Fed Pumping Money into the Economy
This is a very good catch, and an underreported story. The Federal Reserve in the US is surreptitiously pumping money into the economy, fueling cash available for speculation. This is propping up the economy in the near term, especially in light of the contuing decline of the housing market, but it may not be sustainable. The Big Picture blog has the details. Bottom line:
This is a classic case of "ignore what they are saying, because what they are doing is speaking so loud:" While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.
Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives -- even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand -- print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.
Its not just the increase in Money Supply that should be concerning to investors -- its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?
Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.