Money supply figures released back in the 70's used to be as much of an obsession as Fed statements released today. It was a time of progressive inflation and the whole world was catching on to the fact that it was caused by the Fed creating too much money. I still watch M2, which is cash, demand deposits in checking accounts, and savings. This is the pool of money which businesses and consumers draw from to make immediate purchases and payments.

If you check the M2 money supply from mid June to mid August as supplied by the St Louis Fed, the money supply increased from 340 billion dollars to 393 billion. The increase has been stable but decreasing over the years from about a 10% increase to around a 6% increase. And this at a time when everyone is focusing on the trillions of dollars the Fed has created that has not entered the money supply of the nation. Other than buoying assets, it can be argued that the trillions of dollars injected have been mainly impotent. It has ended up in bank excess reserves rather than the economy.

The normal amount of gold (money) entering the economy over three centuries averaged about 4% per year. Today that would amount to about 37 billion dollars of new money hitting the economy monthly. Since June 16th, the money supply has increased by $53 billion. By any standard, gold or fiat, the money supply is stagnating, and has been for some time.

For all the attempts of the Fed to increase money supply and the velocity of money, they've failed. They have, to their credit, prevented a full-fledged deflation which could have turned into a Great Depression as prices imploded, wiping out equity of all assets, leaving only debt which would be unpayable as unemployment soared and wages declined. Through not making the same mistake as the Fed of the 20's and 30's, the Fed today has prevented a spiraling implosion, deflation, and economic collapse.

Here in the US, the Fed has managed to keep the forces of deflation at bay; in Europe not so much. Prior to the financial crisis, monetary policy was fairly "cut and dry", the Fed increased the money supply by funneling money into the banking system. The banks loaned the money out and prices rose moderately -- until the 70's. From January 1980 to last year the rate of inflation declined from 18.52% rates (can you believe it!) to .07%.

The problem of disinflation and the fears of deflation arose as consumers and businesses were either unable to get loans or refused to borrow in favor of paying back debt. Lending dried up, and to this day the financial system is still abnormally dysfunctional. (Home purchases today are made with cash in over a third of all transactions). Consumers and businesses are borrowing at record low levels, hence the low velocity of money. The Fed has opted to address this change through its asset purchase program of buying bonds and home mortgages, yet has not affected the demand for money.

Note that both methods of trying to increase the money supply within an economy (bank lending or asset purchases) is quantitative easing. QE, no matter what number you put on it, has existed since the Fed was established in 1913. It's only a matter of degree. Under a fiat standard the supply of money is controlled by the Federal Reserve System. Under a gold standard the private market controls the supply of money through the mining of gold.

In both systems there is QE. Never has there been a monetary system where zero money was produced or created by either the government or the private sector.

(If you're interested in a further discussion of monetary theory see my article Why Prices Are Not Skyrocketing in the commentary section of on commentary page 9. And for an in depth study of money read my book The New Gold Standard.)

Other than a very small decrease in interest rates from what they otherwise would be, (note that interest rates abroad where there are no such equal purchases of assets, interest rates are conspicuously lower than ours without QE1,2,and 3), monetary policy has not done what it set out to do: reduce unemployment and increase growth. For 5 years, as more than 4 trillion dollars were added to the Fed's balance sheet, we've had the worst recovery ever in the history of the United States. And the Eurozone has done even worse.

In my judgment the Fed has not contributed to falling unemployment rates or increased growth. It has at best prevented, (thankfully) asset deflation. Governments everywhere have done more to prevent a normal healing process and recovery than to aid it. The Fed has been more neutral in its monetary policy where governments everywhere have pursued counter-productive fiscal policies. History, I trust, will bear me out on this point as time passes.

Yet even with these misdirected policies by both institutions, people adjust. They learn to live within the new conditions they are confronted with. One of the reasons the US economy is one of the strongest economies in the world (albeit anemic) is the degree of freedom individuals still have to act.

Even given the counter-productive economic policies we are facing here, people wake up every day and look at how they can improve their situation. They learn to side-step and compensate for the strangling regulations, controls, edicts, and mandates imposed by the government. They move with their feet to freer states, and they learn to neutralize the punitive effects of mounting government controls and regulations. So the economy moves on.

As of today, it looks to me that inflation has peaked for the year, economic growth is healthy and growing more healthy, but the world is a much more dangerous place than it has been in a very long time. Neither Yellen nor Draghi had anything to say last week that will change any of this - and the markets yawned. Moderate growth and moderate inflation look to lay ahead, with further problems in store for Europe. The world will at best heal slowly from this point on, barring any new major factor that appears on the scene. But it WILL move on.

While I'm not real excited about the world economy going forward, I see many possible investment opportunities to trade stocks, and that's where I will be devoting my efforts in the immediate weeks ahead. There is a possibility that gold stocks will launch again in the next couple weeks or months - and this time, they won't look back. We may have to face one more down draft in gold and silver, but the precious metal stocks are turning up even as gold is falling back from its recent high.

Look at the following chart:


Gold stocks have turned up against gold for the first time in four years! Given a stable gold price, let alone an increasing one, gold stocks could soar. No one is looking for a major bull market in gold stocks. Thom McClellan of the McClellan Oscillator made this point on CNBC last week in predicting a seasonal bull market that may begin soon. But he cautions that we could see a hundred dollar drop in gold before that bull finds his horns.

I'm almost 100% invested in precious metals stocks with a portion of cash on the sidelines. I took profits on Seabridge Gold last week and am holding a core position in selected stocks, both explorers and majors. But I have reduced my position. (For specifics see my Market Update here at I plan to commit more funds if we break higher or hedge the core position if we break lower, but to keep a core position in both gold and precious metal stocks.

The next couple of months could be volatile, but profitable for traders both on the downside and the upside. For investors, my call on gold last December posted here stands. From Looking Forward: Toward Normalization:

"Given some possible nasty problems in the first quarter, I think the days of disinflation and actual deflation are numbered. Whether sooner or later, I see growth higher from here after years of stagnation, gaining momentum in the second half of the year, and building momentum from there".

"It's for this reason that I am predicting a turn in gold, silver, and most commodity prices in 2014".

So far, we're up for the year -- particularly gold stocks. Stay tuned -- things are getting interesting.

Paul Nathan