Money supply, oil prices and house price falls, and precious metals

Let us dwell on three key US statistics, one of which is no longer published to cover the national embarrassment. The synthetic recreation of M3, the former lode star of monetary aggregates, shows a year-to-date increase of 16.7 per cent. That crudely means there are 16.7 per cent more dollars in circulation than a year ago.

Europe is running around 11 per cent money supply growth so it is pretty easy to appreciate why the euro is worth more against the dollar than it was a year ago. The $168 billion US economic stimulus package this month is just another expansion of the money supply to try to support an ailing economy.

Indeed, the objective is to offset the impact of falling US house prices which are down by 14 per cent across the nation over the past year. Even in the Great Depression of the 1930s house prices did not fall that fast – it is an appalling statistic, and nobody expects prices to stop falling until at least the middle of next year.

However, the cheap money that is being pumped into the economy to offset the housing slump and take the pressure off the banks whose loan books are taking huge write-downs because of the same housing slump, is also inflating commodity prices.

This is like a patient who takes a cure for a headache only to find it endangers another vital organ. Hot money has poured into commodities pushing up food and energy costs in particular. This in turn puts a new cost pressure on US consumers, dampening disposable incomes while at the same time increasing costs for airlines and industry, squeezing margins and imperiling the survival of the weakest.

Now we are asked to believe that this recessionary cocktail is about to turn around miraculously and that growth will return in the second half of the year. Am I missing something here but I do not see a reason for a turnaround? This all seems to point to at best a relief rally as Washington and Wall Street talk markets up in advance of the presidential election.

But 2009 looks like being a second leg for this recession which has a lot further to go. There will be a Wall Street Crash, still lower interest rates, higher inflation, higher oil prices and a lot of personal and business failures, higher unemployment and then perhaps a savior will emerge in a new global economic order. In the meantime, gold and silver will soar alongside oil albeit with the usual market gyrations.