Saville vs. North, Part 2: What Policy Has the Federal Reserve System Been Pursuing?
April 16, 2008
The following is important mainly because it is important that investors understand Federal Reserve policy. If they misunderstand what the FED has been doing, then they are likely to lose money.
On February 18, I published an article on Federal Reserve policy. I pointed out that the FED was not inflating, contrary to the hard-money newsletter industry. You can read this report here:
On Monday, March 15, I ran an article on how to short gold to protect the value of your coins, so that you do not have to sell your coins. Gold reached $1,030 on the spot (cash) market intra-day. On March 16, I ran an article on how base metals had collapsed on Monday, and that gold was next. On March 18, I ran an article on what to do if gold's price fell sharply. I made this available to everyone. I did not restrict it to members only.
On that day, gold's price fell sharply.
In response, Steve Saville wrote an article saying that I do not know what I am talking about. It was posted on April 1. The price of gold had not recovered. He wrote:
As evidenced by the following charts, M1 -- a very narrow measure of money supply that tends to move in synch with the monetary base -- has essentially gone nowhere over the past three years, while MZM, a more comprehensive measure of liquid money supply within the economy, has experienced a parabolic increase. For some reason unknown to us, Mr. North is fixating on ultra-narrow monetary aggregates such as M1 while ignoring the broader, and more useful, measures of money supply.
The word "fixate" is highly pejorative. According to the on-line Merriam-Webster dictionary, a fixation refers to the following:
the act, process, or result of fixing, fixating, or becoming fixated: as a: a persistent concentration of libidinal energies upon objects characteristic of psychosexual stages of development preceding the genital stage b: stereotyped behavior (as in response to frustration) c: an obsessive or unhealthy preoccupation or attachment
So, Mr. Saville decided to use rhetoric on me rather than respond to my detailed arguments. I was "fixated." I am obsessive. Furthermore, he spoke of "some reason unknown to us...." Unknown? I was quite clear about my preference for M1 over M2, M3 (now defunct), and MZM. Only M1 has come close to predicting the future move of the CPI (consumer price index).
I wrote a long analysis of this in April, 2007. I compared the predictive accuracy of all four Ms. I posted it for my site's members. I also referred to it in my original February 18 article. Why didn't Mr. Saville at least read it? That was the core of my analysis. You can read it for yourself:
So, I responded to Mr. Saville in detail. In order to make my central argument unmistakably clear, I used bold face.
If you use anything except M1 to predict the future movement of consumer prices, you will be wrong -- not a little wrong, but seriously wrong. If you use MZM, you will predict high price inflation that never arrives -- not in two decades of bad forecasts.
I made my point unmistakably clear.
M1 was by far the most accurate predictor of the consumer price index. M2 predicted greater price inflation, M3 predicted much greater price inflation, and MZM was by far the worst. It predicted price inflation almost three times higher than what occurred.
I then challenged Mr. Saville to answer me. He has now done so. He did so by using the old debater's trick of ignoring his opponent's central argument. I made it clear what my main argument was: MZM leads to very inaccurate forecasts of high price inflation.
Read his article. Not once does he mention MZM. He does not try to answer my arguments regarding MZM vs. M1.
We didn't make any personal comments about Mr. North's analytical ability in our previous report -- we took issue with one aspect of his analysis, not with his overall analytical ability -- and won't do so now. In other words, we aren't going to respond in kind to the above-linked article.
Mr. Saville has no analytical response. He may think calling me "fixated" was not making a personal comment on my analytical ability. He is wrong. It was an insult, and if he did not perceive this, then he is unfamiliar with the English language. Maybe in Australia, this use of language is part of intellectual discourse. It is not in the rest of the English-speaking world. His tactic is an ancient one: dismiss your opponent with condescending language, and when he calls you to account, play innocent. "Who, me? Perish the thought."
He then assumes what he is supposed to prove: no FED-tightening.
Further to the above, the catalyst for the recent gold correction was most definitely NOT a Fed-driven tightening of monetary conditions (how could it have been when such a tightening never occurred?), but was, instead, largely a consequence of the extreme bullish sentiment that led to the build-up of a massive speculative long position in gold futures.
I suggest that you re-read my original article. I have added more evidence from reputable sources on the absence of any inflationary policy by the FED.
When you read this evidence, you can better assess Mr. Saville's sweeping "refutation" of my arguments in his original attack.
Considering the extraordinary measures taken by the Fed over the past four months in order to inflate (grow the money supply), the idea that the Fed is purposefully deflating (contracting the money supply) is preposterous.
The idea is not preposterous. The evidence describes what the FED has done, and I am not alone in this view among Austrian School economists and others. It is just that I was the first person to point it out, beginning over a year ago.
My job is not to persuade Mr. Saville of economic reality. My job is to keep people from losing money. I have supplied evidence that Mr. Saville's assessment of the cause of gold's rise in price will lose money for those who act in terms of it.
I am not saying that gold will not rise, if and when the FED inflates at double-digit rates. A war with Iran would raise gold's price substantially. But that has nothing to do with MZM.
Mr. Saville made a mistake when he decided to challenge me in print by calling me fixated. I would not have bothered to call attention to his lack of evidence. I would have ignored him. But that is neither here nor there for you. What you need to know is that his promotion of gold as a price inflation hedge, and his use of MZM to prove that extensive price inflation is coming in the near future, cannot be sustained by the evidence.
Look at the chart. Gold went from $850 to $257, 1980 to 2001. MZM went up. Correlation: negative. Gold went from $257 to $1,030, 2001-2008. MZM went up. Correlation: positive. Conclusion: gold and MZM are not reliably correlated.
