Saturday, Jun 28, 2008
the m3 money supply
Telegraph.co.uk: Has the Fed really flooded the world with dollars?
This rise is almost entirely due to a “bearish” flight from stocks and suchlike. Nervous investors have parked their wealth in money funds for safety until the crisis blows over. These money funds are distorting the M3 data (as Prof Goodhart also recognizes).
“Everybody keeps saying the Fed is dropping money from helicopters and flooding the economy with liquidity, but it is not true. All that is happened is that the precautionary demand for money has gone up. That is not inflationary in any way,” said Mr Ashworth.
Posted by sold out @ 10:19 AM (908 views) Add Comment
13 Comments
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1. sold out said...
s2r1,
From yesterday http://www.housepricecrash.co.uk/newsblog/2008/06/blog-final-stages-of-the-oil-bubble-14699.php
Thanks for your response yesterday and the gragh that you posted.
You said
"The guy in your video blames money printing for high oil prices
But the M3 money supply is showing a topping formation - see graph
No more IR cuts are available, and maybe rises later this year
And when the oil price collapses the US Treasury bond market will collapse too as who will buy them - not the OPEC countries.
IRs in the US will shoot up to encourage people to buy US debt
The housing market and stock market will implode"
I wonder if you can explain to me further what you believe is going to happen next in more detail?
Do other bloggers have a view on this? If so please enlighten me because, i must admit i struggle to understand it all.
2. drewster said...
sold out, thanks for posting, it's a brilliant topic.
His argument doesn't make sense: on one hand he says "Yields on 10-year Treasuries have shot up on inflation fears since March", but then a few lines later he says "Nervous investors have parked their wealth in money funds for safety". He can't have it both ways - either they're parked in Treasuries or they aren't.
Assuming the professor is right that M1 money supply really is contracting, there is another simple explanation for all this. Because of America's trade deficit, China currently adds $1bn a day to its foreign reserves. Saudi Arabia adds $1.5bn a day to its foreign reserves. If China and/or Saudi are secretly getting rid of their dollars as fast as possible then it would be adding to M3, despite what the Fed is trying to do.
In other words, China and Saudi Arabia have enough dollars in their reserves to seriously distort the Fed's actions - growing $2.5bn a day, that's an incredible amount. Over one year that's more than the subprime losses to date. If they start dumping those dollars (which they may already be secretly doing), it will seriously distort M3 and inflation for a while yet.
In the future the dollar needs to fall a lot further to correct this trade imbalance. Treasury yields (which are set by the market) will have to be a lot higher to compensate for this risk. I really don't understand why anyone still wants to hold dollars when there are so many better assets out there.
3. planning4acrash said...
Simple, inflation will hit 30+% (headline), and we will see runs on banks. If you don't have precious metals and asset's, you'll be screwed.
4. icarus said...
The Fed doesn't need to print more money - it has already done the damage. Because of the dominance of the dollar the Fed knew that its policies of cheap money, trade deficits and dollar devaluation wouldn't be subject to market discipline - until the build-up of these forces became so huge that something had to give. The printing of money by the Fed was just one part of the story. The green light it gave to others (the GSEs, especially Fanny and Freddie, which created trillions of $s of credit by buying mortgage debt, the mortgage lenders themselves, consumer credit companies) had a bigger effect on credit creation, devaluation and inflation than the Fed's own printing presses.
5. icarus said...
drewster - spot on, what happens when Saudi Arabia and China dump dollars in a big way? Well, they're both dictatorships - regime change? Surely not.
6. Sharpe said...
The saudis are US stooges so you can be sure they will only do what they are told.
Not sure about China though - they could do pretty much anything and no one could do a thing about it. But the ruling chinese party must fear a crash as much as anyone. i read that the only thing stopping most of the countryside errupting in revolution is the cash sent back from factory workers. Once those factories start to close ...
7. plato said...
sold out :
I believe you have look at this whole event in let's say a less conventional way. This is basically at the very heart of what is now happening :
The confusion in being too technical and analysing every tiny part of all this is self propagating,creating more confusion through too many answers, when everything is really inseparable.
What we actually have now is a huge wealth of money, created by ??? What we have actually acheived is imaginary,but the effects are real. Think deeply about this.
This has grown infinitely by lending and compounding interest. Such growth becomes self destructive and of course worthless. As it grows, its speed increases.Then it destroys itself.
The stage we have now reached is virtually out of control (a lot of people believe)
s2r1 and others are pointing this out in their various ways -- some technically, others by reason.
What is certain is that great change is needed to survive this phase and move on. This requires a massive change of attitude and an equally massive upheaval. For all those that believe so strongly in our Laws of Physics, they can rest assured that this will happen. the only question is When?
8. handle_it said...
I don't think money supply and control has ever been properly understood, or will it ever be so. The question is,at least for me, is whether the chaos we appear to be heading towards is to a greater or lesser extent manufactured or just a case of unregulated markets. I certainly don't think it's the end of the world or some sort of cosmic karma.
9. little professor said...
10. Theboltonfury said...
p4ac
what use is a precious metal if you can't exchange it for money. This is where your logic is fatally flawed. Everything is relative in value to printed currency. I can't see the barter economy starting up again, certainly not with useless metals
11. Kitten said...
"So many better assets out there".
Like What?
I'm don't see anything I like much. I already have one sixth Gold. I'm not going in any further. Its pure speculation.
Safe as houses perhaps? Inact I,ve aslo kept one third property - hedging, cowardice, transaction lethargy.
Sterling is not great but has the benefit of being quickly convertible - ie very liquid. Oil is too close to Gold. Oil, gold and food carry huge risk of government intervention.
12. japanese uncle said...
Barnanke may better serve the world not by throwing greenbacks but himself from a chopper.
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