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“The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity of money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
 
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason", causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks…

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr. O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

By Michael Ashton

Preliminary: My column from yesterday didn’t get posted in some of the places it usually does. If you missed it, and if you care, you can find it here.

Stocks probed lower again this morning, with the S&P bouncing again off the 1040 mark. I suggested before my vacation that the 1046-1070 range was the “indecision zone,” while below that level it would be obvious to all that further declines are in store. It is starting to look more like the narrower 1040-1046 range is the Maginot line that the bulls are defending and the bears seeking to overrun. The data were supportive at the margin, with Consumer Confidence actually rising – but that was only because the “expectations” component rose from 72.5 from 67.5. The “present situation” component, which is the one that is actually correlated with stuff, fell to 24.9 from 26.4, and the “Jobs Hard To Get” subindex (which is correlated with the Unemployment Rate) rose to 45.7, the highest level since March although the chart below makes it plain that this is better considered to be a range trade itself.

Well, jobs ARE hard to get, after all.

The long end of the yield curve was well-bid out of the gate, and the curve flattened with the 10y yield falling to 2.48%.

By JR Nyquist

On 3 December 2007 a curious item appeared in the Russian media. It concerned Igor Ivanovich Sechin, a Russian political figure close to then President Vladimir Putin. Kommersant featured a quote from Oleg Shvartsman, head of the Financial-Industrial Group: "For us, the Party is represented by the power bloc headed by Igor Ivanovich [Sechin]." This statement was offered in response to a journalist's question about Shvartman's strategic task of velvet re-privatization. "Who set this task for you?" asked the journalist. Shvartsman's extraordinary answer slipped inadvertently from his post-Soviet lips: "The party! (laughing)."

By Clif Droke

When Bert Dohmen talks, smart investors listen.

In 2007 when most investment analysts and economists were downplaying the developing credit market troubles, Bert warned investors that the probability was very high that the troubles would escalate into full-blown crisis and would produce a crash of historic proportions. He chronicled the developing credit crisis in the pages of his newsletter and also published a book in early 2008, Prelude to Meltdown, which provided his insightful views on the emerging crisis in depth. The book will surely go down as a landmark written by a financial visionary who was several steps ahead of his peers.

It's has been a while since I have checked in on foreign purchases of US financial assets. It's time now for a number of reasons. There are a few primary "messages" of importance as we listen to what the current data has to say. The International Capital Flow stats for June were released by the US Treasury recently. Only the highlights, we promise. First, over the last twelve months the foreign community has purchased $940 billion of US financial assets. Close to 82% of this number was directly driven by US Treasury purchases. The chart below chronicles the twelve month moving average of foreign purchases of US Treasuries over the last few decades. Of course we've never seen anything like the trajectory of these purchases over the last year that has clearly been vertical in nature. You know how vertical charts end, and it's usually not a pretty sight. Of course the unknown is timing, so that’s a story for tomorrow. So although many in the press highlighted the sale by China of roughly $100 billion in Treasuries over the last year or so, we suggest that contextually that number for now is a rounding error in the greater scheme of ongoing foreign capital flows up to this point.

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