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Analysis Last Updated: Oct 28th, 2008 - 00:10:39

Follow the M3 money to hell
By Jerry Mazza
Online Journal Associate Editor

Oct 27, 2008, 00:21

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Let me not keep you in the dark. As Wikipedia states, our money supply has three large components. M1 is physical currency circulating in the economy plus demand deposits (checking accounts). This measure is used by economists to try and quantify the amount of money in circulation. M1 is the most liquid measure of money supply since it only contains cash and assets quickly usable for conversion to currency. Hang in.

M2 is MI + time deposits, savings deposits and non-institutional money-market funds. M2 is a wider category of money than M1. It�s also used to quantify the volume of money in circulation and to explain economic conditions. M3 is the biggie. It�s M2 + M1 + large deposits, institutional money-market funds, short-term repurchase agreements, and other larger liquid assets. It�s the broadest measure of money used to estimate total supply of money in the economy.

The Fed used to publish data on all three money descriptors. But for some strange reason (couldn�t be saving money as they claimed because they never save money), the Board of Governors of the Federal Reserve discontinued publishing data on M3 (which contain all data on M1 + M2 =M3) on March 23, 2006. M3 also included balances in institutional money funds, repurchase liabilities issued by depository institutions and Eurodollars held by US residents at foreign branches of US banks, in fact at all banks in the United Kingdom and Canada.

In other words, M3 tracked what the fat cats were doing with their bucks. You have to think, why would the Fed do this? Of all three categories, M3 was your best bet to track inflation, i.e., to monitor what the Free-Market�s �Invisible Hand� was picking from your pocket through inflation, sometimes called �the hidden tax� because that�s just what it is. When the government runs off some extra funny money rest assured it�s to spend it. And you get the tab.

It would be, as editor Tim McMahon described it, �like writing checks from an account that was empty.� You would end up in the slammer. Nevertheless, that�s what the criminal Fed (and the government) is doing when it creates money out of air. To see the result, go back to Wiki�s Money Supply and scroll down to �Money Supplies Around the World,� the United States chart for M1, M2, M3 since 1959. You will see the widest expansion of dollars is in M3. You might ask yourself where were all the big bucks going.

Also of interest at Wikipedia�s Money Supply is to scroll down to �Bank Reserves at Central Bank,� which discusses how a central bank can ease the flow of money by purchasing government securities in the open market, or tightening the flow by selling securities on the open market and pulling in money. Also, along with that control, up until the 1970s, the government said that banks had to keep a fraction on deposit of what they loaned out. Let�s say that would be $1 on every $10 dollars. This was to prevent a total freeze-up in case of a run on banks, like the one in 1929.

�However,� as Wiki says, �in the 1970s [the Nixon Era] the reserve requirements on deposits started to fall with the emergence of money market funds, which require no reserves. Then in the early 1990s [the GHW Bush era], reserve requirements were dropped to zero on savings deposits, CDs, and Eurodollar deposits. At present, reserve requirements apply only to �transactions deposits� -- essentially checking accounts. The vast majority of funding sources used by private banks to create loans are not limited by bank reserves. Most commercial and industrial loans are financed by issuing large denomination CDs. Money market deposits are largely used to lend to corporations who issue commercial paper. Consumer loans are also made using savings deposits, which are not subject to reserve requirements. These loans can be bunched into securities and sold to somebody else, taking them off of the bank�s books.� Call that the beginning of the end.

�Therefore, neither commercial nor consumer loans are any longer limited by bank reserves. Since 1995 the amount of consumer loans has steadily increased, while bank reserves have generally remained constant . . .� Here, too we find the blueprint for disaster, which actually occurred in the Savings and Loan debacle,� beginning in the Reagan Era, 1981, ending in the GHW Bush era, 91-92. I leave that fiasco for your perusal. The point of it all has to do with Free Market deregulation of bank lending rules and the lack of lending transparency.

Hiding the growing debt

Returning to March of 2006, McMahon points out the US Trade deficit was running about $800 billion annually, meaning we were spending that much more in foreign markets than we were taking in for our exports. We were shipping billions extra overseas, mainly to China, in return for Wal-Mart�s everyday low prices, or, as Wal-Mart currently says, �Live well. Save money.� Sure. McMahon points out the Chinese weren�t buying our goods to lower our trade deficit. Instead they were saving half their GDP (gross domestic product), which would have been about half of $1.1 trillion a year.

The US only tucks away about 13 percent of its GDP (that is government, business and personal) earnings. But Chinese households tuck away about 30 percent of earnings while US households save less than zero. We�ve actually been spending .4 percent more than we earn every year. So, if you wonder what the Chinese have been doing with all the extra bucks, they�ve been buying back our debt, that is in the form of US government Treasuries. In doing that, they�re actually loaning us the money to buy more stuff. So, the big reason to stop publicly tracking M3 was not to advertise that fact.

The M3 went up an annualized 9.4 percent back in 2006 in the first quarter and 17.2 percent by the fourth quarter. Why would the Fed want to deal with it when it could bury it? I�m sure Mr. Greenspan must have felt shocked and terrible about it, but the pain we�re feeling now didn�t come yesterday, out of the blue, with the phony bailout. We�ll be once again bailing out the M3 types, not the M1s or M2s, when the derivative bomb hits. And, after paying the �hidden inflation tax� we�re being served up deflation, recession and a �once in a lifetime economic tsunami� for dessert. Jolly-o!

Nice going Greenie. I hope you and all your pals enjoy buying up our pensions� bonds and securities, devalued real estate, subprime mortgages, and going to the Cote D�Azur for a few years to get away from it all. This could get really ugly. Or will it be to the Caymans, to those stashed offshore, tax-free accounts, frosted Daiquiris and Caribbean sunshine. But don�t worry. The lynch mob will be here when you get back.

The thing is you could have loosened up the M1 money supply, as my economist friend Dick Eastman says, to ease the purchasing power on that overpriced gasoline and food, that is, while your friends in the club lived high on the hog, sucking up the good times. And, at the same time, we have your good buddy Hank Paulson lining the pockets of his banker friends, hedge fund managers, derivative devils, short-sellers, long-in-the-tooth elites like the Rockefellers, the Rothschilds, and even foreign princes.

Yes, with great sleight of hand, we�ve enabled the stock market to bring us Black Friday with Black Monday, and the volatility of the Perfect Storm, ironically the great liquidity crisis. And our latest $700 billion in tax money paying for all the high rollers to stay high and dry, while we scuffle in steerage, just waiting for the Titanic to hit the iceberg, and to see who gets into the lifeboats. Yes, Mr. Greenbacks, you did a great job of outpacing inflation and debt with obfuscation. The Wizard of the Fed has turned out to be just another felon-in-waiting, along with Dennis Koslowski, the maybe not-so-dead Ken Lay, hopefully Mr. Bernanke and Mr. Paulson, as well.

The disaster dream team

<>There are others worth a quick mention, the Chinese-speaking New York Federal Reserve Bank President, Timothy Geithner, ex Henry �China Opener� Kissinger�s prot�g�. Then there�s Goldman sacker John Alexander Thain; Dr. Gerald Corrigan, chairman of Goldman Sachs Counterparty Risk Management Policy Group, actually in charge of creating the risks and fiascos; BlackRock�s former manager of $1.2 trillion in assets, Ralph L. Schlosstein; BlackRock CEO and co-founder Larry Fink, who pioneered mortgage-backed securities (let�s hear it for this genius); John Pickel, president of the International Swaps and Derivatives Association, et al. [Included is an explanation of Securitized Mortgaged Lending and a lovely diagram]. 

Forgive me if I�ve missed some names, like Mario Draghi, Bank of Italy�s governor, former Goldman sack; or even Joshua Bolten, current White House chief of staff from Goldman.

With a dream team like this, it�s not surprising Goldman Sachs missed the shock of the securitized mortgage collapse and actually showed a 79 percent rise in profits. In fact, back when Paulson was an economist for Goldman, he was outraged that the Chinese had only 4 percent of their capital coming from organized capital markets, when elsewhere two-thirds of capital came in from the usual suspects� capital markets. The Ultimate Sacker is even encouraging Chinese peasants these days to sell off their hard-won land and move to the cities to work in the slave labor palaces of Wal-Mart�s everyday low-prices.

On and on it goes, including that fact that our shocked Mr. Greenspan (along with Goldman�s Lawrence Summers) was being investigated in September of 2001 for illegal gold transactions, specifically for selling Federal Reserve Gold to friendly Wall Street financiers at below market prices at that time. And wait, what about all that gold that disappeared in the collapse of the World Trade Center�s north tower on the 11th of that month?

So it goes, everything into the rabbit hole, no longer published like the M3 reports, more razzle-dazzle from the folks that brought you today�s mayhem, which was another controlled demolition of our economy, not just a matter of some bad mortgages. By the way, those �bad mortgages� were estimated by Paul Craig Roberts, in his �The Bailout and the Smell Test� to be no more than 10 percent of all the mortgages issued in that time frame.

Feel used, feel abused, feel like someone pulled the plug from your life? The answer is yes, yes, yes. But don�t let it disable you. Be strong. Suck it up. Fight back with the truth. We can�t let these vandals take the beachhead of the economy and gobble up the country we live in and love. There will come a time and you will be asked to act. So be ready, patriot. It�s coming, and not at a local theater near you, but in the streets and on the barricades.

Jerry Mazza is a freelance writer living in New York City. Reach him at Look for his new book, State Of Shock: Poems from 9/11 onat, Amazon or

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