitions, sources, notes and references, click here on Austrian Money Supply Definitions, Sources, Notes and References.

For the logic behind the formulation of Austrian money supply, read Money Supply Metrics, the Austrian Take.

Where We Are

The money supply aggregates based on the Austrian definition of the money supply (TMS) slipped in July, with broad TMS2, THE CONTRARIAN TAKE’s preferred money supply metric, down an annualized 2.6%.  However, the more important year over year growth rate on TMS2 was a robust 10.3% in July, down just slightly from June’s 10.6% rate, making this the 19th consecutive month that TMS2 has posted double digit year over year growth.  The last time TMS2 saw this kind of string was during the run-up to the now infamous housing boom-bust, a string that saw 36 consecutive months of double digit growth.  True, not housing bubble worthy, at least not yet, but still a lot of inflation.

As was the case in June, one would not know it by looking at M2.  This mainstream money supply aggregate, the one so closely watched by the deflation “hawks” at the FOMC, but in the opinion of the THE CONTRARIAN TAKE a grossly misleading measure of the money supply, is showing a year over year growth rate of a mere 2%.

To an Austrian, inflation is alive and well.  To the FOMC, mainstream economists and investors alike, deflation is lurking right around the corner.

A Look at TMS2 Internals

Before discussing the prospects for inflation going forward, a look at the TMS2 internals is instructive.

To begin, inflation springs from two basic sources:

The Federal Reserve, via the issuance of currency and covered money substitutes, the combined total popularly termed base money, the bulk of which springs directly from the Federal Reserve’s power to monetize assets by writing checks on itself.

Private banks, via the issuance of uncovered money substitutes, which springs from the ability of those banks to pyramid deposits on top of base money (read create money out of thin air), when making loans or purchasing assets.

With that as background, a look at the chart below quickly reveals who has done the heavy lifting when it comes to inflation; i.e., who’s responsible for that string of double digit growth rates.  Hands down, it’s been the Federal Reserve, as private banking institutions have been generally unwilling to pyramid money substitutes on top of that mountain of base money.

So, with the bulk of the heavy lifting currently in the hands of the Federal Reserve, it should come as no surprise that with the cessation of the Federal Reserve’s asset purchase programs in March, and resultant leveling off of Federal Reserve Credit, money supply growth as measured by TMS2, although still robust, has eased, down from a year over year growth rate of 16.5% in November 2009 to July’s 10.3%.  And to repeat, in the eyes of the FOMC, with their focus on M2, a money supply rate of growth wallowing at a mere 2%.

All that could be changing soon, as it looks like the deflation hawks at the FOMC are about to step up and put a charge into the monetary aggregates.

What’s Next

Let’s begin with the August 10th FOMC press release, bold type THE CONTRARIAN TAKE’s:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.  The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

First, the obvious.  While it is true that TMS2 has been decelerating, the fact is TMS2 is still running at double digit growth rates. Simply said, there is a lot of inflation around, supported by a still huge Federal Reserve balance sheet. Yet, citing little signs of inflation, likely supported by that 2% M2 growth rate, it is clear that the FOMC has no idea inflation is this robust.

Second, and as a consequence, the FOMC has decided to not only continue to maintain exceptionally low levels of the federal funds rate for an extended period, but to exit its exit strategy, as it will now keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

Third, fully aware of the banks unwillingness to extend credit (again read create money), the FOMC ends its press release by assuring the market that when it comes to money it is prepared to do the heavy lifting once more, not only by ending its exit strategy, but employing whatever other policy tools it deems useful to insure the economy gets all the inflation it needs.

What are those policy tools?

As St. Louis Federal Reserve President James Bullard, a supposed hawk and voting FOMC member, laid it out recently – Q.E. II, meaning more asset monetization, before as he says the U.S. slips into a Japanese style deflation.

A position Federal Reserve Chairman Bernanke supports?  You bet.

Perhaps some short-term weakness still in TMS2, but don’t count on it for too long.  A few more disappointing economic reports, perhaps two or three more ugly employment reports, or maybe another credit event, and THE CONTRARIAN TAKE is thinking another round of Federal Reserve engineered inflation is right around the corner.

This time likely starting  from an already robust rate.

Based on the monetary insights of the Austrian school of economics, THE CONTRARIAN TAKE offers up the latest monthly money supply metrics for the U.S., Eurozone and Japan currency blocks.

To see the entire monthly series offering – the latest money supply data for all three currency blocks, with full historical data and chart work, as well as supporting definitions, sources, notes and references – click here on Austrian Money Supply.

For a quick link to money supply definitions, sources, notes and references, click here on Austrian Money Supply Definitions, Sources, Notes and References.

For the logic behind the formulation of Austrian money supply, read Money Supply Metrics, the Austrian Take.

The Austrian take on where we are and what’s next…

Where We Are

The money supply aggregates based on the Austrian definition of the money supply (TMS) surged in June, up 15.6% annualized on narrow TMS1 and 8.4% annualized on the broader TMS2.   Not too shabby.  And although TMS1 is only showing a 2.4% rate of growth year on year, the more important TMS2 metric, the metric THE CONTRARIAN TAKE views as the best overall measure of the money supply in the U.S., is growing at a very robust 10.6 % rate.

In other words, inflation is alive and well.

One would not know it by looking at M2, would they?  This mainstream money supply aggregate, the one so closely watched by the Federal Reserve, mainstream economists and investors alike, but in the opinion of the THE CONTRARIAN TAKE a grossly misleading measure of the money supply, is showing a year over year growth rate of a mere 1.9%.

Having said this, the growth in bothTMS1 and TMS2 has been decelerating of late, reflecting a Federal Reserve balance sheet that has clearly plateaued, particularly since March when the Federal Reserve ended its mortgage asset purchase program.

So then-  yes we have double digit TMS2, but where to from here.

What’s Next

First, lets start with the obvious.  While it is true that the Austrian money supply aggregates have been decelerating, the fact is the all important TMS2 measure is still running at double digit growth rates, and at growth rates still above the median of the last 10 years.  Simply said, there is a lot of inflation around, supported by a still huge Federal Reserve balance sheet.

What’s more, and more importantly, the prospects for even more inflation seem to be growing by the minute.  Indeed, given the Federal Reserve’s preoccupation with the relatively subdued nature of the popular price indices, the persistently high unemployment rate and the continued weakness in housing juxtaposed against the anemic growth in that faulty M2 metric, one could make a strong case that the next big move in TMS will be up.

The reason?

A FOMC worried silly about what all these metrics suggest; namely, brewing deflation, prompting the Federal Reserve to begin expanding its balance sheet in earnest once more.

Witness St. Louis Federal Reserve President James Bullard, a supposed hawk and voting FOMC member, calling for Q.E. II, before as he says the U.S. slips into a Japanese style deflation.

A position Federal Reserve Chairman Bernanke supports, you ask?  You bet.  One only has to read Bernanke’s account of the Japanese experience and what the Bank of Japan should have done about it to be assured that Bernanke is on side with Bullard – lock, stock and barrel.  Here it is in Bernanke’s own words.

Another round of Q.E. and another surge in TMS from its already high level, the CONTRARIAN TAKE surmises, may soon become fact.  You see, deflation hawk extraordinaire Chairman Bernanke and his new accomplice St. Louis President James Bullard will not for long be the only deflation-fearing, inflation-bent members of the FOMC.  Three new Obama-picked, and similarly inflation-bent Federal Reserve Board nominees, all fretting about those very same metrics, are about to be become permanent members of the FOMC – Dr. Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, Dr. Peter Diamond, a professor at the Massachusetts Institute of Technology (MIT) and Sarah Bloom Raskin, commissioner of financial regulation for the state of Maryland.

Perhaps a bit more short-term weakness in TMS to come, but don’t count on it for too long.  At TMS2 10.6% and counting, another round of Federal Reserve engineered inflation is likely to put a charge into the monetary aggregates.

Based on the monetary insights of the Austrian school of economics, THE CONTRARIAN TAKE offers up the latest monthly money supply metrics for the U.S., Eurozone and Japan currency blocks.

To see the entire monthly series offering – the latest money supply data for all three currency blocks, with full historical data and chart work, as well as supporting definitions, sources, notes and references – click here on Austrian Money Supply.

For a quick link to money supply definitions, sources, notes and references, click here on Austrian Money Supply Definitions, Sources, Notes and References.

For the logic behind the formulation of Austrian money supply, read Money Supply Metrics, the Austrian Take.

Also at that time I began publishing, to readers of THE CONTRARIAN TAKE, monthly analytics on the U.S. money supply under the Austrian and mainstream formulations.

That series is now going global.

Again using the Austrian take on money, THE CONTRARIAN TAKE will be adding money supply metrics for the Eurozone and Japan to its monthly Austrian money supply series.  Like the U.S. series, full historical data and chartwork will be standard.

To wet your appetite, and a preview of what will be a monthly feature of this expanded series, here is how the three currency blocks currently stack up:

Austrian Money Supply, Annualized Rates of Growth

As is the case with THE CONTRARIAN TAKE’s U.S. series, money supply definitions, sources and references are included to help readers navigate through, and better interpret the series.  Included are:

Money Supply Definitions, the Austrian Take.  Defines money and banking terms, those tracked in the series, from an Austrian perspective.  Focus is placed on helping the users of the series better understand the real drivers behind the money creation process and in so doing provide a better understanding of the causes behind the ebb and flow of the money supply.

Austrian Money Supply Definitions, Sources and Notes, each currency block. Documents the formulation of Austrian money supply in each currency block and provides its component sources.  Care is taken to explain and compare the Austrian formulation from the mainstream benchmark employed in each currency block.

References. Recommended reading, to better understand the formulation of Austrian money supply and the importance of having a correct formulation.

To see the entire monthly series offering – the latest money supply data for all three currency blocks, with full historical data and chart work, as well as the details on definitions, sources, notes and references – click here on Austrian Money Supply.

For a quick link to money supply definitions, sources, notes and references, click here on Austrian Money Supply Definitions, Sources, Notes and References.

I would like to thank Michael Althof, Stefan Karlsson, Antony Mueller and Steve Saville for the help they provided in my effort to sort out the Eurozone money supply definition under the Austrian framework.

Sensationalism this is not.

Food for thought for holders of U.S. Treasury bonds?  You bet.

To see why, let’s start with a snapshot of the sovereign debt risk metrics of the U.S. government versus the PIIGS on fiscal year 2009 financials:

Sovereign Debt Risk Metrics

United States versus the PIIGS, Fiscal Year 2009

The PIIGS are looking at some huge financial imbalances, that much is for sure.  But I ask you, do the debt risk metrics of the U.S. government look that much different?  Is the debt of the U.S. government, as S&P’s triple-A credit rating suggests, that much more credit worthy than the debt of say Spain, Ireland or even Greece?

Let’s have a look at each risk metric, the way a sovereign debt investor might, ranking the countries on those metrics from “bad” to “worse.”

Economic Burden Metrics

The ability of a government to pay its bills ultimately comes down to the ability of its citizenry to produce income high enough to pay those bills.  On this score, America is not a country that many would want to emulate, showing Deficit to GDP and Debt to GDP ratios no better than the average PIIG:

Coverage Ratio Metrics

Financial analysts measure an entity’s ability to pay its obligations in several ways.  One popular way is through a metric known as a coverage ratio.  In this sovereign risk study, I offer up two coverage ratios:

Receipts to Outlays, measuring a government’s ability to fund its spending needs via current tax receipts, with a ratio of less than one meaning that that spending is being financed by deferring the costs of that spending into the future via the issuance of debt, and

Gross Debt to Receipts, representing the number of years it will take a government to repay its debt obligations at its current level of tax receipts, debt obligations incurred as result of years of opting to finance its spending the easy way – via debt issuance instead of via current tax receipts.

On both these risk metrics, the U.S. is at the bottom of the list by a “country” mile:

Size of Government

America has one big thing going for it – the size of its government relative to the size of its economy is, on a comparative basis, relatively small, taking  some 25% of the economy versus the roughly 50% taken by the PIIGS.  That implies that America’s ability to grow its income and pay its bills is better than that of the countries of the PIIGS.  Have a look at the numbers:

At first glance, and as a holder of U.S. Treasury bonds, perhaps this is reason for hope, and reason for that triple-A rating.  But a deeper dive into the particulars suggests something quite different.

Since 2000, the U.S. government’s spending bill has been growing at an annual rate of about 8%, more than double the rate seen in the 1990s, and a trend that has taken government spending from about 18% of GDP in 2000 to today’s 25%. Add $100 trillion plus and counting in unfunded-liabilities-come-spending into the mix, as well as a host of economically debilitating tax rate hikes beginning as soon as 2011, and you have the makings of an economy that will be increasingly burdened by the government, making it harder and harder for the government to pay it’s bills.  And may I say, all this without the U.S. Congress creating even one more government program.

Maybe not today’s problem, but looking forward, a bad omen for all holders of U.S. Treasury bonds, especially given the debt hole America has already dug for itself.

Debt Risk Metric Scorecard

Borrowing a tool used by baseball, let’s recap by constructing a Sovereign Debt Risk Scorecard.  Again, going from bad to worse, America on this metric is near the bottom of the list:

Granted, these are but a few summary metrics. Granted, the average risk metric so computed is a simple, unweighted arithmetic average.  But if these numbers don’t make you think, think that America’s triple-A status may be a bit too “generous,” then may I suggest you could be guilty of not thinking.  Not something I would recommend if you are, or plan to be an investor in U.S. government debt obligations.

IMF Looks Ahead and It Doesn’t Like What It Sees Either

In its April 20^th 2010 Global Financial Stability Report, the International Monetary Fund (IMF) warned that government risk in the advanced economies is now the biggest threat to the world economy.  These governments, the IMF correctly observes, not only took on many of the bad debts incurred by private institutions these past several years, but due to the economic fallout of the crisis, and the existence of a plethora of government social nets, these governments face continuing heavy borrowing needs for at least the next few years.  An ugly situation for sure, and one the IMF said could get out of hand, and fast, if not addressed.

In conjunction with the release of the report, José Viñals, Financial Counselor and Director of the IMF’s Monetary and Capital Markets Department, said:

In spite of recent improvements in the outlook and the health of the global financial system, stability is not yet assured.… If the legacy of the present crisis and emerging sovereign risks are not addressed, we run the very real risk of undermining the recovery and extending the financial crisis into a new phase.

This author couldn’t have said it better.

Yet, in 2010, the U.S. Congress passed the largest government spending initiative in history in Obamacare.  Now, those same politicians are talking about cap and trade, not to mention even more stimulus programs.  This on top of those already horrible 2009 debt risk metrics.

Clearly, America is not addressing the seriousness of its financial state.

Indeed, the IMF put pen to paper, suggesting the very same thing about America.  This, taken from the IMF’s World Economic Outlook Database:

America, on the basis of these metrics says the IMF, is a nation going in the wrong direction.  With an estimated Deficit to GDP ratio of 10.97% in 2010, only Ireland is expected to show a ratio worse than the U.S.

America is NOT a PIIG?

Surely, you say, America is not a Greece, an Ireland or even a Spain.  And in a sense you would be correct.  Just not in the way you think.  For in one very important respect, America is potentially worse, a lot worse.

You see, America has the Federal Reserve’s printing press.  Steward of the world’s reserve currency, America issues debt in a currency it alone can print.  America can in no uncertain terms inflate its debt away, without limitation, with a few taps on a computer.

Portugal, Italy, Ireland, Greece and Spain, members of the Euro-zone are countries without a printing press.  They can’t bail themselves out by printing money to pay for their debts.  No, as we are witnessing in this, the latest financial crisis, they have to show at least some manner of fiscal austerity before they can get access to the printing press of the European Central Bank.

Can the same be said about America?

In essence, the Federal Reserve’s printing press is buying time for America.  It allows America to kick the debt-can down the road a bit longer, no holes barred, an option not available to the PIIGS.  The result, the appearance that America is in control, its finances manageable, nothing at all like the finances of the PIIGS.

The problem is that same printing press eventually makes matters worse, because it fosters even more irresponsibility on the part of politicians, allowing them to hand out economic goodies without thought, without ever having to ask a single voter to pay for them.  And as a result, the debt-can gets ever bigger, while the urge to inflate it away gets ever stronger.

Isn’t this exactly what we say happening in America, right now?

One day this debt-can, and perhaps by that time the mother of all cans, will have to be paid in full.  The only question will be whether that payment will be via fiscal austerity or via the debasement of the currency in which that can is priced.

One thing is for sure.  If you want to wreck a country’s economy, and its sovereign credit risk to boot, you do it with a printing press. And if it comes to this, you can be equally sure that U.S. Treasury bond investors will be all over it, because at that point it will be clear to all that the last investor out is going to be an investor holding a can with nothing in it but worthless pieces of paper.

Final Thoughts

Right now, U.S. Treasury bonds are in rally mode, as aghast over the crisis in Europe is chasing both hot and scared money into the U.S. Treasury market.  The reason, the U.S., home to the largest government fixed income market in the world and owner of the world’s reserve currency, is still viewed by many as the safe haven of choice.  At the very least, the best of the worst, on the the belief that America will not go down, at least not yet.

And you know what, as negative as this author is on America’s sovereign credit, that assessment is largely correct, for now.

In my book, and I think in the books of a growing number of U.S. Treasury bond investors the world over, it’s rent-a-bond not buy-a-bond when it comes to Americas sovereign debt.  Indeed, for the reasons discussed in this essay, and explored in depth in this series, America’s increasingly ugly sovereign risk metrics will not go unnoticed forever.  They can’t, for the path America is on is simply unsustainable.  If America does not heed the advice of the IMF, it may one day end up just like Greece.

U.S. Treasury bond holders will see to it.

Click here on U.S. Government Financials for a full accounting of the U.S. government’s financial condition, updated monthly courtesy of THE CONTRARIAN TAKE.

U.S. Government Financials is one of several data series available on THE CONTRARIAN TAKE.  For the full series, click here on Economic Data and Charts, with an Austrian Slant.

Good news everyone!

THE CONTRARIAN TAKE is moving over to the Forbes Blog.

The URL for my new site is here…

http://blogs.forbes.com/michaelpollaro/

And directly to my Money supply metrics, the Austrian take essay here…

http://blogs.forbes.com/michaelpollaro/money-supply-metrics-the-austrian-take/

Hope you follow me to Forbes

Regards,

Michael

The health care overhaul, the biggest legislative initiative since LBJ’s Medicare bill, has become the law of the land.  The cost, says the Congressional Budget Office (CBO), is ONLY $940 billion over the next 10 years.  Better yet, adds the CBO, it will reduce the federal deficit by $138 billion over those same 10 years.

Let me see if I got this right.  The Obama administration and its congressional allies  would like us to believe that the biggest piece of legislation in 45 years, one that will expand medical coverage to 32 million uninsured Americans, that will set up two new huge entitlement programs – health insurance subsidies and long-term health care benefits – is going to cost just $940 billion while reducing the U.S. government’s fiscal deficit by $138 billion?

Sorry, I don’t buy it.

In a recent Op-Ed piece in the New York Times, Douglas Holtz-Eakin, the director of the CBO from 2003 to 2005, now president of the American Action Forum and obviously someone in the know, doesn’t buy it either.  I quote:

…the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.

In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.

Now this makes more sense.  According to Holt-Eakin’s calculations, instead of a reduction of $138 billion in the U.S. government’s deficit, we have an increase of $562 billion.  And although Holtz-Eakin doesn’t explicitly say it, that means the total cost of this bill over the next 10 years is not $940 billion but a whopping $1.6 trillion.  That’s a negative swing of $700 billion.

The full Op-Ed is here and I highly suggest a read.

From where I sit though, the true cost of this bill, and the impact on the U.S. government’s deficit, looks to be higher than even Holtz-Eakin contends for two reasons.

First, the bill front-loads tax revenues and back-loads spending; specifically, the new taxes the bill mandates are set to begin immediately while the new spending it authorizes will not begin in earnest until four years out.  In other words, the full cost of this bill and the negative impact it will have on the deficit are being grossly underestimated.

Drawing from Holtz-Eakin’s Op-Ed, have a look at my rough, though I think closer approximation of the true cost of this bill:

Based on this simple exercise, the 10-year cost of this bill when fully implemented, what financial analysts call its normalized run rate, is a huge $2.7 trillion, yielding a negative blow to the deficit of an equally huge $1.6 trillion.  Now, I admit I may be guilty of some double counting with this simple calculation, but by the same token, the bills provisions ramp up over time, meaning this calculation is likely not capturing the full cost of every program.

To put these numbers into perspective, when in full swing, the provisions in this bill will generate $270 billion more in spending per year, or 8% of the government’s fiscal 2009 spend.  It will require $160 billion more in borrowing capacity per year, or 11% of government’s 2009 borrowing requirements.  And it will be done by a government that currently sports a deficit to GDP ratio of 10.5%.

This on an economy considered doing well when it’s growing at 3% per year.

Second, the $1.6 trillion deficit increase that my arithmetic yields is likely too low, for the new taxes mandated by the bill and assumed as revenue by the CBO are simply not going to be realized, quite possibly at anywhere near the CBO’s estimates.

Indeed.  Not only does history teach us that raising taxes is largely self-defeating, inhibiting production, income and employment and therefore the hoped for increase in government revenue, but so too does sound economic logic.

You see, higher taxes discourage the factory worker from taking overtime to earn a few more bucks, a spouse from seeking a job to help with the family budget or a seasoned executive from working a few more years, instead of opting for early retirement. Combined with unemployment insurance, higher taxes may even discourage an unemployed worker from seeking new employment, at least until his unemployment benefits run out.

Higher taxes discourage entrepreneurs from starting new business ventures, expanding existing ones and of course hiring new workers.  And when those taxes become particularly onerous, those same entrepreneurs may even close up shop.

And, most importantly, higher taxes discourage people from saving and investing, the very fuel for economic growth.  It is these kinds of taxes, more than any other, that deprive the economy of the funds necessary to grow production, income, and employment, especially when those taxes, like the taxes in this bill, target those most able to save and invest – the so-called “rich.”

Now, without all these people doing what they do best, hampered as they will be by this bill’s burdensome taxes, the hoped for new tax revenue coming the government’s way, the same revenue assumed in the CBO’s revenue assumptions, will be sure to disappoint.

What this means is that my $1.6 trillion deficit impact is likely just the beginning of even higher government deficits and larger borrowing requirements to come.  Then again, leaving the costs of government spending programs to future generations has been the modus operandi in Washington for years.

I’m not here to debate the government’s role in health care.  What I am here to say is that in the end Obamacare will prove a financial disaster for America, no different that LBJ’s Medicare, which I think is what the boys and girls in Washington originally set out to fix.

One final thought.  When’s the last time a government program began and ended with its opening salvo.  Unless this bill is overturned in the Supreme Court or repealed by a future Congress, this baby may just be getting started.

A full update on the U.S. government’s financial condition, tables and graphs tracking 50 years of financial metrics, can be found here courtesy of THE CONTRARIAN TAKE.

As President Obama, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid round up the final votes on the trillion-dollar-plus health care bill, the U.S. government reported a record monthly deficit in February of $221 billion.

Nasty stuff.

Here are the headline numbers for the first 5 months of the U.S. government’s fiscal 2010 year:

No matter receipts are down 7% from the same period last year, the U.S. government continues to spend at 2009’s record rate.  The result, a deficit of $652 billion.  That means the U.S. government is tracking to a deficit of $1.5 trillion for fiscal 2010, about 10.5% of GDP.  That’s worse than 2009’s 10%, itself a post war record.  All this, even before Obama’s  Recovery and Reinvestment Act spending largesse kicks in, in earnest.

Ouch.

So what’s new here?  Nothing.  This continues a government spending and borrowing binge that quite simply seems to have no end.

Have a look at the trend in U.S. government receipts, outlays and deficit, running 12-month totals:

And now have a look at the U.S. government’s borrowing requirements, again running 12-month totals:

At $12.4 trillion, the U.S. government’s gross indebtedness now stands at 86% of GDP, up 2 plus percentage points from fiscal end 2009.  Yes, that too is a post war record.  And with the Obama administration’s big government agenda only now getting started, I wouldn’t be surprised to see gross debt hit at least 90% of GDP by the end of fiscal 2010.

Moody’s has finally stepped up, says Aaa rating in jeopardy

The news channels are filled with the financial plights of the governments of the Euro zone.  Hardly a day goes by that some analyst is not heard predicting yet more doom and gloom for these countries.  But interestingly barely anything on the sorry financial state of the U.S. government.

That is, until now.

On March 15^th,  Bloomberg, CNBC and Fox Business filled the air waves with the news that the venerable rating agency Moody’s had the audacity to say that it’s not just the sovereign debt of the countries of the Euro zone that are getting more risky by the day.  The debt of the U.S. government is too.

And if that’s not bad enough, Pierre Cailleteau, managing director of sovereign risk at Moody’s, did the unthinkable.  He singled out the U.S. government as a particularly troublesome credit, and I quote:

The U.K. and the U.S. are more tested than, say, Germany or France.  Their rating relies, more than in other countries, on their ability to repair the damage caused by the crisis on public finances.

Well, I am no fan of Moody’s, but my bet is Moody’s is looking at the same trends I’m looking at, and as they do, having a tough time justifying the U.S. government’s Aaa rating against comparisons like this:

I ask you, for all the negative talk about the financial state of the governments of the Euro zone, does the financial state of the U.S. government look that much different?  Is the debt of the U.S. government that much more credit worthy than say the debt of Ireland or Spain? Is the sovereign debt investor that much more likely to receive his money back with a U.S. government bond than he is with the bonds of Ireland or Spain? Other than the U.S. government’s ability to print money at will to pay its debts, certainly not in this man’s opinion.  Perhaps now too in the opinion of Moody’s.

And as I discussed in this series, the ability of the U.S. government to print money at will to pay its debts, it’s not exactly a plus.  Indeed, in the end, that very fact, the ability to pay one’s debt by debasing that debt through the printing press, could make the debt of the U.S. government an even bigger risk than the debt of beleaguered Greece.

A full update on the U.S. Government’s financial condition, courtesy of THE CONTRARIAN TAKE, can be found here.