Many modern day monetarists would argue that the money supply should be fixed at a stable growth rate. This rate may range from 3 to 5 percent and assumes there is a concrete definition of what constitutes money. For all intents and purpose the provided chart shows the growth in 4 critical areas of the money supply, M0, M1, M2, and M3. Here is a brief description of each:
- M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
- M1: M0 + the amount in demand accounts ("checking" or "current" accounts).
- M2: M1 + most savings accounts, money market accounts, and certificate of deposit accounts (CDs) of under $100,000.
- M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.
Money Supply and Inflation
As of March 23 2006 stats on M3 are no longer published by the Federal Reserve. Legislation is currently being presented by Ron Paul trying to reverse this. However this is critical since M3 is an important indicator of money growth and also includes foreign investment that has fueled a large part of this credit bubble. Monetarist would argue and have you believe that a controlled money supply is central to having a sustainable economy. They believe that a healthy economy is predicated on a key interest rate equaling the prevailing funds in society; essentially equilibrium between stable money growth and a prospering economy. Yet when these statistics are fudged or for all intents in purposes not even reported, this theory becomes much harder to stand by.
The fact that inflation is so understated by the Consumer Price Index (CPI) is laughable. For February of 2007 the current inflation rate is 2.42% annually. Oh really? Need we take a look at current house prices? Or maybe we should take a look at healthcare costs. And if you happen to drive you may have noticed that gas prices are not going up 2.42% a year. This again demonstrates the unbelievable measures that the Federal Reserve relies upon to calculate interest rates which directly impact the money supply. Lower interest rates create a higher money supply, the relationship is inverse. This is how the monetary exchange equation explains this:
Velocity x Money Supply = real GDP x GDP Deflator
Basically if the money supply grows at a faster pace than real GDP we would experience inflation. But this is another fabricated lie because we are no longer keeping track of M3 and the CPI is as reliable as Howard K. Stern. Any equation with corrupt variables renders the answer as negligible. From 2000 to 2007 during the Fed pants dropping of interest rates we’ve nearly doubled the money supply; now how is that for moderate inflation and free flowing credit? This actually explains why you may be making a bit more but don't feel richer. The Fed actually is ingenious in pulling the wool over the publics eyes. How can you increase consumer spending, postpone a recession, and keep inflation moderate? Easy. First you need to distort inflation statistics. Next, you need to keep the public bamboozled by thinking cheap money equals wealth. Yes rates are at 1% but that $10,000 car now will cost you $25,000 and you’re income has only increased at the “real rate of inflation.” Next, you increase foreign investment via CDOs and remove M3 stats. See! Shouldn’t we all be working at the Federal Reserve, otherwise known as the Wizard of Oz.
Now that sub-prime is heading toward the light, the focus shifts to the ominous Alt-A loans. You know, the grey matter between prime and sub-prime. Take a look at this chart:
As you can see defaults are rising sharply partly because rates are resetting and housing prices have become stagnate. Countrywide and WaMu are some heavy hitters in this group but all eyes will be on IndyMac to see whether they follow the path of big brother sub-prime. This free flowing money again is because of lose monetary policy that encouraged credit creation and the populations incessant fascination with all things real estate. Just look at the sharp rise of 30 day lates; this will parabolically explode because we are resetting at approximately $100 billion per month and housing is going the opposite way. Otherwise we are in a perfect time bomb with no remedy.
Then we face the celebrity status of housing. Unless you’ve been living under a rock, housing is the talk de jour in becoming an instant millionaire. TV commercials proclaim the benefits of no money down, flipper shows, and even radio ads talking about diversifying your portfolio with foreign real estate. In their view, a diversified portfolio would include houses in
Damn Lying Housing Pundits
And then we have the Real Estate syndicate machine trying to convince the public that housing is not on its last leg. They point to worthless inflation numbers fudged by the government and they focus on easy credit as your vehicle for wealth. Let me highlight an example regarding the Apprentice. Currently four people remain. What are their occupations?
James: Technology Company Owner
Stef: Defense Attorney
Nicole: Real Estate Broker
Frank: Real Estate Developer
Last week their task was promoting the new 2nd