Bet you didn't know...

[Wonk]

...the U.S. monetary base contracted by $211 billion over the last 7.5 months.  That represents a decline of nearly 10% of the total monetary base.

http://research.stlouisfed.org/fred2/series/BASE

Also....revolving credit outstanding (basically cash in credit form) contracted by almost 17% since the end of 2008:

http://research.stlouisfed.org/fred2/series/REVOLNS

Also...the broadest measure of the money supply, M3, has contracted (estimated through reconstruction) about 10%, or $1.5 Trillion (yes, with a T) since it's peak:

http://www.shadowstats.com/charts/monet ... ney-supply

Finally--and what I find particularly interesting--U.S. external debt as a percentage of M3 has grown 500% larger than what it was in 1980.  In 1980, only 6.5% of U.S. debt as a percentage of M3 resided outside U.S. borders.  Currently, 30% of U.S. debt is held outside U.S. borders.  The implication is if overseas investors begin to have second thoughts about holding dollars, those dollars will be coming stateside quickly.

http://research.stlouisfed.org/fred2/series/FDHBFIN

Who says the U.S. isn't a big exporter?  We export debt!  Is it any wonder QE2 is here?  The world economy doesn't grow unless the U.S. feeds it more dollars. 

[Storm]

Good catch Wonk.  There is a lot of deflation going on right now due to credit tightening and fake equity being removed from real estate.  QE2 is just an attempt to print enough money to counteract that deflation.

What I don't really understand is why gold is going parabolic...

[MediumTex]

Good catch Wonk.  There is a lot of deflation going on right now due to credit tightening and fake equity being removed from real estate.  QE2 is just an attempt to print enough money to counteract that deflation.

What I don't really understand is why gold is going parabolic...

These bank reserves are sort of like a pile of kindling.  For a variety of reasons it is accumulating but not making it into the economy.  The Fed is tossing sparks into this pile of kindling, hoping to get something going.

I think that gold is sensing what could happen if one of those sparks actually starts a fire.

Remember, too, that gold is not about current inflation, it's about current perceptions of future inflation risk.  These perceptions of future inflation risk can get pretty wacky (like all perceptions of the future can).

[Wonk]

These bank reserves are sort of like a pile of kindling.  For a variety of reasons it is accumulating but not making it into the economy.  The Fed is tossing sparks into this pile of kindling, hoping to get something going.

I think that gold is sensing what could happen if one of those sparks actually starts a fire.

Remember, too, that gold is not about current inflation, it's about current perceptions of future inflation risk.  These perceptions of future inflation risk can get pretty wacky (like all perceptions of the future can).

IMO, gold is reacting to increasing danger within the system.  Remember, the gold market not only prices in future expectations of inflation but also risk of outright sovereign default.  If the Fed is not successful in stimulating a low-inflation--moderate growth environment, U.S. tax receipts will not be able to keep up with deficit spending.  In a deflationary environment, the real burden of debt compounds on itself and financial judgement day accelerates from the future into the present.  At this point expectations are that the Fed will withdraw liquidity from MB when inflation picks up.  My question is--what happens when inflation picks up but without growth?  Will they have the stones to pull liquidity in such an environment in order to defend the dollar?

To say the Fed is juggling the economy on a high wire is an understatement. 

[MediumTex]

IMO, gold is reacting to increasing danger within the system.  Remember, the gold market not only prices in future expectations of inflation but also risk of outright sovereign default.  If the Fed is not successful in stimulating a low-inflation--moderate growth environment, U.S. tax receipts will not be able to keep up with deficit spending.  In a deflationary environment, the real burden of debt compounds on itself and financial judgement day accelerates from the future into the present.  At this point expectations are that the Fed will withdraw liquidity from MB when inflation picks up.  My question is--what happens when inflation picks up but without growth?  Will they have the stones to pull liquidity in such an environment in order to defend the dollar?

To say the Fed is juggling the economy on a high wire is an understatement. 

I agree.

I often say that gold is not an inflation hedge, but rather an uncertainty hedge.  Here's the key to reconciling this perspective with the conventional wisdom that gold is an inflation hedge--inflation and uncertainty are like fraternity buddies who like to party together.  Uncertainty being the more committed troublemaker of the two, however, he will sometimes hit the bars a little earlier than his housemate inflation.  Sooner or later, though, if one sees uncertainty out tying one on, it's a virtual certainty that inflation will show up before the night is over.