Here's a Surprise

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Nearly flat for 2 years

One of the things that I have occasionally remarked on is how data for M3, one of the broader measures of money supply is no longer collected by the Fed.

The claim is that it's a conspiracy to conceal the reckless and inflationary expansion of the money supply, but as Tim Iacono shows, it hasn't really happened.

Basically, the Fed may be printing money, but banks are not lending, so the money supply, at least the money supply as described by the M3, is basically flat, so we are not in an inflationary situation.

To my mind, this is a bad thing, since, as I have stated many times before, increasing inflation will have the effect of moving the price many assets above the amount of money owed on them.

A description of the various measures of money, cut-and-pasted from the Wiki, is below the fold:

Is the Daily Telegraph for Real?

The Daily Telegraph (UK) wringing its hands over a worrisome drop in the money supply, with bank loans falling at a 14% annual rate, and that M3 is falling at a 5% annual rate.

Anyone know the reliability of the Telegraph, because I'm a bit dubious of this assessment, because the Federal Reserve stopped reporting M3 in 2006., see the graph pr0n courtesy of Shadowstats.com.

The estimated figure looks like a significant drop off in M3, or at least the folks at Shadowstats best estimate of M3, but M2 is stable, and M1 is through the roof, so I'm not sure if all this gloom and doom reporting is warranted.

British financial journalism tends to be a bit more alarmist than that of the US, particularly in The Grauniad^*, so I'm wondering how real this is.

^*According to the Wiki, The Guardian, formerly the Manchester Guardian in the UK. It's nicknamed the Grauniad because of its penchant for typographical errors, "The nickname The Grauniad for the paper originated with the satirical magazine Private Eye. It came about because of its reputation for frequent and sometimes unintentionally amusing typographical errors, hence the popular myth that the paper once misspelled its own name on the page one masthead as The Gaurdian, though many recall the more inventive The Grauniad."

Running Grisly Numbers

As I have noted earlier, I've not made much in the way of comments about the Gaza war, because I have very little to add.

Then there was a discussion of plans by IDF to bring in large pumps and flood the Gaza tunnel complexes with seawater at the Stellar Parthenon BBS, and someone said that they should use desalinated water to minimize the damage.

And then I got to go all, "Guardian of Forever," because I got to run numbers. Someone gave me a problem to solve, and by Spock's pointy ears, once you do that, there is no stopping me.

Just ask Sharon*, when I said early in our marriage that I was neither of us were the divorcing kind, we were the murdering kind, and she asked me, "So how would you kill me?"

Give me a problem, and I will look for a solution.  It makes me happy to figure stuff like this out.

My solution, rather upset Sharon* for a few days, but as the chicken said, "You knew the job was dangerous when you took it.

So back to the flooding problem.

Point 1 which should be obvious to everyone, is that flooding the tunnels will do enormous damage regardless of the salinity of the water , because pumping that much water into a cave complex does a f%$# tonne of damage.

So, let's assume that the IDF has about 20 so pumps to flood the Tunnel.

The first question is, "How much water will they move?"

Well, given that the Three Gorges dam has a flow rate of about 600–950 cubic metres per second with a water head of 86m through through its generators, and you are looking for flow rate, and not pressure (head), we can say that about 20 pumps could likely put out about 100 m3/s, (26,417 gallon/s) probably with about a 10m (32.8 feet) head.

Each pump would put out 5m3/s (1321 gallon/s).

By way of comparison, the one of the larger fire boats out there the Warner L. Lawrence  can put out about 38,000 gallon/minute. (633 Gallon/S or 2.397 m3/s).

OK, so we would probably be looking at more pumps, or less water, but comparative numbers are the same.

The equation for the energy required for pumping is:

P = q h ρ / (6116 103 μ) (3)

where

P = power (kW)
q = flow (liter/min)
h = head (m)
ρ = density (kg/m3) (water 1000 kg/m3)
μ = pump efficiency (decimal value)

100 m3/s equals 6 million liters per minute, we've got a head of 10 feet, and I am assuming a pump efficiency of 80%, which is probably a bit low.

Crunching those numbers, we get 12,263 kW, which is a lot of power, about ⅓ of the shaft horsepower of a Virginia Class SSN.

So for 100 m3/s of water desalination, how much power does it take?

Well, it takes between 3 and 9 kWh/m3 of water using reverse osmosis, generally considered the most efficient method. Taking the low end, 3kWh = 10,800,000 Joules, so to desalinate 100 m3/s of water, you would need, 1,080,000,000 Joules/s = 1,080,000,000 W = 1,080,000 kW = 1,080 mW = 1.08 gW.

That is roughly 88 times more power than involved in just pumping sea water, and about 5% of Israeli generation capacity of 21.5 gW.

As such it is likely not viable.

Now this is all just spitballing, and I am not considering the humanitarian and moral issues, because this serves as a way for me to avoid the potential humanitarian and moral issues.

Please, feel free to check my math.  It is late at night, and I am still recovering from whatever variant of the Plague that I caught from my wife, so my mind is no where as clear as it should be.

Feel free to castigate me for running these numbers as a way to avoid looking at the moral dimensions here.  I just can't do that yet.

^*Love of my life, light of the cosmos, she who must be obeyed, my wife.

Economics Update

Ummm....This is not a day for pleasant economic news.

First, the Leading Economic Indicators indicate a bigger slowdown than anticipated, dropping 3x more than expectations, and then the Philly Fed index fell for the 9th straight month.

Employment isn't good either. While new unemployment claims fell, the 4 week rolling average rose, and in any case at 432,000 claims (seasonally adjusted, which is the elephant in the room), it's still too damn high.

If you are a monetarist, then we have more bad news, because the growth rate for M3 has dropped off a cliff (chart pr0n below):


Note that this is a graph or the rate of growth, not the money supply, so the effect on the overall money supply is less than it appears, but, "As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation."

The chart is a rolling 3 month average of the annual rate, and the rate for May-July is 2.1%, indicating a contraction of the M3 money supply in real terms, which would suggest downward pressure in housing and financial markets.

We also have the Reuters/Jefferies CRB Index of commodities making the biggest weekly jump in over 30 years and oil up by 6 bucks, along with the dollar falling which seems to indicate that the past few weeks might just have been profit taking...a breather before an ascent to the summit, though
gasoline is down over a dollar today.

Alan "Bubbles" Greenspan, the "I Didn't Do It Kid", Says that Housing is not His Fault

Yep, he's claiming that the housing bubble, and subsequent bust are not his fault.

• He claims that evidence of any link between monetary policy and the bubble was “statistically very fragile”.

Let's see, you nearly tripled the money supply before you stopped publishing M3 data in 2006, and that is "fragile".

• He Claims that he is, "puzzled why so many commentators seek to explain the US housing bubble in terms of Fed actions when many other economies with different central banks and different monetary policies also saw rapid house price gains."

M3 again baby, with all that money that you created, it all had to go somewhere.

• Mr Greenspan says, it is only with hindsight that it looks like the US economic recovery was well enough entrenched before 2004

Dude, that was you PIMPING yourself to George Walker Bush for the election, so you would get reappointed.

• Mr Greenspan reaffirms his long-held belief that central banks cannot effectively “lean against the wind” by setting monetary policy a little tighter than it would otherwise have been during asset price booms.

Dude, you have actively pumped up and bailed out every asset boom under your watch. You engineered bailouts, either through monetary policy such as low interest rates, or directly, as you did with the LTCM hedge fund.

• Mr Greenspan also takes issue with those who blame lax regulation by the Fed for allowing a serious deterioration in underwriting standards in the mortgage industry. The problem, Mr Greenspan argues, “is not the lack of regulation, but unrealistic expectations about what regulators are able to prevent”.

Which is why you did your best to effectively dismantle Glass-Steagall back when Paul Volker was Fed Chair.

• The former Fed chief says the core of the subprime problem “lies with the misjudgments of the investment community”. The scramble to invest in what were initially highly profitable subprime loans would have overwhelmed any regulatory effort to slow the growth of this sector, he claims.

You allowed, scratch that, you encouraged the repackaging of garbage into Byzantinely complex instruments, and you called them good.

Regulators are more than able to prevent this, you were simply completely unwilling to take even the most basic advisory steps to do so. Your whole hearted of so called financial innovations like "credit default swaps" which are too complex for the people who trade them to understand is clear.

The legacy of Ayn Rand, your mentor, is bad writing, ugly prose, and the impoverishment of all but the most dishonest.

Thanks asshole.

Stupid Federal Reserve Tricks

I have, on a number of occasions mentioned that the Fed has a habit eliminating statistics that might show them in a less than stellar light, so we have them dropping M3 from their reports, for example.

Well, we have another case of this now, with the Cleveland Federal Reserve ceasing the publication of their TIPS spread derived inflation expectations.

OK, so what is a, "TIPS spread derived inflation expectations?"

Well, the TIPS are, "Treasury Inflation Protected Securities", basically bonds, with a twist, and the twist is that the principal is indexed to the consumer price index, so over the life of the instrument, you have interest and principal, your original investment returned to you.

They are set up so that the bond stars with an index of 1, and can never go below 1.

The spread derives inflation expectations are a measure of the difference in price between new 5 year TIPS and 5 year old 10 year tips.

Assuming that they pay the same interest, you would assume that they would be identical. In both cases you pay your money, and you get all your money back, plus interest, after 5 years, right?

Wrong.

This is wrong, because after 5 years, those 10 year bonds are at an index of 1.2 or so, while the new bonds are at an index of 1.0, which means that if you have deflation, the 10 year bonds can drop back to some number between 1.2 and 1.0, while the 5 year bond will, under those circumstances, stay at 1.0.

In the event of flat prices, or inflation, they are identical.

So, the 10 year bond with 5 years left is somewhat riskier, because you can lose up to 20% through deflation.

So the question is, what do people who buy these bonds think of this risk?

If they think the risk is small, then the price difference (spread) between the two bonds in the open market will be small, and if they think that the risk is large, the spread will be larger.

So, the market has increasingly been saying that they have high deflationary expectations, which translates to "Depression" for the rest of us, and the Federal Reserve Bank of Cleveland finds this inconvenient, so they will stop publishing the data.

Government Shutting Down Economic Indicators Website

Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov) will be discontinued effective March 1, 2008.

Economic Indicators.gov is brought to you by the Economics and Statistics Administration at the U.S. Department of Commerce. Our mission is to provide timely access to the daily releases of key economic indicators from the Bureau of Economic Analysis and the U.S. Census Bureau.

You may link to the most recent release by clicking on the report name in the table below. You may also subscribe to our *free Subscription Service to have these files emailed or faxed directly to you as soon as they are released.

Barry Ritholtz, of The Big Picture, rightly asks, "WTF? Feds Shutting Down Economic Data Site."

He then suggests that, much like eliminating the release of the M3 Data, this was done because the data is inconvenient, and I agree.

In the Annals of Troubled Military Programs, This One Takes the Cake

As I have mentioned a number of times that I spent some time working on the recovery and maintenance vehicle for the now-canceled Future Combat Systems (FCS).

Well, no matter how misbegotten, it appears that the program reappears with a different name a few years later.

Case in point is the replacement for the FCS, the Ground Combat Vehicle, GCV, which is different largely in only one area, it no longer needs to fly on a C-130, so the 20 ton maximum weight for shipping has gone by the wayside.

This is not surprising. After all replacing the 30 ton weight class M2/M3 with a vehicle with superior mobility and protection is difficult to do in ⅔ the weight of its predecessor, all while reducing the cost of operation, is a tough nut to crack.

It's clear that they will be going with a remotely operated turret, and without the space for the gunner and commander and the turret penetration, it makes it rather simple to fix a rather prominent shortcoming of the Bradley, its inability to carry a full 9 soldier infantry squad.

So the Pentagon is are back to square, which means fighting the wheels/tracks war yet again, though it appears that the military is favoring a tracked vehicle.

The advantages of tracks are better off road mobility, better performance in an active city conflict, since it can go over a road block made from cars or trucks, and a wheeled vehicle cannot, and more volumetric efficiency, since the wheel travel is less, and you do not need to accommodate the swept volume of the wheels which pivot to steer.

The disadvantages are operating costs, noise, weight and speed on roads.

That being said, one huge advantage for tracks is that if your infantry fighting vehicle grows into a 70 ton behemoth, wheels just won't work at all:

The U.S. Army's chief of staff wants to put the service's Ground Combat Vehicle program on a diet.

Gen. George Casey said he thinks the future replacement for the Bradley Fighting Vehicle needs to be much lighter than the estimated 70 tons program officials are projecting that the new GCV will weigh.
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"I keep saying, 'Look, man, an MRAP [mine-resistant ambush-protected] is about 23 tons, and you're telling me this is going to be 70 tons, which is the same as an [M1] Abrams. Surely we can get a level of protection between that, that is closer to the MRAP than it is the M1,' " Casey said June 7. "It's not going to be a super heavyweight vehicle."

It would also be unaffordable. I would suggest that if the army really needs a better vehicle, that it procures new-build/rebuilt Bradleys, with the crewed turret replaced with something like the CTI tele-operated turret, and with enhanced armor based on the non-homogeneous armor technologies developed for the M-1 Abrams and the original FCS program.

You would still probably end up with less than a 40 ton weight, and you would get the capability you need at a much lower cost.

Meanwhile in the somewhat less sexy areas of folding in a few drones and an advanced network-based radio called JTRS as part of what is now called the, "Brigade Combat Team Modernization, the House Armed Services Committee is cutting this because of poor performance and cost escalation.

Once again, it's over budget, behind schedule, and not performing.

So on the little things, where the Pentagon knows what needs to be done, they are not executing, and on the big programs, they don't have a clue as to what they want.

Count me in Barney Frank's and Ron Paul's corner. We need to slash military spending.

I would also add that we need to somehow or other put adults in charge of the procurement process.

Monetary Policy Driven Inflation on Horizon

Barry Ritholtz's The Big Picture economics blog shows us a rather interesting picture:



The "continuation" bit is there because Federal Reserve under Alan "Bubbles" Greenspan stopped reporting the statistic, saying that it was not a "useful" statistic.

Rolling the Wiki, we get the following:

• M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
• M1: M0 + those portions of M0 held as reserves or vault cash + the amount in demand accounts ("checking" or "current" accounts).
• M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).
• M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements.

So, all the big money transfers and currency injections in the market over the past few months, they are no longer counted by the Fed, but we can see that the overall money supply is increasing at double digit rates over the past year or so.

We've already had nearly a trillion dollars dumped into the credit markets over the past month.

Money is being shoveled out the door to attempt to resolve a liquidity crisis. The problem is that it is an insolvency crisis, though hyper inflation may bail that out.