Reply #19: My Takes, In Reply [View All]

The leveraging isn't as bad as it looks. It's bad from a U.S. history perspective, but many countries (Japan, Western Europe in the 50's and 60's, Mexico in the late 80's, So. Korea in the mid-90's) had far higher leverage levels and their economies survived. So, while i certainly don't disagree about the fact that we're at high degrees of leverage and the economic condition is mediocre at best, it's far from panic time. I'm of the opinion that economies at our scale move glacially and are not subject to sudden shifts of tectonic proportion. So, there is plenty of time to correct the mistakes. But, they DO have to be corrected.

As to the Iranian bourse thing, don't get me started. I'll get flamed again. In my research, there is absolutely no evidence that an economy can be other directed by the choice a supplier makes in currency of exchange. The Iranians can change but i don't see that having a large impact on the economy. It's going to go where it goes based upon monetary and fiscal policy without much regard to extrinsic decisions like that. And, since the neocons believe that the shift to petroeuro (from petrodollar) would be bad, i'm reflexively inclined to disbelieve it, since they've been wrong about everything else.

You don't M3 to tell how much cash is in circulation. Cash actually in circulation is in M1 and all cash equivalents are in M2. M3 was not a terribly useful metric anyway and the failure to report that is hiding, if anything, how much foreign-held debt there is. But, it's not really hiding it, just making it harder to figure out. We can still figure out that number quite exactly anyway through other market metrics. So, eliminating M3 is not a precursor to, or a smokescreen behind which to fire up the presses. There's plenty of cash in circulation and there would be no real advantage to printing more dollars anyway. Even if the gov't printed another trillion dollars (they won't), their balance sheet still wouldn't mesh. The deficits would still exist as a function of receipts v. outlays, and their cash flow sheets would still indicate negative numbers.

The hit on people's finances may happen if the market corrects to reflect the stagnation of the real economy. Right now, there is great deal of hedging expecting an eventual uptick in the real economy. Investors are, by and large, going very long right now. From a pure economic perspective, this is actually good because it stabilizes the market v. the stagnant economy and reduces the velocity of money within the market. That should keep the market from going nuts due to mid-range speculation. (See 1987 as an example of where the economy was flattening and the market went wild anyway.)

But, again i don't think the elimination of the M3 report will have anything to do with that. More likely, if the economy stays flat and if energy prices keep rising, the overall consumption of other goods and services will fall as people have hit their "lack of comfort" level of debt. That will cause a far more noticeable contraction of the economy which will scare the daylights out of investors. Then investment value may fall by enough to cause some pain.

These are only opinions, but they are at least, based upon a lot of causative modeling and data crunching.
The Professor