After Further Review, Gary North 0, Punk Kid 1

Remember a while ago when I took Gary North to task for dressing down some punk kid* about inflation? Well apparently consumer prices didn't hear the news about shrinking M1.

In his cocky tour de force, recall that North had said:

If he [North's punk kid target] chooses to continue this debate, he has two options: (1) include a link to this article, which will cost him greatly; (2) try to debate without linking to it, which will be an admission that he got in way over his head and cannot get out. ("When you're in a hole, stop digging.")

Either is fine with me.

Of course, he can wait until gold rebounds above $1,000 and the CPI goes back to 4% a year. Then he can try to refute me. But, until then, he would be wise to remain discreetly silent. Too bad for him that his attempted refutation is already all over the Web.

Well, gold was $979 last I checked, and we just had the biggest monthly CPI jump since 1982--over a 14% annualized rate. Get those warm-ups off, junior, you're going back in the game!

* The "punk kid" might be older than me, for all I know. This is purely a functional term.


  1. Anonymous12:38 PM

    Hey Bob,

    Don't count the chickens just yet.

    I was in your camp (although giving you a difficult time about, for the fun of it).

    I fully expected major inflation given that, what I see as the most accurate money supply measure, M2NSA, was soaring at over a 10% annaulized rate.

    However, now M2NSA has collapsed, It is showng no growth over the last two months. I can't recall ever seeing such a dramatic shift. I really think Bernake is clueless. He is really jerkng the economy around with these dramatic swings.

    Note: He is also gettng rid of Fed Treasury paper. It's down from $800 something billion last year to $380 billion now. Last month alone it was down $100 billion. It's this Treasury paper that he has been using to do the bailouts in a non-inflationary manner. Once, he is out of Treasury paper, the only thing he will have left to sell are the Fed office chairs and the Fed's bathroom toilet paper, which means he will be back to printing money.

    Buckle your seat belts, this is a bumpy ride.

  2. If I understand your post, no matter what happens you will be right. If CPI is flat, you predicted it because of M2NSA, and if CPI explodes you predicted it Bernanke is running out of Treasury paper.

    Anyway can you expand on how he's sterilizing the bailouts? People keep saying this but I don't quite get it.

  3. Anonymous5:51 PM

    If I understand your post, no matter what happens you will be right. If CPI is flat, you predicted it because of M2NSA, and if CPI explodes you predicted it Bernanke is running out of Treasury paper.
    Yes, this way I will be correct ex post facto. However, I would prefer having a clear sense now so I can trade the situation, this makes it extremely difficult. No time at the beach for me now, to many undertones in the market.

    As far as sterilization, the term is generally used during foreign currency interventions. Say Japan comes in with huge amounts of yen to buy dollars. This is obviously inflationary if they print new yen to buy the dollars. However, if simultaneous with the intervention, they withdraw yen from the domestic market equal to the new money printed to prop up the dollar, this is known as sterilization. Because it removes the inflation virus (i.e. consequences) of the intervention

    As far as current Fed activity, there's many ways to have a bailout 1. You print money and give it to the financial institutions in need or 2. You can sell off your Treasury portfolio and give that cash to financial institutions. 3.You can print the money and have a direct sterilization by then selling Treasury securities to shrink the Fed money supply by the amount you printed. 4. You can just give the banks Treasury securities in exchange for the junk mortgage paper, which the banks can use by selliing for funds or pretty up their balance sheet. (Hey, look at me, no junk all Treasuries)

    It appears the Fed is using all of these methods, 2 thru 4 sort of lumped together can be considered as sterilization, but #3 being the one that most directly fits the most technical definition of sterilization. As I say, it can be loosely applied to methods 2 to 4 since the Fed is passing out cash or Treasury securities without a net increase in the money supply.

    But, bottom line, the Fed is running out of Treasuries to continue these sterilizations. They had over $800 billion last year, they are down to $380 billion (with a draw down last month of $100 billion!). All this before the Freddie/Fannie crisis. If (when?) the Fed runs out of Treasury securities, this method of sterilization is over. At that point the Fed is down to two choices, 1. print money for any future bailouts and leave it at that, thus dramatically increasing the money supply (highly inflationary) or 2.sterilize the printing, by shrinking the money supply in other sectors of the economy equal to bailout funds supplied (highly destabilizing).

    It should be fun,especially since it appears Bernanke is all over the place, one three month period he's growing the money supply (M2NSA) at a 10% plus annualized rate, then the next two months there is zero growth in the money supply.

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