I first heard about the Federal Reserve's decision to stop reporting the M3 money supply after the press release came out in mid November. As this news was ignored by the media, I had to do some serious digging to understand the ramifications. Even a few self-proclaimed experts couldn't tell me what it meant.
Now Jeff Vail comes along and, as always, distills a complex subject into an easy-to-understand explanation:
And, of course, the timing of the discontinuation of M3 data just happens to coincide with the opening of Iran's euro-denominated oil bourse. Funny how that hasn't exactly been reported at all by ABC, CBS, NBC, CNN, Fox or the other "Main Stream Media" sources.
The result of this is that countries will no longer need to use the US Dollar as their reserve currency. As reserve currency levels drop, the fundamental impact will be a drop in demand for the US dollar. This will result in a decrease in the value of the dollar, but much more importantly it will mean that there is also a decrease in people wanting to purchase US government debt--the debt that we use to carry huge and consistent budget deficits. Of course, it will still be possible to get other nations to purchase our debt instruments and finance our deficit, but the market will shift the price equilibrium for this debt upward--that is, the interest rate that we are paying on the national debt will increase significantly.
Suddenly the mysterious Fed is much less mysterious: the M3 statistic that they will stop reporting this Spring is exactly the one that would be used to identify just such a shift in the use of the US Dollar as a reserve currency. Was that the motivation for the Fed's move? It's the only one that I am aware of, but it's no more than conjecture.
Just how fast and how strong this shift from the petrodollar to the petroeuro will snowball is difficult to predict. There are plenty of people who think that it will be alternatively minor, catastrophic, or lead to the US nuking Iran in a few months. My goal here (for once) isn't to speculate, but just to shed some light on this murky topic.
So what do we make of this news? Well, in most cases, eople only try to hide bad news not the good news. Most likely the Fed sees some serious problems ahead for us as the result of Iran's new oil trading bourse.
Read Jeff's entire post on the Fed's decision to drop the reporting of M3 here.