Who will save China? Part 2

There's a few things I didn't cover in my last post on China, so here is part 2...

On Australian SBS show 'Dateline', there was a piece on "China's Ghost Cities"



Related to video above, Business Insider reported in late 2010:
"There Are Now Enough Vacant Properties In China To House Over Half Of America"

Recent statistics show that there are about 64 million apartments and houses that have remained empty during the past six months, according to Chinese media reports. On the assumption that each flat serves as a home to a typical Chinese family of three (parents and one child), the vacant properties could accommodate 200 million people, which account for more than 15% of the country’s 1.3 billion population. But instead, they remain empty. This is in part because many Chinese believe that a home is not a real home unless you own the flat.

And so people prefer buying to renting, and as a result, the rental yield is relatively low.

Consultancy firm McKinsey's believe this trend will continue with China expected to build 50,000 skyscrapers in the next 20 years. The figures translate to 2,500 skyscrapers each year, more than 200 every month, almost 50 a week. (The definition of a skyscraper is a build at least 80 metres tall)


Satellite Images Of The Ghost Cities Of China

"There’s city after city full of empty streets and vast government buildings, some in the most inhospitable locations. It is the modern equivalent of building pyramids. With 20 new cities being built every year, we hope to be able to expand our list going forward."

Chinese Property Charts
source: Business Insider
Outstanding real estate developer loans are up 50% in two years

Price Spike - home prices in Haikou have jumped 54% in one year

Nationwide there has been a 140% house price rise from 2007 to beginning of 2010

Price to Income

Price to Rent

A sign of systemic risk: local governments now rely on land auctions for revenue


China's State-owned enterprises (SOEs) are the leading cause of over investment in property


China's SOEs

Property Developers in bed with Government is a recipe for disaster (just ask New South Wales Labor!). In China about 50 per cent of local government revenues come from property development. In other words, in China (and to some degree in other countries like Australia), local, state and Federal Government is addicted to property development to fund Government budgets.

As John Lee states
The favouring of SOEs (and suppression of the domestic private sector through capital deprivation) is a key pillar of how the Communist Party maintains its economic dominance and relevance at grassroots levels.

To put some numbers on China's property growth,

bank lending of domestic fixed-asset investment, expanded from US$750 billion in 2008 to US$1.4 trillion in 2009 and US$1.2 trillion in 2010. The 2011 target is US$1.1 trillion. Despite weekly direcectives by Government officials, Chinese banks lent an estimated US$220 billion in January (2011) alone. Three-quarters of the capital goes to state-owned enterpises (SOEs) overseen by thousands of local bank branches.

As I've stated several times previously, all property bubbles eventually burst. China's bubble is unrepresented and makes the US sub-prime property bubble look like a grain of sand on the beach.


China's Inflationary clampdown

Inflation is becoming more prevelant worldwide as the US floods the world with paper dollars, and national governments embrace debt to uphold promoised social security systems.

In China, Neils Jensen, from London-based Absolute Return Partners, argues that China is "massaging" its numbers.

"Official figures show that inflation eased 4.6 per cent in December 2010, from November's 5.1 per cent, but anecdotal evidence suggests the actual inflation rate. particularly in the big cities, is running closer to 20 per cent.

What's more, the Chinese have also taken the extraordinary step of reducing the weight of food in the consumer price index - at a time when sharp rises in food prices mean that households are likely to be spending even more of their income on food.

"when the Chinese ultimately bite the bullet and force the economy to slow down meaningfully (and I believe it is a question of when, not if), the biggest victim is likely to be commodity prices, and none more so than base metal prices, which in recent years have been highly correlated to the fortunes of China."

source: Business Spectator

On 4 April 2011 it was reported that the Chinese government was putting direct pressure on major companies to resist passing on inflationary pressures to consumers. ie. the Chinese government is increasingly relying on administrative price controls to stop inflation (but these will never work!)

Last week, Chinese shoppers emptied supermarket shelves of items such as shampoo, soaps, and even instant noodles, after state-owned media reported that major companies - including Unilever and Procter & Gamble - were planning to lift prices by 5 and 15 per cent from the beginning of April.

Alarmed by the reaction, the National Development and Reform Commission (NDRC) – the country’s economic planning agency – contacted the companies, urging them to exercise price restraint.

Other Chinese companies including Liby, a leading detergent producer, and Tingyi, which produces half of China’s instant noodles, also agreed to delay planned price rises.

The Chinese authorities are clearly worried that rising prices – particularly for essential goods such as food – could trigger increasing social and political unrest. Food prices rose 11 per cent in the year to February, more than twice the 4.9 per cent in the overall consumer price index.

source: Business Spectator

Place your bets. China is in trouble for ignoring basic economic laws. Like gravity, they cannot be defied through government decree.

~ Scott

The mother-of-all bounces

Last November I posted on the mother-of-all-crashes Through a couple of graphs I detailed why the Australian and US sharemarkets were falling at a faster rate than the great sharemarket crashes of 1929. After the post, the Aussie market drifted sideways for a few months before falling even lower to below 3100 (March 09), for a total peak to trough fall of 55 per cent.

Now, a year on from that post, we have witnessed, perhaps, the mother-of-all (dead cat?) bounces, in an 8 month period from mid-March 2009 to mid-October 2009, the All Ords has rebounded some 56 per cent from the trough (see chart below).

Chart 1: All Ords - crash and bounce
The rise or fall of the All Ords is largely attributed to the big 4 Australian Banks and BHP. The big four banks account for 21.47% of the All Ords, while BHP accounts for 10.15%. If you compare the chart below (Financials Index) with chart 1, they are a mirror image of each other.

Chart 2: The Big 4 banks led the All Ords crash, and now the recovery. Notice the % fall and % rise similar proportions to Chart 1 (XAO)
No other area in the Australian economy has done as well as the Big 4 Australian Banks. They now have combined market capitalisations which exceed the pre-GFC crash. Through help of the Government, they have increased their monopolistic position in lending. For reasons unknown, the Australian Government and ACCC allowed Westpac to buy St George Bank (no. 5 bank), and Commonwealth Bank to buy BankWest. In early September 2009, the Australian Prudential Regulation Authority figures reported that the big four lenders captured almost 100 percent of the $7 billion in new mortgages written in July 2009, squeezing the small lenders out of the mortgage market. Before last year's funding freeze in global markets, the big four banks' share of new mortgages was running at about 60 per cent. Some day soon, just like in the US, we will be having the “too big to fail” debate in Australia. The Australian banks are sitting on the mother-of-all housing bubbles, which is staying upright for now due to unprecedented net migration and government stimulus intervention (see further below). Give it a couple of years, the Great Australian Housing Ponzi Scheme will eventually run out of buyers.

Like the Aussie market, most world markets have bounced, including the Dow Jones (US). As the following chart demonstrates the length and magnitude of this bear market bounce is unprecedented when compared to the Great Depression bear market rallies.

Chart 3: Depression-era bear market rallies (Dow Jones)
source: Chart of the Day

The three charts above give us a clue about the state of the world economy (and I would argue, the state of the US-centric monetary system). Extreme volatility is in full swing.

USD-AUD Exchange Rate

No better example of extreme volatility in the system is the USD-AUD exchange rate.

Chart 4: In 16 months the AUD has gone from almost parity with the USD, crashing 39%, and now rebounding 56% from the lows at 60 cents
So what has changed?

Nothing, nothing has changed. The fundamentals are still broken. The US is still trading insolvent and an aging population will ensure most Western Countries will pursue a path of monetisation (going into more debt) to pay for the welfare state. What has changed is two things:

Inflation and Timing

During the GFC we were constantly told of deflation (decreasing prices). However, during this time I argued that inflation was and will remain our greatest concern. In the middle of the GFC (June 08), Australia's money supply growth was at 23 percent (annualised), the highest rate since the mid 1970s. I ask.. is it any wonder that it appears Australia is such a buoyant economy right now? We inflated our way through the GFC. Another angle is that we populated our way through the GFC (see chart below). If you add more citizens to the economy, there is greater demand on food, housing and general consumption. Add Government "free" handouts, and the warm fuzzy experience we feel aobut our "resilient" economy was all-but inevitable. To the contrary, I believe this is making a bad situation worse, at least for the long run. The artificial wealth effect continues.

Chart 5: Inflate and populate out of financial crisis! Australia net migration since 1860. You would think there was a gold rush on...source: ABC News, Alan Kohler, 23 Sept 2009

The other difference at play here is timing. During the GFC, the All Ords, Dow Jones and even world trade (click to see charts) were declining at a faster rate than what they did during the 1929 crash. The rate of fall was just unsustainable. It's the law of the markets... or like bouncing a tennis ball. If you bounce it hard on the ground, its going to bounce back to some extend. In market terms, this is called a dead cat bounce (however some stocks fall and just don't bounce...). Timing is everything. For instance BHP was almost $50 per share prior to the GFC crash, than fell to $21 seven months later. Same company, and arguably the fundamentals of BHP were stronger than ever. The difference is market mood. Perceptions of value change over time.

Dow-Gold Ratio still falling

One of the key indicators I keep an eye on is the gold-dow ratio. When we price the world sharemarkets against gold, the downward trend is still well intact. Historically the Dow-Gold Ratio goes to below 1 when gold becomes very expensive relative to the sharemarket (Dow). There is still a long way to go... Gold is very cheap at US$1,100 oz!

Chart 6: What bounce?
source: Chart of the Day

Money can be made in all market conditions. Volatility in the markets in the last two years is telling us something is happening. Short-term it may appear that everything is back to normal. This couldn't be further from the truth. Measuring the share market and housing markets (and other debt-based markets) in terms of a tangible good (ie. gold) tells a very clear non-volatile storey. The long-term fundamentals have not changed, but arguably getting worse year by year, as Government and banks continue to fuel the fire with more fuel (inflation).

Cheers
Scott

(feel free to comment!)

The Inflation vs. Deflation Debate

There are a lot of articles going around about whether the world economy is facing Inflation or Deflation. Here is my take on the situation.

It’s asset-deflation

Deleveraging of financial assets worldwide has been driving short-term deflationary pressures on world money supply. I label this as asset-deflation or debt-deflation. Deflation has a snowballing effect. It comprises of:

a) Illiquidity. When buyers hit the sidelines on expectations that prices will fall lower in the future.

b) Spreads Widen. With buyers drying up, the difference between what the nearest buyer is willing to pay and what the seller expects to get paid widens. For example, someone may believe their house is worth $500K, but the nearest buyer is now at $400K, causing a spread of $100K. In other words, the house is only worth what the nearest buyer is willing to pay!

c) Many sellers exit the market at almost any cost. In a rising market, buyers out bid each other to acquire an asset. In a deflation environment, many sellers are forced into a position to sell to the nearest buyer (even though it may be vastly under what they believe their asset is worth). There doesn’t need to be many sellers in an illiquid market to make prices fall sharply (just like a lack of buyers). For example, if someone forecloses on their mortgage, the bank will offload the property back onto the market and get what ever it can. As unemployment rises, mortgage default rises, the quantity of surplus properties in bank hands rises. This causes more asset-deflation.

Baby Boomers

More so in the future, demographics will be a major influence on asset-deflation. The Baby Boomer generations is the largest living generation in the United States, Australia and many Western economies. As they move into retirement at the end of their working life, many will sell down their properties, businesses, and shares (held in the Superannuation accounts). However the following generations will be unable to match this selling pressure as they are starting our/half way into their working life. This factor alone will ensure the next 20 years will be vastly different to the last 20 years for financial (DEBT) driven assets.


Asset-deflation should be embraced

Prices have been lifted artificially high for too long, and now the market forces are accounting for misallocation of capital.

Governments, central banks, commercial banks and individuals fear asset-deflation. This is why the Australian Government is guaranteeing deposits, the States debt, forming a Rudd-bank (commercial property fund). The aim of the Federal Reserve (and central banks worldwide) is to ensure property has soft landing so people feel wealthy again. They now want to prevent massive asset bubbles from bursting as it will destroy the artificial wealth effect.

artificial wealth effect - the general population get angry when food prices, rent prices continually inflate (because of an expanding money supply), but also dislike when the sharemarket and property values fall in price (again, due to an expanding money supply). We can’t have it both ways.

Historically property prices are said to double every seven years. What is never mentioned is how much the money supply has grown every seven years, or how our purchasing power has decreased every seven years. For example, if you buy a property for $100K in 1988 and sell it for another house in the surrounding suburb, you would have to pay around $100k for a similar house. Come forward to 1998, that same house is now worth $200K, but if it were sold, you would still have to buy a similar house in that area for around $200K. House prices have doubled in this 10 year example, but overall purchasing power decreased as the M3 money supply more than doubled. This is an artificial wealth effect.

A couple more points. The 1970s and 1980s were ideal times to acquire and invest in property and the sharemarket. The market was in a Debt-cycle. From 1982 to 1999, commodities were largely lousy investment and lost purchasing power. The two cycles have an inverse relationship. We currently remain halfway through an average commodity cycle. The purchasing power gains will continue to occur for gold, silver and most commodities, while the purchasing power of investing in the sharemarket and property will continue to decrease.


By design the system must inflate

The monetary system is designed to inflate over time and reduce our purchasing power. The system is mathematically designed on an exponential growth curve.
These factors include: fractional reserve banking, mandatory savings scheme, government monetary/fiscal power.


i) fractional reserve banking.
Every time someone signs a new mortgage or a new bank loan, new money is created right there and then. Fractional reserve banking is at the heart of the flaws in today’s monetary system. By design, all debts can never be repaid. Exponential credit (debt) is guaranteed. Therefore many nations, businesses, individuals will remain in spirally debts and bankruptcies.

“The most powerful force in the universe is compound interest” - Albert Einstein

ii) mandatory savings scheme (Superannuation)
Superannuation, Government Funds (such as the Future Fund) artificially inflate asset prices over time as they provide excess liquidity to the market and a guaranteed source of continual investment. By design, these schemes also need asset prices to inflate in price.

iii) Government monetary and fiscal power
The reason we have such extreme volatility in the economy is that Governments central banks, commercial banks try to re-inflate bubbles whenever market forces try to account for bad debts through asset-deflation. Central banks (through monetary policy) around the world are currently lowering interest rates in a desperate attempt to manipulate investor decisions, to draw more financially able investors into the asset-deflation black hole. Central banks/Governments aren’t lowering interest rates so people buy more food or enter the rent market. The monetary framework today is all about saving the PRICE of financial assets (debt).

Through fiscal policy, Governments are giving financial incentives (free handouts - free as in using taxpayer money…), such as the first home owner grant to artificially keep house prices high. In the future (its already happening…), these insentives will be funded by Government-debt.

These actions ensure the longer-term money supply will inflate over time and that debts will become increasingly unsustainable.

iii) a) the US Government is insolvent

The US Government currently has a national debt of US$11.2 trillion. Right now the US Government is spending almost. In 2008, the interest repayments on the national debt is US$431 billion (around 14 percent of the annual budget). When you add future liabilities (of an aging 80 million US baby boomers) such as Medicare, Medicaid and social security – debt liabilities total over US$65 trillion.

The US Government cannot escape its debt situation without borrowing more debt. The Government will never consider reducing Medicare or pension liabilities. The result – more money has to be created, and purchasing power must continue to decrease.


Cause and Effect

Economics is all about cause and effect. Unfortunately many (including our current PM) do not understand both elements.

Fractional reserve banking, mandatory savings scheme and Government monetary and fiscal power are all causes. The consequence is Inflation (loss of purchasing power).

Likewise, many journalists continue to ignore the root causes of deflation, but are fixated on reporting the effects of (asset) deflation. For instance, many are now writing up articles about how wages are falling across many Western economies. Wages just don't fall on their own. Wages are falling as a consequence of something else happening. That is, businesses are collapsing due to DEBT, the drying up of liquidity in markets (including debt markets) and as a result, demand is collapsing. Consequently, as the number of unemployed rise, wages come under pressure as they should.


The CP”lie” – is money supply deflating?

Another mechanism now entrenched in today’s monetary system is the constant dilution (manipulation) of Government statistics. Unfortunately Governments and media are now fixed on the Consumer Price Index (CPI or CP-“lie”). It’s the intention of Governments (and thus the media) that it is possible to sell the idea of deflation through manipulated statistics (particularly CPI).

Currently in Australia, the official CPI rate is 2.5 per cent.


Australia’s money supply is still inflating

In the year to March 2009, Australia's money supply:

Broadmoney 12.4 per cent;
M3 increased by 15.1 per cent;
M1 increased by 8.1 per cent.

There is no deflation in the money supply numbers. It's all on the RBA website. It's the media's fixation on CPI that a drastically diluted scenario is continued to be created. We will never hear what real inflation is doing through the mainstream media.

Chart 1: Exponential curves keep expanding
source: Wikipedia

Chart 2: A chart from my second post last year.
The above chart shows the annual grow rates of Australia's M3 money supply. It's not a conincidence that both the sharemarket and property market continued to bubble in the last couple of years (as M3 grew at a faster rate). Expect M3 volatility like the 1970s over the next couple of years (at least).


Japan’s decade of deflation?

Money supply has consistently increased in Japan during the last couple of decades whilst it has experienced deflationary pressures. Asset prices (property, sharemarket remain well below the bubble levels of the 1980s). As the following chart shows, the inflator mechanisms of fractional reserve banking, monetary and fiscal policy etc have meant that Japan's money supply has continued to grow even those asset prices are still subdued.

Chart 3: But the money supply is still growing?
source: Wikipedia

Japan has already been through much of what the Western World is now facing: significant asset-deflation. (Obviously there were other issues going on such as the zombie banks, several stimulus measures etc which I will go into more depth another time).

Summary:

Assets worldwide are being deleveraged and revalued by the market. Asset-delfation is healthy and should be embraced by Governments, banks and individuals worldwide. The market is accounting for excess money and debt in the system.

In Australia the current CPI is 2.5 per cent p.a., banks are offering around 4 per cent interest for savings. Official M3 data shows overall money supply inflation is 15 per cent p.a.
- Aren’t our savings going dramatically backwards in the bank?
- The RBA shouldn’t be reducing interest rates!

Ultimately when it comes down to the inflation/deflation debate, ask yourself this:

* Will the Australian Dollar (or other fiat currency) increase or decrease its purchasing power in the next couple of years? (in this "deflationary" environment). How much stuff will it buy in the future compared to today. This is the crux of the issue.

Remember there is a huge difference between price and value.

- Scott

Money Supply, Debt, Inflation and Purchasing Power!

Today I detail over money supply and what this means for inflation, purchasing power and the world economy.

What is Money Supply?

- is the total amount of money available in an economy at a particular point in time.
(http://en.wikipedia.org/wiki/Money_supply#cite_note-18)

Money supply used to be backed by a gold standard. However all this changed in 1971 when the Bretton Woods system fell apart. Today money represents debt. The total supply of money is infinite so long as there is debt in the economy. No debt = no money being created.

Money supply and Inflation

To leverage our potential buying power we borrow money (debt) to be able to buy more goods then what we could have done otherwise. However, the first rule in economics is that we have unlimited wants, yet limited resources. So at its most basic level, the more money supply in existence (created from loans), the more money there is competing for food, land, labour etc. This leads to price inflation and increased volatility and uncertainty in the economy. Booms and busts become more extreme.

How do you measure Money Supply?

In Australia the RBA define Money supply as:

M0: currency

M1: currency + bank current deposits of the private non-bank sector

M3: M1 + all other bank deposits of the private non-bank sector

Broadmoney: M3 + borrowings from the private sector by NBFIs, less the latter's holdings of currency and bank deposits

M3 is generally used by economists to estimate the total amount of money available in the economy.

What increases money supply?

Every time someone borrows money from the bank, the money supply expands. If you get a new mortgage for your house, or a margin loan to buy shares, you are helping increase the money supply and you are leveraging credit. Through fractional reserve banking, banks have the ability to make money out of thin air. If the fractional reserve is 9 to 1, you deposit $1,111.12 dollars into a bank, the end result is that the original $1,111.12 can ultimately create almost $100,000 of new money!

Movie: See Money as Debt to understand how our Monetary System works today (part 1 of 5 below)



Governments can increase money supply by spending more than they tax (one of the big reasons for money supply growth in the US). US money supply has expanded significantly in recent years due to a double whammy of tax cuts and increased expenditure.

Central banks try to manipulate money supply through interest rates. Central banks do this by buying and selling government securities (and other financial instruments). Ultimately, central banks can only do so much to influence money supply. As we saw in the US earlier this year when the Federal Reserve cut interest rates quickly and threw a $168 billion stimulus package, there was short-term elation, but has ultimately did little to prevent the stockmarket and property prices from falling much lower.

Only a very small portion of money supply (M0) is in the form of currency (notes and coins) generated by a central bank to meet physical withdrawals. This is usually less than 5% of the money supply.

What decreases money supply?

When someone pays back their mortgage (or other debts), money supply decreases. Money supply also decreases when someone defaults on their mortgage or closes a margin loan account, or the Government reduces expenditure and runs surplus budgets.

Central banks try to decrease the rate of money supply growth by increasing interest rates and providing disincentives for people to take out mortgages, margin loans etc.

Ultimately today's monetary system needs money supply (and consequently debt) to keep increasing for the economy to function.

Australia's Money Supply

Putting some numbers on money supply growth and using Australia as a case study, we can see that historical through-the-year growth in M3 has been very strong.
Cumulative:

- In the year from July-2007 to endJune 2008 M3 increased 23%
- In the last 5 years (to end of 2007) M3 increased 82%
- In the last 10 years (to end of 2007) M3 increased 174%
- In the last 20 years (to end of 2007) M3 increased 563%
- In the last 30 years (to end of 2007) M3 increased 1847%

As at June 2008, M3 totalled over A$1 trillion Australian Dollars.

Chart 1: Australia's historical through-the-year growth in M3.

Betweem 1971 and 1990, Money Supply growth was very volitile and tended to grow over 10% per annum. The 1990s till 2006 growth was between 5 and 10% per annum. It now appears we are heading for volitile times again.A spike in money supply will trickle into increased inflation.

Chart 2: Cumulative growth in M3 (A$ billions). An exponential curve. As MS increases, debts owed increases.



Chart 3: Log scale of Australia's M3 money growth.

Note the elasticity has been quite constant over time.

The US Money Supply

Since 1944 the US Dollar has been the world currency and until 1971 the $US dollar (and consequently currencies around the world) was linked to gold. Removing the link to gold essentially gave central banks around the world a blank check to print as much money as they want, as the amount of gold under vault no longer constrained how much money supply could exist in the economy. Money is now backed by our confidence in Government (whom guarantee coins and notes are legal tender). The paper used in a $50 dollar note is no more valuable then the paper used in a $100 dollar note – the only difference is that the Government assures us that one is more valuable than the other.

Is US Govt trying to hide something?

In March 2006 (see chart 4), the US Government ceased publishing its M3 money supply data. The reason? To save money!?


Chart 4: United States money supply

M3 was well over US$10 trillion dollars in early 2007.

The simple fact is there is so many $US dollars out there today! (remember a very small amount is actually printed notes and coins ie. M0). As the $US Dollar is the world currency, today about 50% of the world's currencies is in $US Dollars, and about 50% of the $US Dollars reside outside the US! So non-Americans have also contributed significantly to the growth of US money supply.

The US Govt is trying to hide the true rate of inflation. As money supply increases, the new money has to find a home. More money becomes available to compete for finite resources such as food and property. This is why there is always bubbles in property markets, the sharemarket etc. as more money is created through larger mortgages, larger margin loan portfolios etc. All this leads to inflation and ultimately hyperinflation. At the top of booms there is often deflation. This is when buyers hold off from buying in the expectation that prices will be cheaper in the future. Those struggling with their finances are are pushed to sell (to clear debts) are forced to sell to the nearest buyer. People may think their home is currently worth A$1 million dollars today, based on recent prices. However it is only worth $1 million if you have a buyer willing to sign on the dotted line. Your $1 million house might be only worth $800,000 if that’s where the first buyer is. This is deflation.

The $US Dollar = smoke and mirrors

We are constantly reminded by the daily news reports that over the last several years the $US dollar continues to depreciate against other world currencies (namely the Euro). However, in the last few weeks all we have heard is about the rising $US Dollar. I'm expecting this move to be a short-term pull-back, with the long-term downward trend to continue on its way.

As the $US Dollar is the world currency, it has been used as a base reference to provide a measure of value. For example, we hear the price of oil in $US per barrel or copper in $US per pound. Exchange rates are always first compared to the $US Dollar before other currencies. This continues to disguise the true value of assets. The world knows the $US Dollar is becoming more and more worthless over time. Many OPEC member countries are pushing for the $US Dollar to be dropped as the reference currency in favour of the Euro or a basket of currencies. OPEC knows the $US dollar is disguising the true value of their oil!

Is it a coincidence most basic food prices such as rice, wheat and corn have spiked dramatically in the last year? Rice has trebled in the last 12 months, yet the number of people eating rice hasn't gone up dramatically compared to say 24 months ago.

Ponder this. As more people in developing countries go from the poor class to the middle class, deposable incomes increase, and consequently the money supply. There is now more money (supply) chasing a finite resource. Add on top of this, there are hedge funds and large institutions in the futures (derivatives) markets, which help push prices higher (fuelling expectations). This all causes a bubbling of price inflation. As people soon realise they are spending more of their income on food, fuel, rent etc, wage demands increase, which economists argue is the main cause of inflation.

It's all about price expectations! If people expect higher prices, they will factor this into their spending habits. People gradually expect that fuel will cost more. Rice will cost more. Steel will cost more etc. If people expect higher inflation, they will ultimately receive higher inflation (and more money supply).

The US dollar has lost about 97% of its original purchasing power (of 1913) to inflation! The Australian Dollar has lost about the same amount of value, as have most other fiat currencies.

The Euro

A quick word on the Euro.

Chart 5: The Euro M3 money supply is fast approaching the size of US dollrs and is now about 9 trillion Euros.



Conclusions and predictions for the long-term:

- Money Supply growth tells us about the future. The faster it grows, the greater price inflation will be - "the new money has to find a home" - in food prices, in rent prices, in commodity prices etc. There is a time lag for this new money to go through the system and find a home.

Australia:
- Australia's money supply is going to expand rapidly between 10 to 25% plus, and should be volatile like in the 1970s due to uncertainties and expectations in the economy.

The World:
- The $US Dollar will continue to depreciate against most world currencies, however compare any world (fiat) currency to gold/silver/oil and they are all falling.
- The true rate of inflation in the $US is much worse then the US Government is publishing.
- Measuring goods in $US Dollars is disguising the losses in purchasing power.
- The Euro is fast becoming the new world currency; however the Euro’s money supply is increasing at an alarming rate.

In the near future I intend to cover off on some key value indicators. Namely: gold/silver ratio, gold/oil ratio, gold/Dow ratio and go into more detail on purchasing power.

Until then,
Scott