Thursday, October 23, 2008

$350 Billion Expansion of Base Money

The base money supply, according to this graph from the St. Louis Fed, had been holding steady at $850B for the better part of the last two years. Since September, it has shot up to $1200B—which is a whopping 40% increase in base money. Are we at the verge of the Wiemar Republic?

For now, the U.S. dollar is strengthening against: stocks, houses, nearly all commodies, the euro and nearly all world currencies except the yen, and now recently it is even strong against gold. Gold is trading strongly, it is just that it is priced in dollars, and the dollar is trading more strongly. The U.S. dollar seems to be in high demand worldwide. In short, we have both deflationary forces though the collapse of credit, and inflationary forces through printing in play.

My general investment strategy remains unchanged. With charts like we are seeing now I cannot advocate a cash position, but I still hold the belief that deflationary forces will outweigh inflationary ones as this drama unfolds.

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