Dollar Death Ray #1
Our graph this week is of the Dollar Death Ray, which is aimed directly at the value of the U.S. dollar. This plot is an extension of that which was introduced in last week's Gold Thoughts. In the graph is plotted the year-to-year change in Federal Reserve bank credit. In simplest terms, it is the rate of expansion of the asset side of Federal Reserve's balance sheet. Latest data was released Thursday, 25 September. In this case, it has been adjusted for a circular transaction created by Treasury supplemental financing of the Federal Reserve which was recently done. Federal Reserve bank credit, or U.S. base money, has now been expanded at a record level. Rarely, if ever, has a major central bank intentionally inflated its balance sheet in such an inflationary manner.
What the graph tells us is that the Federal Reserve has increased base money by about 20% from a year ago. This has been accomplished by the massive, more than $200 billion, financing of dubious assets held by U.S. banking system. Plan to bailout Wall Street will only exacerbate this development. While it does not translate directly into money supply growth, it gives a good picture of likely future trend.
If you turn it upside down, you get a picture of the future value of the U.S. dollar. A central bank cannot abandon all restraint in financing an economy without the currency losing value. As it is presented, the graph give a "forecast" for the price of $Gold. The bailout of Wall Street is being done with total disregard of the secondary and tertiary consequences. If you own paper assets instead of Gold, be prepared for the value of your wealth to deteriorate.
Ned W. Schmidt,CFA,CEBS is publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports simply go to: http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html.