Last week on February 5, the Australian Central Bank raised interest rates by a quarter-point to 7.00% in an “effort” to rein in inflation.
Two days later on February 7, the European Central Bank [ECB] held rates steady at 4.00% while the Bank of England [BOE] lowered interest rates by a quarter-point to 5.25%.
Both the ECB and the BOE were reported in the mainstream financial press as ‘weighing concerns’ of inflation against those of a global economic slowdown.
These actions along with this reporting, taken together, almost makes you want to believe that interest rates are the sole determinant of inflation, eh?
Sadly, almost everyone believes this, usually because some accredited news outlet like Bloomberg or Reuters says so. Interest rates, unto themselves, have very little to do with Inflation. Money Growth on the other hand, has everything to do with inflation. This is why the Federal Reserve canceled M3 Money Supply reporting; they quite simply do not want us to know how fast they are growing the money supply because it would make a complete mockery of their “officially published” inflation reports in the 2 – 3% range:
While the Federal Reserve no longer reports M3 money supply data, others like John Williams’ Shadow Government Statistics and Nowandfutures.com continue to do so privately.
For those of you who might be having difficulty grasping the notion that interest rates and inflation are not necessarily co-related, we can look at data from the Reserve Bank of Zimbabwe as a case-in-point:
Interest Rates 31/01/08:
| Overnight | 1200.00% |
| Interbank | 800.00% |
| 91 Day T-Bill | 66.33% |
Inflation Rate – September 2007:
| CPI | 23,808,624.6 |
| M-O-M | 38.7% |
| Y-O-Y | 7,982.1% |
The Reason for the Misreporting
The real reason why the Federal Reserve wants to keep us in the dark regarding money growth is that they are responsible for the creation and oversight of our ‘fiat’ money system.
Fiat Money: Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.
Folks should understand that all fiat money is loaned into existence. Thus, when fiat money is ‘created,’ explicitly, the principal sum [loan] is created out of thin-air, but the interest to be repaid is not. Hence, to service the newly created debt, ever increasing amounts of additional new fiat money must be created. This necessitates an ever-increasing money supply that resembles an ever-expanding ‘inverse’ pyramid:
As you can see graphically, inverse pyramids are inherently unstable and require a delicate balancing act to keep them from toppling.
Apart from that, the picture above illustrates implicitly that the fiat monetary base must expand at a geometric rate.
In a finite world this creates a problem – or a swindle – known as INFLATION, which manifests itself when too much money chases too few resources.
Because the world’s supply of gold is relatively finite -- it’s rare, indestructible and universally desirable -- a rapidly rising gold price has historically served notice that a given fiat money system has grown unstable [folks have lost faith in it as a store of value] and it is about to topple.
This is why champions of fiat money [Central Bankers / Federal Reserve] will stop at nothing to prevent a rapid rise in the price of gold which represents nothing short of a failing grade on their report card.
The preservation, perpetuation and obfuscation of this inverted pyramid scheme is the real reason why the IMF reported their intent to “sell gold” at the G7 meeting in Tokyo this past weekend:
G7 approves IMF gold sales - Italy econ minister
Sat Feb 9, 2008 6:41pm IST
Buyer beware!
Today’s Market
Overseas equity markets began the week on a sour note with Japan’s Nikkei Index falling 189 to 13,017. North American markets fared better with the DOW ahead 57.90 to 12,240, the NASDAQ up 15.21 to 2,320.06 and the S & P adding 7.85 to 1,339.15. NYMEX crude oil futures gained 1.84 to end the day at 93.61 per barrel.
On foreign exchange markets the U.S. Dollar Index gave up .06 to 76.55.
Interest rates were approximately 4 basis points lower across the curve with the benchmark 5 year bond ending the day at 2.65% while the 10 year bond finished the day at 3.61%.
Precious metals ended the day mixed with COMEX gold futures giving up .60 to 923.40 per ounce while COMEX silver futures added .27 to 17.50 per ounce. The XAU gained .83 to 182.08 while the HUI added 1.91 to 445.57.
On tap for tomorrow at 2:00 p.m., Jan. Treasury Budget data is due – expected 15.0 B vs. prior 38.2 B.
Wishing you all a pleasant evening and happy investing!
