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

To: studdog who wrote (99995)	11/28/2008 1:04:48 PM
From: Hawkmoon	Read Replies (1) \| Respond to of 110194

We seem to be on the same page Definitely seems that way.. Glad I'm not a lone voice in the wilderness.. ;0) NOW, should we see a tremendous increase in WRITE-UPs in impaired assets that have been written down ALREADY, then that might result in an unexpected increase in money supply, and hence, inflationary expectations. This is what is so pernicious about applying M2M rules to illiquid assets as the suddenly did 2 years ago. It effectively skewed the money supply in an uncontrollable manner. We've taken performing assets and marked them down 80% and written them off. But as those markets become more liquid and confidence returns, there is a potential for those depreciated assets to be reappreciated and money loaned against this new capital base. And that's not something any of the central banks have control over. It also subjected the money supply to manipulation by short sellers targeting both CDS markets and underlying corporate and mortgage bonds. If they could effectively target and call into question these complex CDOs/MBS instruments which were providing collateral for other forms of leverage, they could literally cause massive deflation in the money supply by forcing M2M accounting. So now US banks, 5 of which were operating at 30 or 40 leverage, suddenly have to deleverage even more in order to comply with commercial banking standards (12-1 leverage), and this is forcing the same deleveraging upon European banks, many of which were operating at 40/50-1 leverage. So the Fed/Treasury is hard-pressed to inject sufficient liquidity to keep up with the pace of money destruction (real and arbitrarily set by M2M in illiquid markets). In fact, John Mauldin's latest predicted we'll need at least 7% increases in money supply for several years (which is what prompted me to revisit the topic of velocity and money supply): As I wrote last April, the velocity of money (how fast a dollar moves through the economy) is slowing rather dramatically. It could fall another 10% and just get back to the average for the last 107 years. Given the growth in population, inflation, productivity, and other factors, the money supply will need to grow by 7% annually for the next several years to keep the economy at equilibrium. Remember, GDP (gross domestic product) is essentially the velocity of money times the supply of money. If the velocity slows down, the money supply needs to rise just to stay even. The Fed is going to have some room to pump up the money supply without seeing inflation rise precipitously. I think this is the first of what will be several large injections, as they will keep it up until the economy begins to recover. They will especially do more if it looks like we could roll over into a deflationary environment next year. I will be writing more about this in the coming months. frontlinethoughts.com I think the M2M factor in depreciating asset prices, and thus money supply, is being overlooked in the equation. FASB 157 was just as effective at reining in money supply as any gold standard, especially if the financial assets are so complex that you need a supercomputer to understand their pay-out schemes (as in the case of CDOs). But what's even more interesting is that this loss of money supply is not just centered in the US, but globally, via the devastation being wrought upon the "shadow banking system". Hawk