The Crash of the American Economy

[Kitsune]

...only, you might not know it is even happening.

From the Federal Reserve:

On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Whoa -- wha? Huh? M3? What the hell is that?

You ought to read on. I never knew about all of these connections on the commodities market and, since Iran has been coming up a lot in the news, lately, find it a bit disconcerting. Who knew Europe would finally get tired of playing ball and set up their own game?

Yeah, it is from The Daily Kos, but you should read it, anyways. Just squint so you can blur out the anti-bush ads on the side. It won't hurt you much.

Verrrry interesting. I have a bad cold today, so I had some difficulty wading thru all the info on the links you provided, Kitsune. It certainly sounds as though some interestings things are in offing that no one is much talking about. Frankly, our military is over-extended as it is with the Iraq fiasco, otherwise, I'd be predicting an invasion of Iran in the near future. I never really understood how closely the dollar is connected to petroleum sales. OK, maybe I did a long time ago and forgot. Iran's bourse and the Fed's decision to stop posting stats on the M3 certainly make me wonder just what is afoot. It would be nice to get a comment from someone like Lookout who has a better understanding of the implications of such things.

Thanks for an interesting article.

[richlevy]

Well, that was scary. I have to admit, with Greenspan leaving, this is a bad time for new leadership. I hope Bernanke is up to it. Part of the problem is that being new, and from an academic background, he will start off lacking the credibility Greenspan had.

A large part of economics is behavioral, with a herd mentality affecting most of the participants. If things get difficult, the Fed chairman is supposed to be a calming influence.

More importantly, will Bush give Bernanke the same hearing he would Greenspan if things get hairy?

[Undertoad]

If you're scared, get a dog.

But whatever you do, don't ask a gold trader for advice about the currencies futures. That would be like asking McDonalds for advice about cholesterol.

I got the dog. Not sure what difference that will make for the economy, though, other than the personal one of the breeder.

[tw]

Oil is literally the blood of an economy. Wild oil price changes have adverse affects on an economy. Since all oil is traded in dollars, then any change in dollar value has no adverse effect on domestic oil prices. In that discussion, the dollar dropped from $0.82 to $1.25. That is a 50% valuation change. Therefore oil price changed 50%? Not in America. It changed in other currencies because, again, all oil is traded in dollars.

As Milton Freidman (Nobel Prize winner and a strong advocate of Reagan economic policies) even noted on Charlie Rose, the current president is spending wildly and destructively which is why tax cuts are not helpful. This has caused massive dollar amounts in other nations - that may even contribute to inflation problems in other nations. Why then would these nations (ie oil economies) want to sell oil for dollars that will only drop more in value? Why would they want dollars that will only drop in value due to uncontrolled 'drunken sailor' spending by this president?

IOW shifting oil sales to another currency would (according to economists) be another downer to the American economy. It would only make your bank accounts worth significantly less. No longer would other nations need dollars to lubricate their oil sales. Just another reason for further dollar dropping.

It’s not so much that each dollar drops in value. Using another currency for world trade would cause the dollar's value to further fluctuate destructively. Currency fluctuations are not healthy for an economy.

One reason why the dollar has been so stable: all oil is traded in dollars. A world isolating or protecting itself from an uncooperative and less stable US, well, even today's launch of Galileo is but another example of currrent world opinion.

I'm not sure why the author considers no M3 reports destructive. Normally such reports are not manipulated for political purposes. Federal Reserve is traditionally independent of the Presidency. But then I don't understand why the Fed would no longer provide an M3 report.

[Griff]

To follow the oil story a little further, did anybody else read Confessions of an Economic Hit Man yet? Perkins comes off as a con man possibly running a new con, but there is a lot of truth buried in his story that Bush supporters just can't seem to grasp and he puts to rest the idea that American business = free enterprise.

[Kitsune]

The solution is simple! Invest in the second most traded commodity in the world: coffee. We're even coming up <a href="http://www.thedailyjournalonline.com/article.asp?ArticleId=212603&CategoryId=12395">on a shortage</a> that will drive up the price rather nicely.

[Undertoad]

When the economic news is all good, the loyal opposition has to come up with scare stories about how it's actually secretly bad.

Iran can ask for dogshit in return for its oil. Or it can ask for the "Euro", a currency backed by the same thing as the dollar but where the voters just rejected the notion of forming a Constitution around this notion of "Europe". In the end, there will need to be an economy behind what they trade for, or they will be poorer. In the last year the dollar has risen 10% against the Euro and almost all US economic indicators are quite healthy right now despite the fact that oil doubled in price. That is pretty remarkable.

So if you're scared, get a dog.

[Undertoad]

I did more research into this:

- There are four M3 components and Eurodollars is the smallest of all of them;
- Most economist bloggers are unconcerned;
- Partly because the numbers are available elsewhere;
- And one of the 12 regional fed reserve banks may publish it anyway;
- And there used to be an M4 and an M5, and the Fed stopped publishing them and it didn't turn out to be a catastrophe.

So who started the idea and where did it go then?

- Most of the meat of that Kos Diary entry was almost completely taken from an August 2005 post here which seems to have been the start of the speculation.
- Googling for "Iran oil bourse" finds a ton of speculation about "petrodollar warfare", but none from serious economists, major publications (except al Jazeera, hmmm), etc.

Which to me is the killing blow. It suggests that the Kos diarist is wildly speculating, and are people who read it are glossing over the lack of serious connection between oil being traded for Euros and a massive drop in the value of the Dollar.

Because this stuff is hard to understand. But if it's the wrench in the economic engine, the untied shoelace in the US economic engine that will trip it so hard it falls on its face, shouldn't there be more serious conversation about it, from serious thinkers?

And nobody dare speak the fact that almost all economic indicators right now are like, pretty great. That's dog-bites-man news.

Which, in turn, leads me to another aspect of this. When all economic indicators are great, what economic matters will Kos diarists cover? Something like this -- sure, things seem great, but there's a secret monkey wrench that only we know about, which proves disaster is just around the corner.

In such worlds, markets that are really booming are not positive news, they are troubling "bubbles" that mght go bad at any time.

That sort of idea lives in the Kos sector, because it is widely repeated, because it tends to prove the suspicions in the school of thought.

And THAT, in turn, is why I remain a swing voter. I believe that, the further inside these schools of thought, the more error is introduced into one's understanding of the world. Similarly, if you want an example from the right, see Little Green Footballs falling away from the serious analysis he used to do, and into simple, unserious racism.

Sorry for the long post.

[Kitsune]

Originally Posted by Undertoad

Sorry for the long post.

No, no -- thank you for the long post, as it is fairly interesting stuff. This is all new to me, all of these economic links, and so I find it difficult to digest. Macro economics was never my thing.

As for the "economy is doing great" thing, I just don't see it. I'm ignoring the bond rate inversion news of today and just going on what I see around me. With consumer debt at an all-time high and the insane spending that both the people and government are engaged in scare me greatly, not to mention that manufacturing and the dollar are in the tank. The trade deficit continues to widen and China's grip on industry tightens each day. So even with the hyped growth, I don't get positive feelings about any of this. That is, however, because most of my information is based on a national level. I look at the closing of manufacturing plants, layoffs, and the trend of the general state of the average US citizen. I suppose none of this explains the economy overall, so when I found out about one of the major international ties to oil, I considered that it might help explain a lot of the fluctuations I don't understand very well. But, ah, it is still very confusing and I'm not certain I buy into any of these "analyst" predictions.

A lack of dog and economics education won't prevent me from playing armchair economist, though!

Nice digging, UT.

[Undertoad]

What economic indicators are important? Mine would be GDP, unemployment, job creation, personal income, and corporate income.

GDP and income figures available here; employment information here

GDP and corporate income are doing awesome right now. GDP is the most important economic indicator of all, the big daddy. They just reported 3Q05 GDP increase of 4.1%. That is not just good. It is excellent.

Personal income recovered from Katrina and the summer gas prices and continues a light drift upward; unemployment has been flat at 5% for a long time now, which suggests it is returning to the "baseline" it stood around for a long time in the 80s-90s. Job creation was the most-reported economic statistic preceding the 2004 election, but it was a lagging indicator and has been strong through 2005.

I don't care about the trade deficit because I remember the last time the trade deficit was a concern and it truly was not. I think trade deficits just happen automatically when the US economy is growing quicker than its trade partners.

I don't care about personal debt because people buy cars and other big items when they have an optimistic outlook on their income potential. Ask LJ.

I don't believe the manufacturing numbers are actually that bad.

[Undertoad]

Oh, and one more economic indicator that's fun to track. Jacquelita's brother is a UPS driver. They were utterly swamped over this Christmas season, way above and beyond previous Christmasses. He worked long hours and drove routes he normally doesn't drive and such. That's all raw economic activity happening, more stuff being bought and shipped and probably a very healthy internet economy too.

[glatt]

Originally Posted by Undertoad

Oh, and one more economic indicator that's fun to track. Jacquelita's brother is a UPS driver. They were utterly swamped over this Christmas season, way above and beyond previous Christmasses. He worked long hours and drove routes he normally doesn't drive and such. That's all raw economic activity happening, more stuff being bought and shipped and probably a very healthy internet economy too.

Yeah, but the brick and mortar stores were emptier than in previous years, so it's just a shift in where people are buying stuff, not a reflection on how much they are buying.

Well, here's my own very small economic indicator. I sell flowers on every major holiday. The flower selling biz is a pretty competive one in my town, and there's a big outfit called, surprising enough, THE Flower Company, which stakes out all the good spots. Then there's a few independents like me. I've found a pretty good spot - a major crossroads area south of town where people of every economic stratum find it necessary to pass by if they are trying to get from point a to points, b, c, d, e and beyond. The weather here Christmas weekend was mild and sunny - perfect flower selling weather, yet I'd say my sales were down by a third over previous years. And I had my dog out there with me.