Scott Grannis writes in his blog Calafia Beach Pundit (highly recommended) – Money Supply and Panic Update – 9/9/11.


And what does all this tell us?

One: If the supply of dollars is not rising faster than the demand for dollars, then this is not an inflation story that is unfolding. The Fed is not making a mistake. In fact, the Fed has been preemptively supplying plenty of liquidity to the banking system, and that’s exactly what the banking system has needed.

Two: If the demand for dollars and the safety of T-bills and gold is huge, there must be something out there that is scaring the bejeesus out of the world’s capital markets. As I’ve been detailing in recent posts, everything points to the Eurozone sovereign debt crisis as the proximate cause for the panic that has overtaken markets in recent weeks. Governments all over the world have grown too big, too fast, and they have squandered the proceeds of all the debt they have taken on; the Eurozone is just the first to be forced to come to terms with this reality.

Three: If there’s one big thing lacking right now in the world, it is leadership. The Greeks need to shut up, grow up, and tighten their belts, or just admit that they are scoundrels and default. The ECB needs to stop trying to bail out the slackers in the eurozone, and maybe that means letting some banks fail; after all, bank failures are not the end of the world. Obama needs to channel Clinton and triangulate, and stop trying to blame the Republicans and the Tea Party for the results of his abysmal economic policies. California’s Gov. Brown needs to just say NO to the unions and their demands for outrageous retirement benefits—let’s have some public sector austerity, please.

HKO comments:

Perhaps the ultimate burden of a reserve currency is the accommodation of the demand for security. Other sound currencies like the Swiss franc are refusing or unable to accommodate the demand for their money.  The Fed is betting that they can destroy the supply of dollars created to end the financial crisis when a real recovery ensues to prevent excess inflation. This was already uncharted territory, at least in the quantities we now face.  Now they must accommodate a huge demand for dollars from abroad seeking security.  Is there a risk that this huge creation of dollars abroad cannot  be controlled when the time comes? If Bernanke can accomplish this he may make the ‘genius’ of Greenspan look like a cashier at a Dollar General Store.

It remains supremely ironic that just as we have elected an administration that has sought to emulate the social and economic policies of Europe, that Europe is collapsing under the weight of its socialistic system .

Regardless of how we arrived at our position, it will take extraordinary measures to extract us from this quagmire while retaining social order.  The Fed was designed to maintain independence because they long understood the difficulty of such decisions in a political realm.  Populist rhetoric and demonization may make legitimate points about how we got into this mess, but they offer little as to how to extract us from it.

We need leaders who can clearly say ‘no’ to worthwhile programs we can no longer afford.

While Europe is swimming in a river of denial, we need to build a bridge over it.  We are living through a period of economic convulsions that will be studied for centuries.