Contraction Action

Look up on the wall, there on the floor
Under the pillow, behind the door
Theres a crack in the mirror
Somewhere theres a hole in a window-pane
--Genesis

The observations of 'money printing' by the Federal Reserve continue. Such money printing is thought to be a primary driving force behind the recent rise in gold. Spectres of 1920s Weimar or modern Zimbabwe come to mind.

For the most part, however, the Fed is not printing currency via a 'printing press.' Instead, it is trying to create credit. It is offering cheap credit supply to the banks. However, to pyramid this initial credit supply thru the monetary system requires credit demand by banks and, ultimately, from borrowers.

When the monetary system is functioning 'normally', $1 of Fed credit might be pyramided into anywhere from $10 to $100 of credit via the banking system. Currently, demand for credit is low, resulting in a much lower leverage ratio.

Moreover, money 'velocity' data suggest a marked decline in funds actually being used in transactions. Money is being hoarded by both lenders and borrowers alike.

This is classic deflationary, not inflationary, action.

position in gold