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Causes And Effects

M3 - CONT'D

The Differential Picture

But there is yet another way of looking at M3. As Central Bankers always say, it is the difference that counts. Fair enough, let's calculate the difference between years in terms of M3. What we get is the plot below.

Let's take a look at the same events previously described and see if there is any correlation at all.

1 - 1979: Volker takes over the US Fed rising interest rates to ridiculous highs in order to "fight inflation". Printing stops hence M3 plunges.

2 - Regan is elected in US. He imposes "supply-side" economics. Printing restarts and M3 increases.

3 - Latin America Debt Crisis. Several Latin American countries enter default partially due to very high interest rates in US. M3 is increased substantially by Central Banks in order to prevent major US and EU banks from going bankrupt.

4 - Private equity boom in early 1980's. All the previously printed money is used to finance private equity purchases and leveraged buyouts. A stock bubble also forms. M3 begins to decrease for Central Banks attempt a "soft landing".

5 - The USD surges as a consequence of high interest rates in US. M3 begins to drop.

6 - The Plaza Accord is signed between key Central Banks to depreciate the USD. The Johnson Matthey Bank collapses in UK threatening to take the entire UK Banking system with it. M3 is increased dramatically to "depreciate the USD" and to "save the system".

7 - Passed that point, governments attempt to "stabilize" the situation by preventing more bubbles from forming, hence decreasing M3. They soon realize that the market is addicted to cheap money; particularly in the stock and private equity sectors. No new money means a market collapse and so they re-start increases in M3. This leads to the market crash of 1987 (bubble burst).

8 - As a consequence of the 1987 crash, Central Banks step in maintaining high M3 levels to prevent further market decreases. This fresh money is funnelled to Japanese stocks which enter into a bubble phase. This money is also funnelled to Savings & Loans financial organizations in US which also enter a bubble phase.

9 - Japanese stock market crashes. S&L operations crash. M3 is increased by Central Banks in order to prevent further economic and financial collapses. This creates an Emerging Markets stock and financial bubble.

10 - Governments attempt to decrease M3 to prevent further bubbles but they finally realize that without "stimulus" the entire market will collapse. Emerging Markets bubble grows and it finally bursts.

11 - Baring Brothers Bank in UK goes bankrupt. Bond crash in US. Mexican Peso Crisis. M3 is increased to prevent the collapse of the world financial system.

12 - Asian crisis. Several countries in Asia (Asian Tigers) can no longer afford to finance their debt. M3 is increased to prevent a "contagion" throughout the world financial system.

13 - Central Banks again attempt to reduce M3 in order to prevent bubbles and realizing that this does not work, they reverse path and increase M3. This triggers the Russian collapse. Russia can no longer afford to finance their debt. M3 is increased again. M3 is re-directed towards "safe" investments such as the Technology sector in stocks in US creating a bubble.

14 - Technology stock bubble crashes in US. For once Central Banks do not intervene (the correct thing to do) and they decrease M3.

15 - Partially because of the lack of M3, Argentina can no longer afford to finance their debt and it defaults. M3 is increased to prevent a financial system collapse. Fresh M3 money is re-directed towards "safe" investments creating the Real Estate and Commodity bubbles.

16 - M3 is soaked by Real Estate and Commodity bubbles.

17 - Several crises happened. Example: the US housing correction, recessions, pre-2008 mini-crisis. Because of these "successes" M3 is decreased to prevent further bubbles.

18 - US Sub-Prime Crisis and world-wide contagion. M3 is drastically increased which creates a bubble in Gold.

Global M3 Differences

Summary

Do you begin to see the pattern here? For whatever reason (typically a "stimulus" excuse of some sort) M3 is increased which creates "better economic conditions". The problem is that because these conditions were created by the increase of M3, they are dependent from it and because the creation of M3 is "inefficient" in "stimulating" the economy, vast amounts of M3 are necessary and so they end up elsewhere. This "elsewhere" is the next bubble. As soon as the "stimulus" conditions are established the geniuses at Central Banks deemed the expansion of M3 "mission accomplished" and they decrease M3 in order to engineer a "soft landing" which never happens and ends up bursting the bubble. Because of this and to prevent "global financial risk" M3 is increased again and the next bubble is formed.

In short the process is:

  • M3 Increase
  • Bubble
  • M3 Decrease
  • Bubble burst = Crisis
  • Repeat

CONCLUSION

In this article we showed you compelling evidence of what everybody and their cats (but not Central Bankers) know: printing money produces bubbles. Furthermore, we showed that for at least the last 45'ish years of Central Banking this cycle has been un-interrupted with one critical observation; every crisis is larger than the last one. Because of the actions of Central Banks the entire economy of the world is utterly un-forecastable. There is a cause of every effect in economics but the ultimate causes of these massive economic debacles we are going through now and will continue to go through are Central Banks. It is always the same old story:

  • Central Banks print
  • Bubbles are created
  • Central Banks stop printing
  • Bubbles collapse
  • Repeat

And the question becomes why? Not why this is happening but why do we put up with all this manure? The answer is simple: we (you, us) have been brainwashed. Thoroughly. Communists may have lost all credibility but Socialists are still alive and well. The people using the Central Bank system today are the worst socialists of all times, with the exception of those that will come tomorrow.

If you trace the origins of Central Banks back in time, you will always find government action at the bottom of it. Central Banks did not originate because of Communism or Socialism, they predate them. Central Banks originated because of government wishes, which is to say politicians' desires…which were in many cases commercial desires. Free enterprise saw the opportunity to make huge profits through the creation of Central Banks, this is absolutely true. However, we must point out that these commercial interests were only able to do so because of the existence of governments. Without governments Central Banks are not possible and a truly free market (i.e. serving the needs of customers) is the only way to make money. In ultimate analysis Central Banks are at the root of all our problems and they are there because governments exist. Remove governments and problems sort themselves out. Hummm…. Where have we seen this before….

But then again, you may believe that economic crises somehow "just happen" and that Central Banks and M3 are just passive passengers or "benign" agents attempting to prevent "unbound greed" in free markets. Fair enough, but then why exactly do we need Central Banks? If they are passive they are neutral and serve no purpose. If they are benign, they have failed miserably in preventing any economic crisis and serve no purpose. Why exactly is that you believe we need them?

Note: please see the Glossary if you are unfamiliar with certain words.

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