The gold bulls say the fed is printing money? http://www.federalreserve.gov/releases/h3/Current/
The link above shows that printing has been very minimal according to Fed statistics. In fact, the most recent monetary base was lower than it was in August 2007. No new hundred dollar bills floating out the window here is there Ma.
This link is the most recent Fed Z1. If you go to page 14, you will note that credit creation fell significantly in 2007. Consumer borrowing fell significantly while business borrowing rose significantly, but the total percentage gain was down from 2006. Where borrowing was up was in the financial sector. Where are we having trouble right now? The financial sector.
This is one of the keys to what is happening at this time. Where is the really bad news? It is the financial sector. What was the financial sector doing? My observation was it was borrowing money to buy the debt the banks issued, thus keeping it off the books of the banks. This sector is broken.
We are in the midst of a huge deflation that is being disguised as an inflation. The system that supported the inflation has broken down and there isn't one to replace it. Financial lending is illustrated by the $21 Billion borrowed by Carlyle Capital Corp. to finance leveraged longer term loans. It is the money borrowed by Peloton that ended up in the implosion of that company. These loans are being liquidated now and the system doesn't have the capital to take on this debt, meaning someone is either going to have to replace the credit or the assets are going to be written down.
Now we have this huge commodity inflation going on. This is a remnant bubble due to the risk in paper and the decline in what drives the stock market. There is one asset here that has huge monetary value, gold. If gold is money, then gold is actually inflating the nominal money supply. That is, the inflation here just might be gold and the gold bull market instead of an actually declining dollar. The currency differentials of major nations are generally a reflection of interest rate differentials and not purchasing power differentials. Part of what launched the gold bull wasn't a decline in the worth of the dollar, but a decline in the interest rates. Lower interest rates this time won't equate to higher borrowing for a couple of reasons.
Before I go to those reasons, lets examine what $1000 gold is in relation to $500 gold? Well, for the main part, this now represents around $5.3 trillion in money in the system. You can trade this stuff as if it is actual cash, maybe with a little more effort. When gold was $500 an ounce, this represented only $2.6 trillion, an increase of $2.7 trillion (I am adding a little for the gold mined). The monetary base of the United States is $822.4 billion, merely 1/6th of the current value of all the worlds gold. Don't get into M-2 and M-3 because these have nothing to do with the monetary base, but with bank liabilities. In any case, I find it highly doubtful that the world gold supply is worth even a minor fraction of the housing in the US, much less all the homes, factories, streets, educations, and minerals in the US.
There is one thing that the M-2 and M-3 will do right now, buy gold and gold will acquire the monetary base of the US 6 times over. What gold will do right now is buy a lot more assets on the market than it would, being an inflated asset itself. Being that it is money to the point of meeting the definition of money, we are now experiencing through a bull market, a massive inflation with gold. It isn't the currency inflating gold, it is the bull market inflating gold.
The gold bulls forget one thing, the sellers? I saw a post on the Prudent Bear page that said "Gold shorts report to your local homeless shelter". Who does this guy think these shorts are? They are clearly the very few people that hold about all the gold in the world, being that the pissants on the Prudent Bear board in sum couldn't come up with the interest earned on the gold one of these guys holds for a month. Remember, the monetary base of the US is flat to falling and who do you think will have it all when the longs have bought all the gold they can stand to have?
The banks aren't in shape to make new loans. The financial boom is over, as we are now seeing the mere beginnings of the liquidation of that bubble. Banks are going to have a harder and harder time relating their liabilities and their reserves to this monetary base. Banks are hocking their stuff to the Fed, not the Fed printing and giving cash to the banks as is assumed. The only giving the Fed does is in forcing the interest rate on the overnight money down. The banks are insolvent and their capacity to produce more money is falling and the amount of liabilities they can carry on their balance sheet is also declining. The system is keeping secrets to keep this net worth as high as possible and filter out the losses over time instead of all at once. In the meantime, it appears that gold is going to serve as the inflation for the system.
Why won't lower interest rates equate to higher borrowing? For 2 reason mainly. One is the public is out of credit and usually doesn't get much lower rates in a situation like this in the first place. The other reason is risk. The prime borrowers of money recently was the financial system outside the banks. Hedge funds, finance companies and the such who leveraged debt against higher yielding debt. The asset base has broken down and the banks this time around aren't going to lend the carry to these guys to get fat on these borrow short and lend long situations. Plus, the idea that the Fed is going to have to raise rates as soon as possible is also in the works right now. Not too many badly burned risk takers wants to walk into that situation in a system that won't ever have the liquidity it had in the past. The system is leveraged up and low rates won't fix it this time.