Topic: Monetary Policy
The Dollar, Inflation, and Recession Threaten To Turn Nasty Financial experts, including the Fed chairman, can't agree on exactly which problem needs the most focus. The squeeze is on, and many key segments are under attack, but no one is willing to admit that it all adds up to a huge problem caused by fiat money.by Walt Thiessen
(Libertarian)
Friday, November 9, 2007
When Federal Reserve chairman Ben S. Bernanke testified before Congress earlier this week that the economy was going to get worse before it gets better, he wasn't kidding. The dollar has lost over 30% of its value vs. the euro since January 2003, the year that George W. Bush decided to invade Iraq. The mortgage crisis threatens to blow the lid off the whole shebang because of the shaky state in which it has left the banking industry and money markets. Oil and energy costs are making the situation even worse. A Bloomberg article reports:
"The Fed's in a bind because oil and energy costs are putting pressure on inflation even as the economy weakens, said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina....
"For investors, 'the short-term problem is growth expectations,' said Silvia, a former economist at the Joint Economic Committee. 'Inflation is a problem for another day.'"
The Wall Street Journal's David Malpass bemoans the fact that, "Dollar weakness is neutralizing the positive effects of the Federal Reserve's interest-rate cuts. As the dollar spirals downward, weakened by Washington's indifference and market expectations of more rate cuts, liquidity drains from the U.S. into inflation hedges like gold and, in the case of entrepreneurship and risk-taking capital, to countries with strengthening currencies."
The New York Times reports that former Republican presidential candidate Senator Sam Brownback of Kansas, who recently dropped out of the race, begged Bernanke at length to cut rates as soon as possible, demonstrating his ignorance of the way that such cuts fuel the inflationary dollar scenario.
A Los Angeles Times article says, "Bernanke is in a spot, and he's trying to provide some comfort to the market by saying, 'We don't know what the immediate future holds but we'll remain vigilant and if action needs to be taken we'll take it,' " said Stanley Nabi, chief strategist at New York-based Silvercrest Asset Management in New York. "There's nothing else he can say."
What does all this mean? It's hard to say for sure, but it can't be good. Where fiat money (such as money produced by the Federal Reserve System) is concerned, it's always hard to say exactly what is going on. The government has made it even harder to say over the past couple of years. Back in March 2006 they ceased publication of the M3 indicator of money supply. M3 is (or was) the broadest and most complete measure of the money supply that the Fed used to report. In addition to the money supply as measured by M1 and M2, the M3 included large account CDs ($100,000 or more), eurodollar deposits, and repurchase agreements. In other words, as Tim McMahon, the editor of inflationdata.com noted in 2006, "M3 tracks what the big boys are doing with the money." The Fed foolishly dropped the M3 because it considered that measure to not be meaningful anymore.
Well, apparently it was meaningful. In fact, it was so meaningful that the Fed had to drop it for other, more nefarious reasons. As McMahon noted, "The writing is on the wall. When the Government starts hiding data the problem is big! If this trend continues, inflation is going to come roaring back big time. We will see the late 70's all over again."
It seems that the M3 measure between 1995 and 2006 when it was eliminated (as illustrated in this chart) shows the overall money supply increased to roughly 2.5 times its previous size. That's huge! Then the Fed pulled the rug out by refusing to publish any more data about it. This translates to roughly 13% inflation per year over an 11 year period. Official government numbers regarding inflation put it at about 1/4 that amount.
In other words, the federal government and the Federal Reserve had been lying to us about the real rate of inflation for over a decade, and they made it clear that they didn't want to have to lie any more, but they also had no intention of changing their inflationary policies. So they cut off the information.
If you want to understand why real estate boomed from the turn of the millenium through 2006, M3 is a major part of your answer. The government's cost of living index does not include real estate investment. So when real estate skyrockets in price, the cost of living index remains relatively unchanged. Thus it seems that there has been no inflation, but in fact it was there anyway all along.
The other major contributor to the real estate boom was the prior stock market boom. Once the tech stock crash in 2000 happened, investors pulled their money out of the market and had to move it elsewhere. A large proportion moved it to the real estate market. The result is that real estate prices are practically out of reach for most Americans these days, and those who took the plunge anyway have borrowed way beyond their means, many of them using variable rate mortgages. I'm not talking about just sub-prime mortgages here. I'm talking about mortgages taken by borrowers who had stronger financial track records and credit ratings.
The sub-prime mortgage crisis is only the tip of a bigger iceberg. For those who aren't sure what sub-prime mortgages are, they are the most risky mortgages that were made during the real estate boom. They were loans made to buyers who really couldn't afford them by unscrupulous brokers who were trying to make a fast commission, underwritten by lenders who preferred to look the other way. Reports are still emerging today of the fallout from these loans. RTE Business is reporting that shares traded in Barclay's Bank, the third largest bank in Britain, were suspended today after their share dropped 9% in one day. The reason for the drop? Barclay's was a major sub-prime investor.
Barclay's is far from the only bank being hit by the crisis. The BBC reports that Morgan Stanley has lost over $3.7 billion so far. They also note that, "A number of US financial firms, including Citigroup, Merrill Lynch, and Bear Stearns have all reported problems from exposures to lower-quality debt."
If you think this can't get worse, guess again. This is just the fallout from the weakest real estate buyers going belly up. That's just the first wave. Can you imagine what will happen as more mainstream buyers also start facing foreclosure? The real estate market is in tatters, so the opportunity for buyers with better credit who are in trouble anyway to sell their property and get out from under before the collapse hits is becoming more and more difficult to find. Prices will have to come down a lot, and while that happens, more and more people who bought during the boom are going to be hurt.
We could see the economy get really bad, really quickly as a result. I know of no way to time it, so I can't predict exactly when it will happen. However, I know for sure that I wish we had a hard money man like Ron Paul in the White House who could lead us out of this fiat money den of thieves that threatens little guys like me on all sides.
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The views expressed in this
article are those of Walt Thiessen only and do not represent
the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is
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Posted By: Parks Squyres
Date: 2007-11-09 20:44:17
I think you are right on with this article. We live in an up scale retirement complex of homes. There are several retirement complexes in this area of Arizona. All of them have come to nearly a stand still in selling homes in the last year. Prices just 2 years ago were out of reason and now people who bought cannot sell their homes unless they take a super big loss. It sounds like this is the problem all over the country.
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