M(3)urder Will Out!

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Since conspiracy theories abound regarding the Fed’s mysterious and rather sudden decision to discontinue collating the M3 data, we offer this — only partly tongue-in-cheek — as a further, suitably alarmist example of the genre.

Firstly, we must ask whether it could be wholly a coincidence that, just as we are to read the obsequies over our beloved aggregate in March 2006, Iran (if not yet "wiped off the map" by the Imperial legions or their auxilia) is due to open its long-heralded oil bourse; an exchange where trading will be conducted — horror of horrors! — in Euros, not USD.

Now, if this were to spark a reserve shift and/or a more general flight from a dollar currently back in vogue with the leveraged crowd — a switch perhaps aided by moves from those other energy kings, Mssrs. Chavez and Putin — dear old Ben Bernanke would probably be compelled to help American banks monetize much more of Uncle Sam’s debt, in order to keep domestic bond yields from soaring.

Though the mere fact of opening another financial casino might not, of itself, seem to pose much of a threat to the u2018exorbitant privilege’ of the pax Americana, it could, in fact be the crack in the levee which allows the dollar’s unsteady hegemony to be swept away in an ensuing deluge of fear.

For one, America’s main creditors — the Asian central banks — are undeniably nervous about the $2.7 trillion Faustian bargain they have struck with their most importunate customer, as HK Monetary Authority chief, Joseph Yam, reminded an audience only this week, when he told his listeners:

“Whether we like it or not, we now find ourselves in the unenviable position of holding a substantial part of our savings in the financial liabilities of an economy that does not save, fearing that a diversification of a small part of such holdings might lead to a sharp fall in the value of the rest, thus shooting ourselves in the foot."

"We also find ourselves somewhat stuck with recycling a large part of our savings through the developed markets back into the region in a much more volatile form, occasionally creating havoc in our monetary and financial systems.”

Moreover, though the participants have understandably been chary of divulging any specifics of the scheme thus far, the six oil-rich members of the Gulf Co-operation Council are aiming to “reach agreement on the principles of a monetary union by 2006″ and “to press ahead with preparations for a single currency along the lines of the euro” — under the guidance of none other than the European Central Bank itself.

At present, all these candidate currencies are pegged to the almighty dollar, but it would hardly stretch credibility to imagine that the Arabs’ European advisers might see fit to hint that a broader basket of reference currencies — to include those of their other, major trading partners — might be more suited to the purpose.

With the IMF estimating that, as a group, the world’s oil exporters will enjoy cumulative current account surpluses of no less than $900 billion this year and next — and with the Gulf inevitably bound to reap the lion’s share of that enormous bounty — the question of the ultimate fate of this mountain of petrodollars is hardly a trivial one.

It should be obvious that, given the potential sums involved, even a proportionately minor shift, on the part of the oil producers, in favour of a wholly sensible reserve diversification, could have profound implications for markets in the chronically over-borrowed and acutely over-stretched US of A.

Furthermore, if the Bank of Japan can shake off the snarling pack of political dogs who are threatening to legislate against its operational independence in the event it should actually choose to exercise that same privilege, the close of the current fiscal year — March, 31, 2006 — might also be an opportune moment for it to commence the delicate task of weaning its recovering economy off the drug of its u2018quantitative easing’ policy and to begin edging interest rates up from their present, wholly unnatural, zero setting.

Then, absent the multi-billion, one-way bet which relies on further copious BOJ largesse, both local Japanese investors and the hordes of greedy gaijin — who finance a great deal of their speculative trades almost for free, by borrowing Yen and then selling it for dollars — could find it expedient either to liquidate their positions outright, or to finance them directly in dollars — so pressuring asset prices and interest rates in the US, in turn.

Bernanke’s putative problem could be further exacerbated next Spring by dint of the fact that last year’s soggy stock market is not likely to produce much of an April tax windfall in 2006 and so bad deficit headlines will once again be in prospect just as the Administration will want to be ladling out extra dollops of vote-winning pork ahead of the mid-term Congressional elections.

A similar rational would come into play if, by then, any of the following, homegrown exigencies arise:

  • the finally-exhausted US consumer finds herself in need of a little Rooseveltian assistance from the public purse;
  • the impending pensions bust intensifies (post GM?) to the point where a new Resolution trust is deemed necessary;
  • any of the mortgage, M&A, or LBO bubbles begin to produce a few shockers for the financial sector

(Timing here, however, is necessarily much less exact.)

Finally, who knows what retaliatory action — or even unintended consequences — might redound if those Solons of virtue and wisdom, Senators Charles Schumer and Lindsey Graham, at last succeed, by the March 26 procedural deadline, in raising a punitive tariff on Chinese imports and so inscribe their names in the roll of economic history, right next to their illustrious predecessors, Senator Reed Smoot and Representative Willis C. Hawley.

Ergo, if, in order to deal with any of the above, a heliborne rescue mission of the accelerated monetization of government debt were seen to be needed next March, the simultaneous suppression of the M3 data would usefully serve to obscure the extent of the US banks’ role in the scheme by no longer revealing — as one of the aggregate’s particular components — what would then be the banks’ rapidly swelling repurchase agreement liabilities (all of them held against USTs & government Agency bonds).

Thus, the abandonment of M3 could disguise this Reichsbank-like response to America’s hypothetical future ills for some little while thence, delaying market fears of a hyperinflationary outcome, and so keeping "Blackhawk" Bernanke hovering over the scene of the emergency for a little longer than might otherwise be the case.

As with all good conspiracy theories, we hope this sounds just credible enough to keep you wondering whether it might even be true, even though, at this juncture, we have to emphasise that it represents nothing more than the rankest of rank speculations.

After all, it would surely be simpler to assume that the new Chairman might just have taken pity on the poor, overworked public servants — toiling selflessly away in the dreary depths of the Marriner S. Eccles building — and that he has therefore decided to lighten the drudgery entailed in crunching the same, weary old set of numbers they have routinely had to process for each of the past 47 years.

Only time will tell.

Sean Corrigan [send him mail] writes from Switzerland.

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