Bypassing "Ka?"

[Alfredo Dominguez]

Anyone starting to wonder if the hiding of M3 is part of an attempt by the Fed to let the air out of the housing bubble without risking a period of illiquidity? That is, while posturing as "hawkish" with regard to interest rates and having the real effect of putting the brakes on the real estate market, simultaneously opening the floodgates on M3 in order to provide the liquidity with that hand that they are removing with the other? Looking at how today we had such an "everything up" day one day removed from the interest rate hike, it makes me curious if the Fed might not already be "chasing inflation up" but, of course, knowing exactly what they are doing.

Any thoughts?

[jeffolie]

THE FED'S PLAN TO LET HOUSING CRASH AND SAVE THE DOLLAR
They will deflate by having the overseas investors taken down while sparing the T-bill market with the "NewBank". In a flight to safety investors will jump on treasuries strengthen the dollar and crashing gold. Searching NewBank, check out
http://www.dailyreckoning.com/Writer.../MG030706.html
Very funny.
The first US bank to go down will be JP Morgan. Over 800 US banks hold derivatives. Check out: http://www.occ.treas.gov/ftp/deriv/dq305.pdf You'll see that the amount of derivatives in "insured" commercial bank portfolios increased by $2.6 trillion in the third quarter of 2005, to a whopping $98.8 trillion. 98% of these are concentrated in 5 banks. Total assets of these top 5 banks is $3.3 trillion if I am reading the chart correctly. Just look at the charts like the year ends 91-2004 chart (Graph 3) and you'll see a chart shooting straight to the moon. Maybe these bankers are smarter then me, but this is a house of cards in my book.


Most of the $570 trillion in derivatives are held by overseas investors. These will collapse from the housing bust causing defaults. The default follow like dominos to mortgage backed securities, then collaterized debt obligations and lastly to derivatives.

Controlled deflation will be the Fed's goal so that the dollar will rise. This will help the US government as investor, institutions and countries buy Treasuries as a safe haven. US Treasuries held as reserves will not be sold off (by China and Japan) avoiding a dollar devaluation. Win -Win for the Feds. Lose-lose for derivatives, MBS (which are explicitly not backed by the US).

Controlled deflation is the Fed best choice among bad choices.

I doubt the deflation can be controlled by lowering Fed rates to zero, but the Fed will try to "mop up".

I predict a head and shoulder top in the stock market. The bottom may not drop out until the mortgage defaults are large enough to collapse mortgage backed bonds, collateralized debt obligations and lastly derivatives.

[blazespinnaker]

Won't the numbers show up in m2 if they open the flood gates?

I thought m3 was just the eurodollars extra

[Alfredo Dominguez]

Won't the numbers show up in m2 if they open the flood gates?

I thought m3 was just the eurodollars extra

Also repos.

[bart]

hmmm... there are all those points.

The statment by Blinder over a decade ago comes to mind:
"The last duty of a central banker is to tell the public the truth."
-- Alan Blinder, Vice Chairman of the Federal Reserve, on PBS’s Nightly Business Report in 1994

The Fed excess reserves stats and various other liquidity based ones are still in very good shape.

And then there's the little known fact that the only item truly discontinued was repos. All the rest of the M3 data is still available per http://www.federalreserve.gov/releases/h6/20060316/


Other than all those points though, whatever would make you think that the Fed is doing something other than what the new transparency announcements and PR would have fold believe? ;-)

[EJ]

You may be right about bypassing "Ka."

For a while now, the U.S. economy has been consumption dependent for 2/3 GDP growth and employment. It is becoming more dependent on government spending for GDP growth and employment. To soften the transition from its unsustainable current weighting toward borrow/import/consume to restore greater balance toward save/export/produce, government spending for GDP growth and employment is likely to increase in the next few years while the U.S. consumer is allowed to stop consuming as much and save more. The U.S. will have to monetize much of the debt required to pay for this transition, as it is less import dependent and thus will not be financed by the Asian export block; it's not in their interest.