Central Banks, Monetary Policy and Inflation Part II
From Gary Dorsch AKA Sir Charts-a-Lot: The Commodity Super Cycle. Great stuff, wonderful charts and a must read, here are some snipets. Now we know why they call him Sir Charts-a-Lot...
How did the Reuter's CRB index reach record levels in the first place? Well consider the Chinese and Indian economies, which also account for one third of the world's population, and the super easy money policies pursued by the big-3 central banks, the Bank of Japan, the European Central Bank, and the Federal Reserve.
Chinese demand for imports has soared by 330% from roughly $15.5 billion per month in early 2002 to a record $64.4 billion in December 2005.
The People's Bank of China increased its M2 money supply by 18.3% last year, issuing more yuan to soak up foreign currency earned through foreign trade and direct investment into Chinese factories from abroad.
India being Asia's fourth-biggest economy expanded 8% in the second and third quarters of 2005. India's industrial production grew at an annualized 8.3% rate between April and November 2005. Only China and Argentina recorded faster industrial production rates of 16.6%, and 9.6% respectively.
Japan 's exports rose 14.7% in November from a year earlier to 5.9 trillion yen ($50.2 billion), the second highest ever, on the heels of the yen's 19% devaluation against the dollar, and 17% drop against the Chinese yuan.
Japanese imports of raw materials have soared 66% to 5.42 trillion yen per month from three years ago, and in turn, providing underlying support for global commodity prices. Japan paid 20% or more for nonferrous metals, crude oil and coal in 2005, which companies are expected to pass on to customers.
The Japanese government claims that consumer prices are just emerging from a seven year bout of deflation. But the Japanese wholesale price index tracks major trends in the Reuters Commodity price index, which has risen 91% over the past four years, for an annualized gain of 23%, much higher than the Japanese wholesale price index of 1.9% inflation.
(We echoed the same concerns about the dichotomy of the US CPI & PPI vs actual commodity prices in Asleep at the Wheel Part I)
Global commodity prices bottomed out in late 2001, soon after the Bank of Japan lowered its overnight loan rate to zero percent, and adopted quantitative easing.
The central bank prints about 1.2 trillion yen ($10 billion) per month to purchase Japanese government bonds, inflating the amount of yen circulating around global money markets. More Japanese yen yielding zero percent, chasing fewer natural resources in turn, leads to sharply higher global commodity prices.
The Japanese ruling elite are devaluing their way to prosperity, by flooding the Tokyo money markets with 32 trillion to 35 trillion yen above the liquidity requirements of local banks. (We commented on the rationale behind this flood of yen in the 35 Trillion Reasons Why Series)
The enormous supply of excess yen pushed Japan's 3-month deposit rate below zero percent for most of 2004. With borrowing costs at zero percent or less, Japanese and foreign hedge fund traders have found the cheapest source of capital to leverage speculative positions in global commodities.
And the Japanese ministry of Finance is not expected to grant permission to the Bank of Japan to begin mopping up some of the excess yen until the second half of 2006, at the very earliest.
For two and a half years, the ECB ignored a 50% surge in commodity prices, since lowering its repo rate to 2.00% in May 2003.
The Euro M3 money supply growth rate was 7.6% higher in November from a year earlier, above the central bank's original mandate of 4.5% growth. Thus, the ECB's quarter-point rate hike to 2.25% in December was too little, too late.
For the past three years, the ECB pursued a policy of "asset targeting", inflating its Euro M3 money supply to lift European stock markets into higher ground, and through the "wealth effect" lift the spirits of the frightened European consumer.
(We commented on the massive 116% US M3 flood since 1996 which has created a similiar "happy daze" climate in Asleep at the Wheel Part II)
Traders should always trust the hard dollars and cents flowing through the commodity markets for real time indications of future inflation, and not government statistics. (Truer words have never been spoken!!!)
One has to question how the Japanese wholesale price index is only 1.9% higher from a year ago, or roughly 3.3% less than the German PPI, when the yen was 6% weaker than the Euro against the dollar last year.
But in an age where ruling parties distort data to serve their own interests, it is hardly surprising that Japan's financial warlords present price indices and inflation data in a manner best suited to their immediate needs. (Hardly surprising considering we are the masters of this practice.)
How did the Reuter's CRB index reach record levels in the first place? Well consider the Chinese and Indian economies, which also account for one third of the world's population, and the super easy money policies pursued by the big-3 central banks, the Bank of Japan, the European Central Bank, and the Federal Reserve.
Chinese demand for imports has soared by 330% from roughly $15.5 billion per month in early 2002 to a record $64.4 billion in December 2005.
The People's Bank of China increased its M2 money supply by 18.3% last year, issuing more yuan to soak up foreign currency earned through foreign trade and direct investment into Chinese factories from abroad.
India being Asia's fourth-biggest economy expanded 8% in the second and third quarters of 2005. India's industrial production grew at an annualized 8.3% rate between April and November 2005. Only China and Argentina recorded faster industrial production rates of 16.6%, and 9.6% respectively.
Japan 's exports rose 14.7% in November from a year earlier to 5.9 trillion yen ($50.2 billion), the second highest ever, on the heels of the yen's 19% devaluation against the dollar, and 17% drop against the Chinese yuan.
Japanese imports of raw materials have soared 66% to 5.42 trillion yen per month from three years ago, and in turn, providing underlying support for global commodity prices. Japan paid 20% or more for nonferrous metals, crude oil and coal in 2005, which companies are expected to pass on to customers.
The Japanese government claims that consumer prices are just emerging from a seven year bout of deflation. But the Japanese wholesale price index tracks major trends in the Reuters Commodity price index, which has risen 91% over the past four years, for an annualized gain of 23%, much higher than the Japanese wholesale price index of 1.9% inflation.
(We echoed the same concerns about the dichotomy of the US CPI & PPI vs actual commodity prices in Asleep at the Wheel Part I)
Global commodity prices bottomed out in late 2001, soon after the Bank of Japan lowered its overnight loan rate to zero percent, and adopted quantitative easing.
The central bank prints about 1.2 trillion yen ($10 billion) per month to purchase Japanese government bonds, inflating the amount of yen circulating around global money markets. More Japanese yen yielding zero percent, chasing fewer natural resources in turn, leads to sharply higher global commodity prices.
The Japanese ruling elite are devaluing their way to prosperity, by flooding the Tokyo money markets with 32 trillion to 35 trillion yen above the liquidity requirements of local banks. (We commented on the rationale behind this flood of yen in the 35 Trillion Reasons Why Series)
The enormous supply of excess yen pushed Japan's 3-month deposit rate below zero percent for most of 2004. With borrowing costs at zero percent or less, Japanese and foreign hedge fund traders have found the cheapest source of capital to leverage speculative positions in global commodities.
And the Japanese ministry of Finance is not expected to grant permission to the Bank of Japan to begin mopping up some of the excess yen until the second half of 2006, at the very earliest.
For two and a half years, the ECB ignored a 50% surge in commodity prices, since lowering its repo rate to 2.00% in May 2003.
The Euro M3 money supply growth rate was 7.6% higher in November from a year earlier, above the central bank's original mandate of 4.5% growth. Thus, the ECB's quarter-point rate hike to 2.25% in December was too little, too late.
For the past three years, the ECB pursued a policy of "asset targeting", inflating its Euro M3 money supply to lift European stock markets into higher ground, and through the "wealth effect" lift the spirits of the frightened European consumer.
(We commented on the massive 116% US M3 flood since 1996 which has created a similiar "happy daze" climate in Asleep at the Wheel Part II)
Traders should always trust the hard dollars and cents flowing through the commodity markets for real time indications of future inflation, and not government statistics. (Truer words have never been spoken!!!)
One has to question how the Japanese wholesale price index is only 1.9% higher from a year ago, or roughly 3.3% less than the German PPI, when the yen was 6% weaker than the Euro against the dollar last year.
But in an age where ruling parties distort data to serve their own interests, it is hardly surprising that Japan's financial warlords present price indices and inflation data in a manner best suited to their immediate needs. (Hardly surprising considering we are the masters of this practice.)
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