GOLD THOUGHTS
by Ned W. Schmidt, CFA, CEBS
Schmidt Management Company
November 18, 2008

Central banks around the world are indeed doing everything but dumping money out of helicopters. That inflationary rush has been led by Federal Reserve. Ignoring the fact that easy money has been a failed policy twice in recent years, to wit the technology stock bubble and the housing bubble, FOMC is pursuing most inflationary policy in that organization's dismal 95-year history. Federal Reserve's balance sheet is now 90+% larger than it was a year ago. Never in peace time has a major central bank acted in such an inflationary manner. Economists at the Federal Reserve are committed to not making same mistakes of 1920s and 1930s. Be assured, they will not. Economists have an uncanny and totally reliable ability to create new mistakes. This weeks graph portrays the monetary consequences of the Federal Reserve's actions, and the beginning of their new mistakes.   

Yes, no one can make banks lend money, as so many emails have noted. For that reason, Federal Reserve is going around the banks, lending directly to borrowers. At same time, U.S. government is running a deficit of almost $1.5 trillion, financed by selling debt to banks and investors. These two activities have the same first round impact as that of bank lending. While in short run U.S. money supply numbers are volatile, those money supply numbers are starting to show some fairly dramatic growth. A central bank expanding its asset base by more than 90% will have an impact on the money supply.  Thus far, a desperate need for dollars to meet redemptions and liquidations by hedge funds has increased the value of the U.S. dollar and decreased the value of $Gold. However, the rate of monetary expansion shown in chart will ultimately come to dominate U.S. dollar's value, sending it down by as much as 50%. Gold should rally nicely in such an environment. Talk of dollar deflation is fun and amusing, but do not let such musings keep you from buying Gold!

© 2008 Ned W. Schmidt
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