The Oil Drum

313 comments on DrumBeat: June 5, 2006

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TechGuy on June 5, 2006 - 6:00pm

>Pulled from Wiki: According to the last published data from 16 March, 2005, M3 has been growing at an annual rate of over 8.22%. As of 16th March 2006 M3 was $10'336.3 billion. One year earlier, on 14th March 2005 the M3 was $9'550.5 billion.

The expansion is largely caused by the Huge trade deficits. Virtually all major US trading partners have High USD reserves. Some of the foriegn trade surpluses are reinvested in US bonds (Treasury, CP, and Mortgage Debt) which has prevented bond rates from rising significantly.

>What all this means is that the Fed can "print" money in ingenous ways that may or may not inflate the monetary base.

I doubt the Fed is Printing money to manipulate the economy, not when there there are Asian countries dumping goods and providing easy credit for them. I suspect that the reason that the Fed has decided not to publish M3 (Its still calculated by the Fed, just not released) is related to the surging trade imbalances which presents a systemic risk. In the past, large trade imbalances always end in a financial crisis.

The Feds biggest mistake was to lower short term rates to 1%, which kicked off the housing bubble, which will only end in suffering. The Fed failed to enact laws to prevent excessive bad loans (ie low income borrowers using ARMs, insufficient background checks, insufficient regulation with credit swaps, etc) that might have dampened the hardship Americans will face in the future.

One item of interest that may signal bad times ahead is the large number of Fed banking officials resigning and few replacements can be found to fill the vacant positions.

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tate423 on June 6, 2006 - 12:57pm

>The expansion is largely caused by the Huge trade deficits. Virtually all major US trading partners have High USD reserves. Some of the foriegn trade surpluses are reinvested in US bonds (Treasury, CP, and Mortgage Debt) which has prevented bond rates from rising significantly.

While this may have been true a long time ago, please read some more on this.

The surprise here is that China and Japan are doing what they said they would do, even selling off some of their holdings. If Japan and China are not buying the government debt, who is buying? The little islands of the Caribbean stand out. Obviously, they are not wealthy nations with the wherewithal to by such quantities for their own natives who are harvesting coconuts. They are acting on behalf of investors from other nations who are passing money through the banks of the Caribbean to make their purchases. Unfortunately, the US Treasury is unable to capture the true source of this money since they only know the first party of their transactions. The most cynical observers offer a theory that the US government itself might be behind these off shore operations to prop up the dollar. They have no evidence, and we are unlikely to ever know.

http://www.safehaven.com/article-3097.htm

If you want the whole story look at this website. It's got plenty of graphs to back this data up.

>Fed has decided not to publish M3 (Its still calculated by the Fed, just not released)

Really? So when the Fed said it was ending the release of the M3 data, what was their reasoning? I could have swore they said something like, "the costs to prepare the data does not justify the information it provides." M2 is sufficient according to them, however M2 data does not include repurchase agreements. What don't you understand about liquidity? It doesn't take bills being "printed." Money is created everywhere through various financial instruments. There are securities for sale that base their value on an underlying security. There are securities of those securities.

So if this is the reasoning and now you're telling me they are still data mining. While I would agree that this could go on, if we agree that it is going on, itt would be proof that the FED is lying. Who cares what they are doing THEN. Do you trust a private bank (proxy for gov't) that lies to the American Public?

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TechGuy on June 6, 2006 - 5:51pm

>While this may have been true a long time ago, please read some more on this.

China is still accululating dollar reserves. Back in Jan 2006, China held about $800 Billion, Today its approaching on $900 Billion.

Below is an
http://216.109.125.130/search/cache?ei=UTF-8&fr=ush1-finance&p=China+Reserves&u=www.chin ability.com/Reserves.htm&w=china+reserves&d=Y7bpOzmtM4Pv&icp=1&.intl=us

>The surprise here is that China and Japan are doing what they said they would do, even selling off some of their holdings. If Japan and China are not buying the government debt, who is buying?

China diversifaction was from US treasuries into the US mortgage debt market. If I recall correctly 1/3 to 1/2 of all new mortgage debt after 2003 is held by China. This is why the mortgage rates didn't rise in step with treasuries.

>I could have swore they said something like, "the costs to prepare the data does not justify the information it provides."

The cost for public consumption was the issue. However. All large financial institutions are still required to collect and provide the data to the Fed. Perhaps the data isn't been used to calculate an "M3" figure, its still used by the fed. I suspect that the reason for discontinuing publication is hide how fast the money supply is growing and prevent it from spooking the bond markets.

>Unfortunately, the US Treasury is unable to capture the true source of this money since they only know the first party of their transactions.

The source is mostly large hedge funds, using carry trades to make money. The Caribbean are relatively small. If I recall correctly, back in early 2005 it was about $70 billion, where as Japan had over $550 Billion and China was somewhere between $300 and $400 Billion in Treasury withholdings. If the gov't wanted to secretly expand the money supply, why bother using a front? They could just buy and hold treasuries with out any paper trail. Why would the gov't bother expanding the treasury bond market by creating new debt. Why not just fictiously deposit funds in electronic banking accounts instead of raising funds through the treasury market?

>What don't you understand about liquidity? It doesn't take bills being "printed." Money is created everywhere through various financial instruments. There are securities for sale that base their value on an underlying security. There are securities of those securities.

I think your missing the point. The money supply is expanding just fine with all of the various capital inputs. For instance, we have the $600+ billion trade deficit, Easy credit fueled by the housing bubble and comsumer debt growth, bond carry trades, Federal deficit spending and so on. With all these sources of input capital there is no need for secret gov't transactions to further inflate the money supply. All the fed needed to do is drop the rates by ~550 bps to kick it off. If they wanted to accelerate it further, they just need to lower the rates again.