Is Helicopter Ben 'Printing Money' or Not?

Posted by urbandigs

Sun Nov 23rd, 2008 11:16 AM

A: We got a great thread going on over at Streeteasy, discussing the gold trade and whether or not the fed is really printing money or not. It's always nice to have a constructive conversation on these types of topics, without going on tangents. I'm no expert on monetary policy theory but the subject does fascinate me from a trading/investment standpoint. In some crazy way, I feel the deeper my understanding of the dynamics at play here, the better the chance I can position myself and my portfolio to take advantage of the situation I helplessly find myself in. So, is the fed 'printing money' out of thin air? Is hyperinflation the end result? Will fed actions stop the deflationary spiral? Great questions, but for now lets start with the effects on the monetary base and see if the fed is 'printing' or not.

Michael Shedlock over at Global Economic Trend Analysis, has proven to be spot on from before this crisis even started in 2007; the site is a daily must read. I want to go back to a discussion Mish had in SEPT 2007 titled, "Is the U.S. printing money like mad?":

Curve Watchers Anonymous (a group that normally focuses on the yield curve) is asking a different question today: "Is the U.S. printing money like mad?"

That's a good question so let's take a look. For purposes of this discussion we choose to define "printing money" as an expansion of monetary base money.
When most think of 'printing money', they think of helicopter Ben dropping freshly created dollar bills from the air into the economy. Well, its not that simple. When I think of printing money, I think of the actions the fed can do to inject money into the system; these include:

1) Buy Treasuries/Securities via Open Market Transactions / Repos - buying Treasuries from primary dealers, thereby exchanging 'dollars' for treasuries and injecting 'new money' into the system. With all the new lending facilities, the fed has been taking on much riskier securities as collateral in exchange for short term loans. If you look at the fed's ever growing balance sheet (now up to $2Trln), you will see that the amount of treasuries held has gone down, while the amount of riskier securities help shot up.

2) Lowering Reserve Requirements - (similar to #1) in this case, lowering reserves allows more money to flow into the economy; The fed buying securities makes the reserves go up, and thus is called a quantitative ease as the banks supply of reserves rises. Reserves are either in bank vaults or on deposit at the federal reserve

3) Lowering Fed Funds Target Rate / Discount Window Rate - cheaper money usually means more is taken out, borrowed and put into the economy. With credit deflation however, the lowering of these overnight borrowing rates have NOT translated into more loans, given the state of the banks balance sheets and the seizing up of the secondary mortgage markets where MBS were previously traded. The credit freeze resulted in banks hesitant to lend to each other or to riskier borrowers as peak credit is upon us

Back to the discussion. As the fed pursues these measures, where would it show up in the data that reflects the 'printing' effect on the money supply? Mish argues that it will show up in the St. Louis Fed Adjusted Monetary Base, which can be compared to the current CPI data to see if the fed is printing money. I am not about to argue with Mish, because I will lose, and lose bad! Back to Mish's 2007 discussion on the topic, after doing this analysis (Adjusted Monetary Base compared to CPI), allowed him to come to the conclusion that, "...Heck, the U.S. is actually printing well below the CPI". So, at the time, the answer was NO, the fed was not printing like mad!

Which brings us to today, some 14 months later. Lets redo the analysis. Here are two charts, the first is the St. Louis Fed Adjusted Monetary Base dating back to 1970:

adjusted-monetary-base.jpg

Now, lets take a look at the % Change Y-o-Y of the St. Louis Fed Adjusted Monetary Base dating back to 1970:

adjusted-monetary-base-%25-change.jpg

Quite telling isn't is! Look at the spike in the adjusted monetary base resulting from the 18 fed credit facilities, 525 basis points of easing, and expansion of the fed's balance sheet as they dealt with this current credit crisis!

Y-o-Y Monetary Base expansion went from just above 0% to about 33% in 2008! With current CPI -1% in October, and the fed expansion of the monetary base by 33% year over year, not only is the fed printing, it seems they are printing like crazy! Quite a different environment from when Mish addressed the topic late 2007.

Now, again, I am no expert here but I dig learning and I try to absorb as much as possible when I educate myself on topics like this. But its not that cut & dry. Things like:

a) are fed actions sterilized
b) is the fed monetizing the debt

etc., are things that I don't fully understand that may play a role here in determining the full effect of the spikes shown in the above charts. That's why I blog with a comments section and encourage readers to chime in with their thoughts! In my opinion, the fed IS printing its way out of a deflationary spiral with hopes to inflate us out of this mess. The end result may be inflation without assets seeing the normal strength as they would have in inflationary periods (due to regulation, extinct securitization model, credit deflation, 10:1 leverage down from 30:1 leverage, and asset deflation's effects on investor psychology); but that is years away and the fed knows how to handle that (as painful as the medicine may be at the time). Time will tell, for now, the printing, the lending facilities, and the bailout chapters to this story are not finished. Yet the effects are already evident in the adjusted monetary base!

Discuss!

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