Alan Greenspan


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Fed Can’t Print Its Way Out

A well-known stock market commentator this week said, “There’s been no growth in the money supply for two to three years.”

He also suggested that the recent increase in consumer credit is a positive economic development.

Well, here are the facts. At the end of November, the latest date for which data is currently available, the most common measure of the money supply, known as M2, had risen 11.4 percent since November 2005 and 16 percent since November 2004.

(Just in case you wanted to know: The M2 money stock includes currency, coins and traveler’s checks held by the public; balances in commercial bank checking accounts; balances at credit unions; savings accounts and certificates of deposit accounts less than $100,000; overnight repurchase agreements at commercial banks; and non-institutional money market accounts).

A broader measure of the money supply, the MZM money stock, has risen at an even faster rate over the past few years.

As of Nov. 30, MZM had risen 18.2 percent since Nov. 30, 2005 and 20.8 percent since Nov. 30, 2004.

(In detail, MZM includes all of the components of M2 mentioned before, plus institutional money market accounts and greater-than-one-day repurchase agreements).

So, as you can see, the money supply has clearly grown over the past few years.

My guess is that the well-respected economist who made the comments about the lack of growth in the money supply was referring to a different measure of money, known as the monetary base. That’s defined as currency in circulation plus funds held by commercial banks at their respective region’s federal reserve bank (“reserves”).

Although the monetary base also has risen over the past few years, it has grown at a much slower pace than the M2 or MZM money stock. As of Dec. 31, 2007, the monetary base had risen a modest 4.2 percent since December 2005 and only 8.5 percent since December 2004.

So, you’re probably thinking “Why all of the talk about the money supply?”

The answer is this: When the money supply increases, short-term interest rates tend to decline, and when the money supply decreases, short-term rates tend to rise.

In fact, the Federal Reserve adjusts the target rate for the Fed funds rate by affecting the level of the money supply, or more precisely, by affecting the monetary base.

When the Fed seeks to lower the target Fed funds rate — the rate at which commercial banks borrow (overnight) from one another — the Fed increases its purchases of U.S. Treasury securities in the open market.

(Those who follow the Fed may have noticed that the press releases issued by the Federal Reserve following meetings on interest rate policy always begins with statement, “The Federal Open Market Committee decided to… ”. That’s why it’s called the “open market” committee, because it buys securities on the open market.)

Likewise, when the Fed desires a higher Fed funds rate, it sells U.S. Treasury securities.

However, the Fed is not able to set the exact level of M2, MZM or other money supplies, because there are other factors that affect the money supply.

For example, the ongoing credit crunch and large sums of money that commercial banks have lent to financially-strapped businesses and to individuals over the past six months has caused commercial bank reserves to fall — even though the Federal Reserve has increased its purchases of Treasury securities.

As a result of the decline in bank reserves, the monetary base has grown at an anemic rate over the past few months. In fact, the monetary base rose only 1.5 percent during December 2007 from the same period a year ago.

In light of the ongoing credit crises, the Fed will likely need to significantly increase its purchases of Treasury securities in order to increase the monetary base. Many Wall Street economists have recently been encouraging the Fed to take this step in an effort to lower short-term interest rates.

(Note: When the Fed increases its purchases of Treasury securities, the prices of those securities rise as a result of their increased demand and the yields — interest rates — on those securities therefore fall.)

Well, here’s what I have to say about the recommendations of these “insightful” economists. Go ahead, persuade the Fed to increase the monetary base, because one outcome is certain if the Fed follows the desperate advice of these “experts.”

The result will be that the exchange value of the U.S. dollar will plummet and inflationary pressures will skyrocket. Gold prices, already breaking records, will continue to surge.

In regards to the esteemed economist’s comment regarding the supposedly positive increase in consumer credit, you should consider the following: When the economy is in an expansion mode, an increase in consumer credit is usually a positive development, because such a development indicates that consumers are confident in the future direction of the economy.

To be more specific, when consumers feel good about their employment prospects and their future earning power (that is, salaries and wages), they tend to take out more loans for automobiles, consumer electronic devices and home appliances. They also tend to use credit card debt more willingly for spending on clothing and other personal items, as well as dining out at their local restaurant.

As a result, aggregate consumer spending tends to rise during such periods, as does the total output of goods and services (GDP). That’s because consumer spending accounts for approximately 70 percent of U.S. GDP.

However, when consumers become more fearful of losing their jobs and their confidence in future economic conditions falls sharply — which is exactly what has been occurring over the past two months — an increase in consumer credit should be interpreted as a very negative development.

This is especially so when a large number of consumers begin using credit card debt to help pay their home mortgage loan, as they have also been doing over the past few months. But, don’t worry, there’s also a way to profit from this type of supposedly “positive” economic development.

How would what goes on in the US economy affect the rest of the world, one would ask? Because US Treasury Securities are the world’s most trusted and are purchased by almost every enterprise public or private. So when they are catch a cold, the world sneezes …

Copyright (c) 2008 Money News

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Former U.S. Federal Reserve chairman Alan Greenspan said it is possible that the euro could replace the U.S. dollar as the reserve currency of choice.

According to an advance copy of an interview to be published in Thursday’s edition of the German magazine Stern, Greenspan said that the dollar is still slightly ahead in its use as a reserve currency, but added that “it doesn’t have all that much of an advantage” anymore.

The euro has been soaring against the U.S. currency in recent weeks, hitting all-time high of $1.3927 last week as the dollar has fallen on turbulent market conditions stemming from the ongoing U.S. subprime crisis. The Fed meets this week and is expected to lower its benchmark interest rate from the current 5.25 percent.

Greenspan said that at the end of 2006, some 25 percent of all currency reserves held by central banks were held in euros, compared to 66 percent for the U.S. dollar.

In terms of being used as a payment for cross-border transactions, the euro is trailing the dollar only slightly with 39 percent to 43 percent.

Greenspan said the European Central Bank has become “a serious factor in the global economy.”

He said the increased usage of the euro as a reserve currency has led to a lowering of interest rates in the euro zone, which has “without any doubt contributed to the current economic growth.”

© 2007 Associated Press. All Rights Reserved.

By press time of the article above, the US Federal Reserve had not yet announced its intentions to cut benchmark rates by half a percentage point.

As of the time of this posting the rate stood at 4.75% bringing new surge in the markets around the world with the Dow Jones gaining over 300 points in one day … thanks a trillion.

Brainwave R Mumba, Sr.

Market Reaction Around The World …


StarPhoenix

Interest rates decision spurs Australian stock market
Melbourne Herald Sun, Australia – 1 hour ago
THE US central bank’s decision to slash interest rates for the first time in four years spurred the Australian stock market to its biggest one-day rise in a
Fed Cuts Rate Half Point, and Stock Markets Soar New York Times
Fed lowers interest rate, and stock markets soar Kansas City Star
Fed’s Rate Cut Korea Times
TheStreet.com (subscription) – San Jose Mercury News
all 2,326 news articles »


Aljazeera.net

Asia markets soar after US rate cut
Aljazeera.net, Qatar – 8 hours ago
Asian stock markets have seen strong gains, following the first cut in US interest rates for four years. Shares on Wednesday were up by more than 3 per cent
Asia Stocks Jump After Wall Street Surge Washington Post
Most Asian markets lower; Tokyo stocks fall amid renewed concern International Herald Tribune
Financials weigh on Asian stock markets Financial Times
Euro2day – Euro2day
all 393 news articles »


StarPhoenix

Toronto stocks seen rising on commodities
Reuters Canada, Canada – 3 hours ago
TORONTO (Reuters) – Toronto’s main stock market index was seen opening higher on Wednesday as the US Federal Reserve’s bigger-than-expected interest rate
Stocks surge post-Fed Globe and Mail
Toronto stocks steady ahead of Fed decision Reuters Canada
Toronto stocks steady before Fed decision Reuters Canada
Globe and Mail – The Canadian Press
all 146 news articles »


Montreal Gazette

Clash Of The Emirates
Forbes, NY – 21 hours ago
could give Nasdaq an extra-thick financial shield against the ambitions of Dubai as well as more investment in international stock markets for Qatar.
Stockholm shares close lower, but OMX up on M&A speculation – UPDATE Forbes
all 48 news articles »


Hindu

Stock markets, rupee scale record highs
Earthtimes.org – 2 hours ago
The 30-stock Bombay Stock Exchange sensitive index (Sensex) rose 653.63 points or 4.2 percent to 16322.75 at close. All the components of the index were
Markets surge on Fed Reserves rate cut buzz Business Standard
Sensex breaches 16000 mark; up 653 points at close Zee News
Sensex recovers initial losses in late morning deals Hindu
Hindu – Economic Times
all 87 news articles »

Stock Market Update – Wed Sep 19 12:00:01 EDT 2007
Reuters – 11 minutes ago
5.5% gain in the stock. The feeling that the market is getting a bit overbought on a short-term basis could invite some afternoon selling interest.

Stock Market Update – Wed Sep 19 09:45:01 EDT 2007
Reuters – 2 hours ago
COM] The stock market has started the session on an upbeat note as the good vibes from yesterday’s trading continue to be felt.

Global stock markets rally after US interest-rate cut
Belfast Telegraph, United Kingdom – 8 hours ago
Stock markets across the world are continuing to rally amid signs that the global credit crunch is starting to ease. The rally follows a decision by the US

Stock Market Update – Wed Sep 19 10:35:01 EDT 2007
Reuters – 1 hour ago
COM] Buying interest has calmed after the excited start that followed yesterday’s rate-cut rally and the huge gains in foreign markets overnight.


Capital News 9

After Fed cut, debt market problems persist
CNNMoney.com – 1 hour ago
Global stock markets cheered Tuesday after the central bank cut the target for a key short-term interest rate. On Wall Street, the Dow Jones industrial
AP Executive Morning Briefing The Associated Press
Debt Market Looks to Fed to Restore Confidence New York Times
Wall St. awaits the other Fed guy CNNMoney.com
CNN-IBN – USA Today
all 157 news articles »