Thursday, April 12, 2007

Sound money, or toilet paper ?

The ABS has the following table online:

Money base M3 Broad money

$m $m $m
2004 37,194 623,049 686,293
2005 38,678 678,292 764,400
(increase) 3.990% 8.867% 11.381%
2006 41,278 747,229 841,134
6.722% 10.163% 10.038%

Money base - comprises holdings of notes and coin by the private sector, deposits of banks with the Reserve Bank, and other Reserve Bank liabilities to the private sector.

M3 - is defined as currency plus bank deposits of the private non-bank sector.

Broad money - is defined as M3 plus borrowings from the private sector by non-bank financial intermediaries (including cash management trusts) less their holdings of currency and bank deposits.

It looks to me as if the Australian Federal Reserve has been pumping out money recklessly and as the Austrian school warns us, this results in huge mal-investments which will eventually correct themselves, causing a pretty big shock to the economy. After watching this video of US congressman Ron Paul warn about the impending recession, it would be wise of people to take heed of these warnings.

The Austrians warn that the first sign of the coming crash is a contraction in the manufacturing sector, and thankfully, that hasn't occurred yet. But when it approaches, gold and metals will be looking very attractive to cautious investors who realise that after decades of inflating the moeny supply, currencies may not be worth the paper it is printed on.