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December 17, 2005

The Grand Illusion
by Rob Kirby

Who hasn't read about the U.S. Federal Reserve's plan to discontinue reporting M3 money supply data? Well, in case you missed it, you can read about it here:

Discontinuance of M3

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.

Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).

Much has already been written about this announcement - made on Nov. 10, 2005 - most of it not particularly flattering toward the Fed.

What strikes me as being of most odd about the press release above is that "The Board" will also cease publishing the following components part. You see folks, large-denomination time deposits, repurchase agreements [RP's], Eurodollars and the like are exactly where one would expect to find the 'capture' of any large scale monetization effort that the Fed would embark upon - should the need occur.

You see, I've written about this topic before and would like to remind everyone how the 'super spike' in aggregate outstanding Repos [Sept. 05] depicted in the chart below was directly co-related [time wise] to the well publicized liquidation [roughly 20 billion worth] of U.S. debt obligations by Venezuela.

Compliments:www.omo.co.nz

What strikes me as being even odder is the date - March 23, 2006 - that the Fed plans to cease reporting this data. Any guesses as to what else [of major significance] is supposed to happen on or about this date?

It just so happens that on March 20, 2006 - everybody's favorite Middle Eastern Nation, Iran - is scheduled to begin trading oil for Petroeuros on their own "newly minted" Iranian Oil Bourse [IOB].

So What You May Say?

Call me silly, but has anyone noticed that the Fed's last report of M3 just happens to be the week prior to the first day of trade on the IOB? You see, if countries like Japan and China [and other Asian countries] with their trillions of U.S. dollars no longer need them [or require a great deal less of them] to buy oil - does anyone suppose they might begin a wholesale liquidation of their U.S. Bonds [the primary instrument where foreigners 'store' their U.S. dollars]?

Well, count me in coach - because [barring an accidental war or invasion of Iran] the demand for Petroeuros [and subsequent liquidation of dollars] could have - in Greenspan parlance - highly undesirable effects on foreigner's willingness to hold vast sums of U.S. debt obligations.

If [and I'm afraid when] foreigners begin wholesale liquidation of U.S. debt obligations, there is no doubt in my mind that the Fed will print the dollars necessary to redeem them - this would necessarily imply a an absolutely enormous [can you say hyperinflation] bloating of the money supply - which would undoubtedly be captured statistically in M3 or its related reporting.

It would appear that we're all going to be 'flying blind' as to how much money the Fed is truly going to pump into the system folks. My best guess is that the gold market [and perhaps the oil market, natural gas market, copper market, etc.] has already sensed this and is reacting accordingly. Better get your wheel barrows early, they might be harder to find than rocking horse droppings or M3 related statistics come April!

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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