"“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” "

Chinese premier Wen Jiabao 12th March 2009

""We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."

Timothy Geithner US Secretary of the Treasury, previously President of the Federal Reserve Bank of New York.1/3/2009

Wednesday, October 29, 2008

The Fed are are beyond clever. They are insane. How M3 disappeared ... and why.

It is worth re-visiting what we noted about the new Man at the Fed, Benny Bernanke - Wednesday, January 03, 2007 The Mysterious case of the disappearing M3 relating to the decision to cease publishing M3. It was on March 23, 2006, the Board of Governors of the US Federal Reserve System announced that they .....

" will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release....... M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."

Senator Jim Bunning asked (the new) Fed Chairman Benny Bernanke why M3 was no longer published - who persisted that it is merely a cost saving exercise. It was of course touching that the great man responsible for Trillions was so careful with the candle ends.

However this piece of statistical legerdemain was critical and central to the concealment of the final splurge of insane monetary inflation allowing the boyz in the backroom to really let rip on all their debt shuffling which precipitated most (but not all) the world's banks into a credit crisis as they finally had to prepare balance sheets that bore a reemblance to the truth.

Simultaneously (almost) Michael Nystrom on January 10, 2006 published Is This Rally for Real? And Other Thoughts in which he listed the bearish points for 2006....

Rising short term interest rates
Inverted yield curve
Housing bubble slowdown / pop in the works (See this excellent article by Gary Schilling)
Massive slowdown and/or bankruptcy at GM and/or Ford on the horizon
Rising unemployment in home building, financial services, and manufacturing due to 3 & 4
Rising energy costs
Corresponding slowdown in consumerism due to 5 & 6
Stock market's four year / presidential cycle pointing down
Rising trade deficit
Rising budget deficit
Rising national debt
New Iranian oil bourse in the works to price oil in euros this spring
Falling dollar as a result of most of the above, but especially #12
New guy on the job at the Fed to deal with all of the above.

Which in the afterglow of hindsight, highlights the lily strewn path of dalliance led by the Fed and Ben.

Nystrom goes on however with some fascinating remarks on Bernanke's Fed speech on deflation (Deflation: Making Sure "It" Doesn't Happen Here).

"I remember the first time I heard his printing press remarks -- I was blown away. I didn't know who this guy was, other than that he was a new guy and that I thought the line about the printing press was an extremely irresponsible thing to be saying. I was sure that he would be fired, or at least reprimanded for his remarks, but look where he is now. Shows you how much I know. "

"This is what I gleaned from the speech last night: Bernanke tells a story, that if an alchemist invented a way to make gold in unlimited quantities, then released this news to the world and said he was going to start making and selling unlimited amounts of gold, the price would drop immediately, before the Alchemist made or sold a single ounce. He goes on to compare the Fed to that alchemist. He talks about the printing press, then says, "By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services."

"Then it struck me - this elimination of M3 in March is the credible threat.. It's a bluff. First they juice M3 like it is the end of the world (or 1999), and then they turn the lights out on the statistics. "

"Since we're all in the dark, the only thing we can assume is that the Fed is inflating like there is no tomorrow. But they really don't want to do that -- monetize debt, that is -- it is not good for their balance sheet -- so instead they engineer this bluff. Everyone believes it, and they (we) act accordingly, bidding up stocks and gold."

"If you don't think the Fed is that clever, I encourage you to read Bernanke's speech. It is a long treatise on stimulating demand and causing inflation in the event that interest rates fall to zero."

"After reading the speech, you may find that they are beyond clever. They are insane."

Peter Schiff of Euro Pacific Capital was on Bloomberg again yesterday, reminding everyone on Wall Street of what he said in August 2006 ..."The United States economy is like the Titanic and I am here with the lifeboat trying to get people to leave the ship ...I see a real financial crisis coming for the United States."

Schiff is the author of two books Crash Proof (Amazon - Review ..."Schiff argues that the U.S. economy is going to hell, and that clueless consumers, opportunistic Wall Streeters and pandering politicians are carrying the handbasket. Schiff's screeching tone is a bit grating ...That doesn't mean you shouldn't take him with a grain of salt, but this book was published in 2007, and in mid-2008, Schiff's forecasts of a weakening dollar, rising gold prices, a bursting real-estate bubble and strong foreign stock markets were spot-on..." )and The Little Book of Bull Moves in Bear Markets and was economic advisor to Ron Paul in his failed Presidential campaign.... during which he said;

"We need a plan that stimulates savings and production not more ofthe reckless borrowing and consumption that got us into this mess inthe first place. Ron Paul's plan is the only one that amounts to astep in the right direction. If you want meaningful change - for thebetter that is - Ron Paul is the only candidate capable of deliveringit. The others merely promise to continue the failed policies that areat the root of our current economic problems."

It cannot be said that no-one saw this train crash ***coming, or the reasons for it.

*** Schiff describes the proposed merger of Chrysler and GM as a a slo -mo crash of 2 garbage trucks.


Anonymous said...

"The Fed are are beyond clever. They are insane"

I think it was Shakespeare who said...

"In the dark depths of the lunatic asylum the daft boy is king"

sam_m said...

@anon 2:44 Interesting quote. There's also a saying "in the realm of daft boy, ivmcdermott is king" lol

(C) Very Seriously Disorganised Criminals 2002/3/4/5/6/7/8/9 - copy anything you wish