Monetary Inflation and Shadow Money, a Primer

I can’t think of three topics that cause more confusion than money creation, monetary inflation, shadow money.
And that’s before trying to calculate money on the sidelines. Here is some reference material that might be helpful:

1. Calculation of Sidelines Money

Check out “Cash on Sidelines” Less Than Investors Anticipate: Goldman:

Investors could be disappointed if they anticipate tons of money waiting to get back into the stock market, since “cash on the sidelines” is much less than estimated, Goldman Sachs analysts said. Based on their calculations, net equity inflow from individuals, institutional investors and corporations over the next several quarters could total $600 billion, the analysts said in a research note on Wednesday. “‘Cash on the sidelines’ is much less than the $3.4 trillion in money market mutual fund assets that market participants typically cite as the No. 1 reason stocks are poised to rally,” analysts wrote.

2. Shadow Money Creation

Credit Suisse analysts Sweeney and Lantz discussed the shadow money supply on May 11, 2009 with Tom Keene at Bloomberg:
This is the research report they refer to in the interview. Click Open in New Window to view enlarge document.

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3. Monetary Inflation

This is an excerpt from the August 2009 issue of SED Profile by Woody Brock that covers all the bases:

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Click Open in New Window to view enlarge document.


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  1. Hi Teresa –
    (2) and (3) show up as large white spaces where there probably should be some text or image. This also occurred yesterday with the volatility clustering report. Is this something on your end? Previously, the new site was working like a charm using Windows Vista.

    • Ron – Maybe you could try a different browser to see if you get the same result. Might also be good to upgrade to the latest Flash player. I’m also running on Vista with the latest Flash and can see everything properly in both IE 8 and Firefox.

    • Ron – Ah, you are right. We have the blank space problem again in IE 8.

    • There seems to be a conflict between the flash MP3 player and the flash documents. I’ve made a link to the MP3 file for now.

    • Hi Teresa –
      Whatever you did, it looks fine now. Thanks.

      • It seems the Flash MP3 player can’t walk and chew gum at the same time. One player and one document is fine, but not one player and two documents. Ugh.

        • Hi Teresa –
          The documents look fine but when I went to the MP3 file my computer just churned and churned although the screen showed that the video was being loaded. Maybe this is what you were talking about?

          • The best way to handle MP3 (a sound file) links is to right click and download the file onto your computer’s desktop. Then click to listen. Or (depending on the browser you use) you may also be able to right click the link and select “Open With…” and choose whatever player you have going on

          • The best thing for me to do is to find the conflict, if possible.

          • Teresa –
            Doing what you suggested (right clicking and opening in new window) works fine. Thanks.

          • Even better, I found a non-flash method of embedding the audio player that also provides the download link. It is working for me in IE 8 and Firefox.

        • Teresa –
          I also just checked the volatility cluster video and that is fine as well.

          • OK, perfect. I guess some people have bandwidth issues while the two flash players cannot walk and chew gum.

  2. Re: Sideline Loot and Woody’s take on “Exits”.
    Very spicy stuff !
    Cooked-up (aggregated) only at your house.
    ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
    In a completely different matter; Cultural Values as hood-ornament.

  3. I’ve read one of the reference you uploaded, I believe it was written by Gordon and about shadow money, which took about two weeks for me to understand that. The shadow money from repo, using either treasury or securities or derivatives has interesting features. One thing intrigued me was that they (bankers) create this kind of money to support their lending, which means the actual reserve money and side money was decreasing (by lending) and the bankers go out to the repo market to get funding (create shadow money). That, kind of, may cause paradoxical outcome, which means small/reduced reserve/side line money is actually supporting equity prices. The opposite view is reduced side line money (leverage as a result) increase high risk of collapse.

  4. Shadow Money very informative. Almost at the end of the interview they mentioned the wealth effect. To me that basically sums it up. It is also what I don’t think Barrack Obama understands. Or he understands it but rejects it in order to promote the democratic agenda.
    In other words his economic stimulus was not immediate and wasn’t given to individuals. It was for government to oversee projects like roads and infrastructure that could take years to be undertaken.
    Meanwhile the money given to banks to lend isn’t being lent because they are having to keep the money to shore up their reserves.
    When the stock market is dong well and individuals see their wealth growing(weather real or paper profits) they spend more. They feel wealthy or good about their financial condition. Of course the oppposite happens when the stock market is going down.
    In order for any real progress to be made people have to have income from some source which for most people means a JOB. Until unemployment is decreased I just don’t see any real gains or progress for the U.S. economy.
    I have had the conversation about inflation to many times and just really don’t talk about it that much anymore. I don’t see any threat of inflation in the near furue because as these men suggest the money is not in the system. It is being held by the banks not being lent. I will start to worry about inflation when people go back to work and have an income so that they can apply for loans.
    Just my opinion on the mess this country is in.

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