The Multiplication of Money

The economy grew in the fourth quarter by 5.9%, the most in years. The adjusted monetary base is exploding. Bank reserves are literally through the roof. The Fed is flooding money into the system in an effort to get banks to lend. A historically normal response by banks (to increase lending) would have been massively inflationary, causing the Fed to stomp on the brakes. Despite raising the almost meaningless discount rate (as who uses it?), this week Ben Bernanke assured Congress of an easy monetary policy, with rates remaining low for a long time. Many ask, how can this not be inflationary?

This week we look at some fundamentals of money supply and the economy. If you understand this, you won't get misled by people selling investments, telling you to buy this or that based on some chart that shows whatever they’re selling to be what you absolutely have to have to protect your portfolio and/or make massive profits. And we touch on a few odds and ends. And yes, I can't resist, a few more thoughts on Greece.

Where Is All That Greek Gold?

Last week I mentioned the (what seemed to me and much of the world) odd incident of Greek politicians talking about the need for Germany to pay its debts to Greece. I got this response from a Greek reader.
 

Dear Mr. Mauldin,

I am an avid reader and I just wanted to correct you about a comment in one of your articles, The Pain in Spain, specifically:

“Somehow they forgot about the German government paying 115 million deutschmarks in 1960 -- not a small sum back then.”

This repayment of 1960 is undeniable. but the total amount owed was $10 billion ($3.5 billion for the return of the gold stolen and the repayment of the war loans Greece was forced into giving Germany, and $7 billion in war reparations awarded to Greece in 1946). As the DM/$ parity was then four for one, this means they gave Greece $29 million out of the $10 billion owed.

Germany also proclaims that they have given Greece over the years, in one form or another, €16.5 billion. But the fact of the matter is that despite these alleged payments, the issue of the war loans and gold is still not settled.

Greece has never stopped asking for the money to be paid back ... it is estimated that this sum owed now totals $70 billion [I assume the Greeks want interest. -- JM]. So even taking into account the €16.5 billion, more than $50 billion is still owed.

Helmut Kohl refused to even discuss the repayment, presenting as an excuse that this amount was owed by the whole of Germany and until Germany is unified the issue could not be discussed.

Guess what, Germany is unified....

Best Regards,

Anthony Kioussopoulos

PS: Do not take my email as a refusal to acknowledge the fault of successive Greek governments in creating this mess; just take it as a correction for a specific issue.