I was looking at some data from the time right before our present economic situation began.  Here is the Federal Reserve’s H.4.1 balance sheet from March 1, 2007:



Notice how the Fed held $780.79 billion of US Treasury securities as assets.  Also, notice how the Fed had liabilities of $770.96 billion in “Federal Reserve notes, net of F.R. Bank holdings”.

This tells us that there was almost $771 billion of “base” money actually circulating in the economy back in March, 2007.  More importantly, it also tells us that the ENTIRE source of the “base” money was from US Treasury securities.

Banks around the nation used the “base” money and leveraged it up by a factor of 10 through loans.  The total leveraged money supply was about $7.3 trillion, as can be seen from this graph (look at March, 2007):



This graph (MZM) measures the total amount of money in circulation plus all demand deposits. The total amount of the money supply in 2007 was less than the allowed 10: 1 that is supposed to govern banking. Everything was “normal”.  Yes, our economy was (and is) entirely debt-based – but the numbers made some sense.  All “base” debt was created by the US government.  All “base” money was created by the Fed , being backed by US government Treasury securities.

Let’s see what’s happening now.

Here’s the Fed’s H.4.1 balance sheet (assets) from last week:



Notice how the Fed holds about $776.6 billion of US Treasury securities as assets.  From this, we could deduce that the Fed probably has less “Federal Reserve notes, net of F.R. Bank holdings” than this – or about the same.

Here’s the liabilities section of last week’s H.4.1 report:



We can see where “Federal Reserve notes, net of F.R. Bank holdings is $884.45 billion!

Here’s the question.  What ELSE is making up our “base” money supply besides US Treasury securities?

It gets worse.  Here’s the current MZM chart showing the total money in circulation plus demand deposits:



Notice how it is around $9.5 trillion.  This shows that banks are leveraging above the 10:1 ratio (around 10.75:1).

The question remains, what is the Fed using as a “backing” for some of the money it’s putting into circulation if it’s not US Treasury securities?
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Watch for these indexes to drop:

Chinese Shanghai Composite Index: 3,215.55 (change of 1.57% from July 20, 2009 base value of 3,266.92)
Shenzhen Stock Exchange Component Stock Index (SSE): 13,204.19 (change of 1.32% from July 20, 2009 base value of 13,381.22)
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Here are today’s numbers for the economic indicator:

1) Gold = $1,141.50
2) Silver = $18.66
3) Dollar Index = 76.77
4) Oil = $79.21
5) S&P 500 Index = 1,148.46
6) 3-month Treasury Bill yield = 0.05
7) 3-month OIS = 0.14

HEI = 30.86

(A value of under 100 indicates deflation, while over 100 indicates inflation – as referenced to Sept. 12, 2008…the day before Lehman Brothers collapsed)



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Here are the numbers for the day:

Dollar Index adjusted indexes:
Dow = (10,710.55) x (0.7677) = 8,222.49
S&P 500 = (1,148.46) x (0.7677) = 881.67
Nasdaq = (2,316.74) x (0.7677) = 1,778.56

3-month Treasury: 0.05

2-year Treasury: 0.91

10-year Treasury: 3.73

30-year Treasury: 4.61

2-yr vs. 10-yr Spread (Target > 273): 282 basis points – (Danger Zone)

2-yr vs. 30-yr Spread (Target > 369): 370 basis points – (Danger Zone)

3-month LIBOR: 0.25

3-month EURIBOR: 0.68

3-month OIS: 0.14

TED Spread: 20 basis points

LIBOR/OIS Spread: 11 basis points

Dollar Index: 76.84

Volatility Index: 17.75

JPY-EUR Exchange Rate (Target < 115): 132.1959

JPY-GBP Exchange Rate (Target < 145): 148.818

JPY-USD Exchange Rate (Target < 90): 91.135

USD-EUR Exchange Rate (Target < 1.25): 1.4506

USD-CNY Exchange Rate (Target > 7.0): 6.8272

Warmly,

Brad

Comments or questions?  brhamill@hamill.com

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