Pure Spending Power! Rarr!

Let's start with the ballpark idea that our spending power is a combination of money we have in the bank as seen in M2 plus the money we borrow as seen in the total consumer credit outstanding plus the money we borrow as seen in the real estate loans at all commercial banks. It isn't perfect, but it might illustrate a point or two.



It's kind of scary how we fell off the exponential trend line back in 1989, but let's conveniently ignore that for a while. Trust me. You won't even be thinking about it at all by the time you've read the rest of what I have to say.

Let's now factor in the rise of modern mining equipment to meet our spending power needs.



This shows what the aluminum price might be if it all of the world's aluminum was still in existence, we owned it all, and it fully backed our M2, consumer debt, and real estate loans. I've also shown the actual price of aluminum.

And lastly, let's see how stable the system might look under such a scenario. I'll divide the prices as seen in the black line by the actual price as seen in the red line to come up with a ballpark stability proxy. The more stable that ratio is the more stable the system should be, at least in theory.



Let me summarize this a bit for those not quite following along. I know it is complicated. I'm basically suggesting that the growth in the money supply and debt compared to the actual production of aluminum should be enough to actually guess the price of aluminum. That's pretty much what the chart shows from the 1970s to 2008. It just hovers around 7, give or take.

Now for the bad news.

I started with the assumption that our spending power is a combination of the money we have plus the debt we are willing to take on. That's pretend spending power in my world. It's an illusion. I'm retired. I can't spend money like that. My real long-term spending power is the money I have in the bank MINUS the amount I owe.

Cash and credit are not the same things to me. In fact, they are the exact opposites. The more I have now the more I can spend in the future. However, the more I owe now the less I can spend in the future.

Therefore, let's try again looking at cash and credit in a different way. We'll update those three previous charts using a new economic model based somewhat on common sense. We won't think of our spending power as the amount of money we have plus the amount we can borrow. Instead, we'll think of our spending power as the money we have in the bank minus the amount we have borrowed.



Ouch.



Cringe.



Oh my. What a difference a few minus signs make. What are we going to do with all that extra aluminum if this trend continues?

This may seem very complicated, and it is. These are arguably the most complex charts I've done yet. I had to break it into two groups of three to even have a hope of explaining what I am thinking to others, or even myself for that matter.

Unfortunately, these charts are way too simplistic to do our economy justice. This analysis is just a flea on the back of an elephant. It does, however, suggest why I might be more deflationary than most though. A vacuum exists where growth once was, but aluminum production continues on almost as if nothing had happened.

Aluminum is a new hope for the U.S.

In brief: Aluminum production in the U.S. begins to grow at a steady pace because of rising demand for the metal in the manufacturing sector.

A new hope? I saw that movie. The empire's death star blew up in a "one in a million" black swan type event.

China Becomes Net Aluminum Exporter for First Time Since 2008

China’s aluminum production capacity will expand 20 percent this year, Neil Buxton, managing director at London-based researcher GFMS Metals Consulting, said May 21. Stockpiles monitored by the Shanghai Futures Exchange have climbed almost 65 percent this year to a record 489,495 tons.

I'm not quite done yet. Here's the worst news of all. I've made the bearish case without even mentioning our national, state, and local government debts. Technically, I should be subtracting that from my long-term spending power too. That's assuming I don't get the unborn grandchildren of others to pay for it of course. Sigh.

I really don't think now would be the best time to be swinging for the fences using leveraged high risk bets. Just an opinion!

See Also:
The Quantity Theory of Aluminum
Trend Line Disclaimer

Source Data:
St. Louis Fed: M2 Money Stock
St. Louis Fed: Total Consumer Credit Outstanding
St. Louis Fed: Real Estate Loans at All Commercial Banks
USGS: Historical Mineral Statistics