Sunday, April 04, 2010

Federal Reserve Way Wrong about M3

The US Treasury has delegated to responsibility to print US money to the Federal Reserve. You will notice that our currency are entitled "Federal Reserve Notes." The US government claims it a good idea to have the private Federal Reserve print our money for fear that the Treasury would print too much and devalue our currency. However, when our money was on the gold standard, this wasn't a problem because the government only printed the amount corresponding to the amount of gold the government owned.

Since Nixon took our money off the gold standard, our current money is allowed to float based on the supply vs. the demand for our currency. The Money Supply is measured in different ways by the values of M0-M1-M2-M3. Together M0-M3 represent the total money in the economy at any one time. M0 is the amount of actual currency in the system including loaned money which is created by fractional reserve banking. M1 includes M0 + the valued of money in checking accounts. M2 includes M1 + money in savings accounts and CD's. M3 includes M2 + derivatives which are used to leverage money a bank loans. M2/M0 = money multiplier.

starting in 2006, the FED stopped tracking M3 claiming that is wasn't all that different than M2 and hadn't really changed much for a long while. Good thing other people kept track of M3, because immediately after stopping to track M3, M3 began to expand to unprecedented levels while M1 dropped. If the FED blames greedy bankers for over-leveraging their fractional reserves, it's funny how the FED knew to contract M1 at the same time M3 expanded to prevent the signs of inflation as it was supposedly not watching M3. You could argue that it was the greedy bankers that expanded M3 immediately after the FED stopped watching. But I want to know how the FED then knew to contract M1.

Just like the Great Depression according to Milton Freedman, some blame the FED for contracting the money supply which precipitated the most recent downturn. That is very interesting because Bernanke confessed in 2002 that Freedman was correct.

[In 2002 Ben Bernanke (then a Federal Reserve governor, today the chairman of the Board of Governors) made this startling admission in a speech given in honor of Friedman’s 90th birthday: “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We did it. We’re very sorry.”] Excuse me, what kind of confession and apology is this? We are sorry? Sorry just doesn't cut it.

Then the FED bailed out the banks and through the TARP program trillions of dollars where given to the big 5 banks interest free in exchange for their MBS/CDO/ABS (mortgage backed securities/collateralized debt obligation/asset backed securities), but the US Government didn't get delivery on the toxic assets. I guess the banks figure that these securities would eventually regain value and why would the US tax payer want to make a profit?

Contracting the money supply makes it so banks cannot lend. When banks can't lend, they give fewer home and business loans. When banks give fewer loans, people stop buying houses, and businesses stop giving raises, and start laying workers off. When people lose jobs they cannot pay the mortgage and when people couldn't pay the mortgage then that affected the value of the MBS which exacerbated the problems with lending especially since the "mark-to-market" poiicy was imposed following the ENRON scam.

Now the question is, what is the Bohemian Club going to do next. Derivatives allow the bankers to control the price of all commodities in the world. When oil was 150$/barrel Moscow, Saudi Arabia, Exxon, and Dubai were enjoying record profits. Saudi, Dubai, and Moscow started massive building projects. Since then oil dropped to 50$ a barrel that really started putting the hurt on these economies causing Dubai to nearly go bankrupt and need a bailout. Oil is now up to 80$/barrel but if the dollar is being devalued or oil goes back down to 50$ this summer, then some believe the Bohemian Club could bankrupt Iran and Venezuela who require higher prices for oil. Another way the US can drop oil prices to hurt the overextended oil producers is to start drilling at home which Obama recently announced or begin exploring the Bakken Formation in North Dakota and Montana.

Another question for the FED is why are they now having to buy $300 Billion in long-term US T-Bills. The FED has never done that before. Could the FED be hiding the fact the foreign governments are not buying our dollars? The FED buying long-term T-Bills will result in massive inflation. I guess, according to the FED, they want the lower the return on 30-year T-Bills and get banks to resume their more typical lending and investing practices.

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