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Minyan Mailbag - Supply & Demand

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Hi John,

A couple of questions for you. You can answer on Minyanville if you'd like:

1. Why is money supply growth so far below debt growth?

2. In theory, why couldn't the fed fill any funding gap caused by diminished foreign buying of our securities? It seems to me that the fed has an unlimited ability to step in if/when the rest of world decides to walk away from the U.S. (Bernanke's printing press).

Thank you,

Minyan Jim

Jim,

1. This ratio is more a function of the willingness of consumers to accumulate debt (in our case since that is the major source of private debt growth, or in better terms, credit expansion). For example, Japan has been expanding their money supply aggressively in addition to extremely low nominal interest rates and is not experiencing credit expansion. Their population is strictly conservative while ours is, well, you know.

In addition, we are fairly certain that our money supply figures are under-reported. Studies have been done that show that GSE's have added greatly to credit expansion, yet as they expand their balance sheets, money supply as reported is not affected. Somehow the GSE system has circumvented the reported figures.

2. Another way to look at this is that it is taking more and more debt to create GDP growth.

We have talked about this factor: monetization. I am fairly certain that a degree of this is currently going on where the Federal Reserve creates its own credit to buy U.S. treasury debt. This can go on for an undetermined period of time and magnitude, but infinity, as you suggest is a difficult thing to grasp. Will the world let the Fed print untold dollars (where the value of the dollar is severely affected) without consequences. I have wondered aloud for some time as to when the world (central banks) will cry uncle. But remember, central banks are not profit motivated, so I guess it can go on for a while and ends only when it is too late.

Regards,
Prof. Succo

No positions in stocks mentioned.

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