The Magical Mystery Economy Tour

As I have revealed before, I’m not an economist.  I decided to take a little tour today anyway.  First stop on the tour: The Dow Jones. Today the Dow dropped 214 points closing at 12,040.39.  I remembered that some months ago a big celebration took place on Wall Street with a record high.  That would be October 9th, 2007 with the high recorded as 14,164.53.  Its fallen ever since with a few sporadic jumps.  The difference between today and that high: -2124.14  This is the lowest closing level in 18 months.  What’s so magical you ask – the economy is doing fine, we’re not in a recession (imagine Ben Baranke and the Administration waving their magic wands as you recite that mantra).  The mystery – when will the dow stop its downward spiral.

Second stop on the tour: The housing crisis market.  Another jumbo mortgage lender, Thornburg Mortgage Inc, went into default today.  Citigroup thinks it can solve its problems by cutting its home loan exposure by $45 billion.  How exactly they can pull that off is both a mystery and magical.  Not to be outdone, Freddie Mac and Fannie Mae were both down today and it is official that foreclosures hit a record high in 2007’s 4th quarter.  And they say the bubble still hasn’t popped – that’s going to be a fun addition to the tour.

Third stop on the tour: The American dollar.  Won’t be long now before we are crying for that Amero.  As of today that piece of paper with ink on it folded up in your wallet gets you .65 Euros and .50 Pounds.  No European vacation for me at the end of the tour, but that sure explains all the accents at Walt Disney World the past couple months.  The mystery to this – what is giving the dollar any worth at all.  The magic – the FED.

Fourth stop on the tour: The M3 Money Stock.  Wait a minute, we can’t go there because on March 23, 2006 the Board of Governors of the FED ceased publication of the M3 monetary aggregate and its components because “the costs of collecting the underlying data and publishing M3 outweigh the benefits”.  What benefits would those be – first let me explain M3.  M3 is the broadest measure of money covering the entire supply of money within an economy.  That includes physical currency, checking accounts, saving accounts, CDs, etc.  So what is the mystery behind this move?  If M3 is not published for all to see, then we don’t know exactly how much money the Central Bank FED has printed and added to the money supply which they usually do in times of recession (which we magically are not in, remember).  So there would be no obvious measure to reveal how screwed we are.

Fourth stop on the tour: The FED.  I’ve already blogged before about this private institution so the only mystery here is what will their next move be and I’m betting it is another cut in interest rates.  A dilemma for the FED in regulating the money supply is that when interest rates are lowered for one asset class, like real estate, prices in other assets rise.  It is a delicate balance which the FED has never gotten right.  Milton Friedman was right when he advocated non-intervention from a Central Bank.  But then they couldn’t magically control us via the economy.

So where and when does this tour stop?  I believe that could be summed up by the words of the website “Recessions and a bust in asset price bubbles often precede banking and currency crisis.  High world oil prices {which hit $106 today} pose a danger to the current account position and could lead to domestic recessions.”  I don’t think it is a matter of could, but DID!


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