Submitted By M2 is calculated by totaling up the value of cash held by the public, checkable deposits, household savings deposits, small time deposits, and money market mutual funds. M2 is an important economic indicator used to forecast inflation. If you have too much money or M2 awash in the economy chasing too few goods and services, the result is higher inflation.
Since the start of this global economic crisis, the U.S. government has been injecting massive amounts new currency into the financial system to prevent deflation and stimulate economic growth. This is referred to as reflation.
This large injection of currency into our economy will certainly lead to higher inflation, which will be further amplified due to our fractional reserve banking system. In a fractional-reserve banking system a new sum of money is created whenever a bank gives out a loan. Here’s how it works…
A U.S. based bank is required to keep only 10% of deposits in reserves. They can loan out the remaining 90% of the deposits. This money multiplier effect tends to enlarge money in circulation by tenfold. For example, if you deposit $10,000 in a bank, the bank is required to keep only $1,000 of your money on reserve and it can lend out the remaining $9,000.
Essentially, the bank has turned $10,000 into $19,000 by giving you a $10,000 credit on your deposit and then lending the additional $9,000 out to someone else.
Now, if the bank does this over and over, your original $10,000 deposit can become $100,000 under our 10% fractional reserve banking system. Here’s how:
You deposit $10,000–The bank loans someone else $9,000
That person deposits $9,000–The bank loans someone else $8,100
That person deposits $8,100–The bank loans someone else $7,290
And so on…
Eventually, your initial deposit of $10,000 can grow into $100,000 under a 10% reserve requirement. Every new dollar that is injected into our economy can essentially become ten dollars.
Bottom line: The massive amounts of new currency being dumped into the U.S. economy will be multiplied under our fractional-reserve banking system, which will lead to higher inflation. This will be a disaster for savers, whose nest eggs will be devalued. But it can be quite profitable for those who are prepared.
What is the reflation trade?
We will see a large spike in prices for goods and services when we finally emerge from this global economic crisis, which could be within a year. Hard assets like oil, gold and agricultural products will see substantial price increases in the coming high inflationary environment. Commodities will be one of the strongest sectors over the next decade or more.
This huge underpinning force in the equities markets opens up an once-in-a-lifetime trading opportunity. Here are my top reflation plays:
HAP - This ETF closely tracks the Hard Assets Producers index which consists of over 250 companies engaged in the production and distribution of hard assets and related products and services.
GLD - This gold tracking Exchange Traded Fund (ETF) mirrors the price of gold.
SLV - This silver tracking ETF mirrors the price of silver.
DBA – This ETF tracks widely traded agricultural commodities like corn, wheat, soy beans and sugar. As agricultural prices rise the price of this ETF goes up.
MOO – This ETF comprises a basket of companies engaged in various sectors of agribusiness, like agricultural chemicals, livestock operations, agricultural equipment and ethanol/biodiesel.
PCL – One of the best timber producer stocks. Historically, timber prices have done exceptionally well under inflationary circumstances.
FCX - Freeport McMoRan is one of the world’s largest copper producers. This stock goes up when copper prices rise.
XOM – Buy Exxon Mobil stock to invest in oil. XOM is well positioned to benefit from higher crude oil prices and is one of the best managed companies in the energy sector. XOM has increased its dividend for 26 consecutive years and has excellent earnings, dividend growth and stability.
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