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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: orkrious who wrote (45303)	11/11/2005 2:14:51 PM
From: Eva	Respond to of 110194

exactly BASTARDOS

To: orkrious who wrote (45303)	11/11/2005 4:44:48 PM
From: Gulo	Read Replies (4) \| Respond to of 110194

Hi guys. I don't think I posted here before. Since you guys are more familiar with money supply than most, I'd appreciate if you'd critique an email I sent to a friend that thought the feds were simply printing money. He didn't understand the email, so I'd like to rework it so a lay person can understand it. Any thoughts? "The Wikipedia entry for Money Supply will give you a decent explanation of the various measures of money supply. The measures that matter most as far as inflation is concerned are the M2 and M3. At one time, the money supply was directly linked to the amount of money the feds put into circulation via overnight loans (not paper money - paper money is printed only to replace existing electronic credits). Since a lot of credit can now be created without reserves, only the M1 money supply (and part of M2) is completely determined by reserve multiples x bank reserves. The feds can still try to manipulate M0 (and therefor M1) by buying or selling treasuries, but that has become a hopeless task in the last decade or two (~98% of treasuries are bought by foreigners). Now, the overnight interest rate is the only practical means the fed has of influencing money supply. What I'm sure Greenspan would like to come out and say, but can't, is that the disconnect of M3 from M0 is like disconnecting the front wheels from the steering wheel. He's retiring, so maybe he'll speak his mind in the coming years. As an aside, the purchase of treasuries by foreigners has reduced the "velocity of money" despite lower savings rates, etc. that would work to raise it. If foreigners reduce buying, the velocity will rise, and with it, inflation (for small numbers, inflation ~= % growth in M3 + % change in velocity - % growth in real output). However, the velocity rise won't be aided by more rapid consumer turnover (that probably can't increase much beyond what it currently is), so I predict the U.S. $ devaluation (~= inflation) will continue to be a long drawn-out affair rather than a collapse. The perverse thing is that tightening money supply (raising rates) makes treasuries and the US$ more attractive to foreigners, which allows the feds to sell more treasuries to finance deficit spending. I suspect the net result is that raising rates won't actually tighten money supply as long as the feds run big deficits and that the current strength in the dollar will only last as long as raising rates attracts more treasury buyers. en.wikipedia.org en.wikipedia.org How is this all used to analyze the U.S. dollar and the economy? Here is one take that I have a fair bit of sympathy with, particularly on the issue of inflation (it's here, and it's 6%, not <3%): financialsense.com "