The Fed's Money Supply Armament is Underway

By: Robert McHugh | Sun, Jan 8, 2006
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M-3 has been launched into outer space, up another $56.3 billion last week, up $92.4 billion over the past two. This is some real horsepower. Over six weeks, the meaningless figure, ahem, is up $177.8 billion. These annualized growth rates are 28.7 percent, 23.6 percent, and 15.3 percent respectively. Those are the seasonally adjusted figures. The raw, non-seasonally adjusted, figure is up $293.3 billion over the past 12 weeks, on a pace to add 1.2 trillion in money to the economy. Wow. There must be a need for this. Maybe the master Planners see a coming need to monetize our debt? To support markets? They tell us the economy is good, so clearly they cannot be stimulating our way out of a recession. There's a lot of money flooding the economy and it has to go somewhere. Right now it is lifting markets.

The following is pure educated speculation: What if Iran goes through with its threat to sell oil for Euros instead of U.S. Dollars? Well, then Dollars won't help you much if you want to buy oil from Iran. So, you sell the Dollars you are holding for Euros. Whenever anything is sold en masse, its value drops. This means less demand for Dollars, which means the Fed will not be able to print excessive amounts of Dollars without further driving down the Dollar's value. There would simply be too much supply. Right now, the Fed can print all the Dollars they want because the demand for Dollars has been on the rise, especially as the cost of oil has risen. In other words, lately it has taken more Dollars to buy oil, so the demand for Dollars has been up. Again, this extra demand has allowed the Fed to print all it feels like with little consequent damage to the Dollar.

However, if the Dollar were to tank - and the Iran oil Bourse should push the Dollar in that direction - it puts pressure on Treasury Bonds and other U.S. financial assets to fall as well, since they are denominated in a declining-value currency. In this event, the Fed would have to step up its buying of U.S. financial assets to lend support to these asset prices - to stabilize U.S. markets. In other words, the Fed would have to monetize the U.S. Treasury's debt, and also monetize equity markets (be the buyer that keeps prices from falling). This would take so much fresh money that the Fed would need to create it in secret. Thus, they would have to announce that they are no longer going to transparently reveal the level of the money supply, but will hide it. The alternative is to punish Iran for - and make no mistake about this - effectively declaring economic war against the United States.

If this speculation is true, then the Master Planners are likely preparing accordingly. But if this is true, you just wish there would be more forthright communication with the American people.

M-3 has a direct but lagging impact on financial markets. Look at the chart on the prior page. Whenever M-3 rises, the Dow Industrials rise. Whenever M-3 is flat or declines, the Dow Industrials decline. The Dow Industrials are a bellwether for the economy. If we can monitor M-3, we can better monitor the future path of equities and the economy. It is wrong for the Fed to stop its disclosure for this very reason. Investors need to know in a free market economy, because M-3 infusion is centrally planned intervention into a free market system.

The U.S. Dollar has completed its second wave A up and second B down of a Double Flat/ Zigzag corrective intermediate-term rally. The first leg of a final wave C up should begin soon. We can estimate the timing of the start of the Dollar's coming collapse into the 60s (probably even lower) by doubling the time the first A-B-C (a Flat 3-3-5 pattern) took for corrective Primary degree wave (2) up. From the time the U.S. Dollar's Primary (1) bottomed on December 31st at 80.39, to the time the first of what will be two A-B-C patterns topped at C on July 8th at 90.77, was about seven months. Then the dividing wave, X, took the Dollar down to 86.02 on September 2nd. That timing says the start of the decline should arrive coincident with the March/April period when M-3 is hidden and Iran starts selling oil on its bourse in euros.

Gold's wave iv triangle is taking shape as an Ascending Bullish Triangle, bouncing off the lower boundary as we annotated a week ago. Once this back and forth pattern completes, we should see Gold rocket higher again, perhaps as high as $600. Gold understands what is going on with the money supply. It understands that the Fed's decision to hide the figures means it is about to be increased dramatically. Gold gets it, that too many Dollars is inflationary. Gold is rising because M-3 is going through the roof.

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"Now the Lord said to Abram,
Go forth from your country,
And from your relatives,
And from your father's house,
To the Land which I will show you;
And I will make you a great nation,
And I will bless you,
And make your name great;
And so you shall be a blessing;
I will bless those who bless you,
and the one who curses you I will curse."

Genesis 12:1-3


Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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