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| Economy |
| US money supply plunges at 1930s pace as Obama eyes fresh stimulus |
| 2010-05-27 |
| This means individuals and small businesses are rapidly running through their financial reserves and not getting new credit. The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened. The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever. "It's frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said. The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015. Larry Summers, President Barack Obama's top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said. David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said. |
| Posted by:phil_b |
| #23 Comment from zerohedge, What might happen is the credit will just stop - i.e., banks will stop lending completely, but I don't think it will be sudden - although that is possible. It seems more likely to me that it will start getting tougher and "some" lenders will begin to tighten standards. I have not seen that this year at all. (From 3 years ago yes, but since January of this year, no.) Which was my suspicion. The problem is primarily people running through their savings rather than a lack of credit. Expect a sudden fall in demand in the next few months. |
| Posted by: phil_b 2010-05-27 22:02 |
| #22 Reading history the bank runs were because the banks didn't have enough paper money to cover withdrawals, it could happen today, at least until a truck from the treasury gets there. |
| Posted by: Redneck Jim 2010-05-27 21:35 |
| #21 I doubt we will see significant bank runs because of deposit insurance (in those countries that have deposit insurance). |
| Posted by: phil_b 2010-05-27 21:23 |
| #20 "mandated bank holiday" Probably a dumb question, 'moose, but does that include credit unions? |
| Posted by: Barbara Skolaut 2010-05-27 20:52 |
| #19 Look for NEW (Color/style/denominations) bills to be printed shortly Zimbabwe style to Inflate" the treasury back to health. Look for it to fail exactly as Zimbabwe did. When is your best guess this might happen? Or is this the usual Kookage? Give me a date. I'll wager money on you idiociy anytime, I like taking candy from |
| Posted by: Shipman 2010-05-27 20:19 |
| #18 I suspect this article is related: Mervyn King, the Bank of England Governor, summed it up best: "Dealing with a banking crisis was difficult enough," he said the other week, "but at least there were public-sector balance sheets on to which the problems could be moved. Once you move into sovereign debt, there is no answer; there's no backstop." In other words, were this a computer game, the politicians would be down to their last life. Any mistake now and it really is Game Over. Or to pick a slightly more traditional game, it is rather like a session of pass-the-parcel which is fast approaching the end of the line. The European financial crisis may look and smell rather different to the American banking crisis of a couple of years ago, but strip away the details – the breakdown of the euro, the crumbling of the Spanish banking system to take just two – and what you are left with is the next leg of a global financial crisis. Politicians temporarily "solved" the sub-prime crisis of 2007 and 2008 by nationalising billions of pounds' worth of bank debt. While this helped reinject a little confidence into markets, the real upshot was merely to transfer that debt on to public-sector balance sheets. This kind of card-shuffle trick has a long-established pedigree: after the dotcom bust, Alan Greenspan slashed US interest rates to (then) unprecedented lows, which helped dull the pain, but only at the cost of generating the housing bubble that fed sub-prime. It is not so different to the Ponzi scheme carried out by Bernard Madoff, except that unlike his hedge fund fraud, this one is being carried out in full public view. The problem is that this has to stop somewhere, and that gasping noise over the past couple of weeks is the sound of millions of investors realising, all at once, that the music might have stopped. |
| Posted by: Anguper Hupomosing9418 2010-05-27 13:25 |
| #17 Look for NEW (Color/style/denominations) bills to be printed shortly Zimbabwe style to Inflate" the treasury back to health. Look for it to fail exactly as Zimbabwe did. |
| Posted by: Redneck Jim 2010-05-27 13:24 |
| #16 having intimate knowledge of bank accounting I beg you don't get into a discussion of debits and credits on a banks statements versus in your mind. Sorry, we in the electorate (at least those of us who need to spend money to live) generally need to learn a great deal more about how banks run & how credit affects our lives. Eschew superfluous obfuscation. |
| Posted by: Anguper Hupomosing9418 2010-05-27 13:09 |
| #15 I wonder how much of this is our foreign trade rivals refusing to fund the US budget and trade deficits any longer? |
| Posted by: ed 2010-05-27 12:43 |
| #14 The vigilante traders over at Zero Hedge have picked up on this article. Some interesting comments. |
| Posted by: tipper 2010-05-27 12:36 |
| #13 Please, having intimate knowledge of bank accounting I beg you don't get into a discussion of debits and credits on a banks statements versus in your mind. |
| Posted by: Nimble Spemble 2010-05-27 09:28 |
| #12 Humorous side-note: my university is in the process of planning a "Milton Friedman Institute of Economics". Prof. Friedman was on our faculty, he won a Nobel, he's one of the most influential economists of all time, and we have perhaps the very best, most influential School of Economics on the planet, so it's a natural, right? Oh noes. Certain faculty (who teach in non-economic fields, the disciplines you'd expect from what they're writing) are angry and are trying to stop this. According to these progressive-leftist-Marxists, Friedman is discredited, nothing he said was right, and he dared to advise Pinochet, so he's 'bad' and naming an institute after him can't be allowed. Along the way the usual faculty, who of course can only exist in the cultured, hothouse environment of academia, have broadened their complaints about the 'corporate university', the influence of money, grants, etc., and are demanding 'faculty governance' of our university. Sure, folks, the Board of Trustees will get right on that. It's especially humorous yesterday in that I, along with every other faculty person, received a long, tedious e-mail inviting us to sign a petition about the matter. I read that, then this morning I read this story about monetary supply, and realized that Prof. Friedman WAS RIGHT ALL ALONG. |
| Posted by: Steve White 2010-05-27 09:24 |
| #11 At a personal level, this indicates a strong risk of hard and fast deflation. This is made worse by banks now being authorized to suspend both demand (checking) and savings deposit withdrawl, on their own recognizance. I keep warning that there is increasing risk of a bank paper run leading to an institutional suspension followed by a mandated bank holiday, so it is a very wise idea to have several thousand of mattress money in a safe place at home, where you have absolute control over it. In the article, banks are being advised to raise their capital asset ratios ASAP. This sucks money out of the M3. The wiser ones have been doing this for a while now, on their own. But what isn't said is that many corporations are doing the same thing. Credit is hard to get right now, so they go as liquid as possible in a defensive mode, for money to operate if the credit market seizes up. Much, much more money sucked out of the M3. Then to get as much cash as fast as possible, companies dump inventory. This is the great fear, a deflationary stampede. So by keeping mattress money, you are in effect doing what the banks and many other corporations are doing. You are dumping (non-paying) assets currently extended as credit to the bank (savings and checking), and putting them under your exclusive control, out of the economy. So good enough for them, to cover their buns, good enough for you, to cover your buns. |
| Posted by: Anonymoose 2010-05-27 09:16 |
| #10 in a bank's accounts, customer deposits are debits. Suppose that's why they call my credit card a cr... well that makes sense, seeing that I owe them money. |
| Posted by: tipper 2010-05-27 09:10 |
| #9 BP, you are confusing credit in the sense of loans in various forms and credit in the accounting sense. BTW, in a bank's accounts, customer deposits are debits. |
| Posted by: phil_b 2010-05-27 08:40 |
| #8 That should have read "shouldn't be able". PIMF. |
| Posted by: no mo uro 2010-05-27 08:19 |
| #7 "This is just like the liberal desire for equality of outcome. How it happens doesn't matter, only the result. To them, prosperity is a matter of what you get, not what you earn." Well said, NS. Or as White once said about Mike Dukakis and his ilk, they try to achieve equality of excellence and happiness by spreading wealth around, and instead get equality of misery and mediocrity. Dale, the real stinky stuff is when the business community needs government capitalization in order to exist. Think about it. As NS says, live within your means. A couple of posters here on the 'burg have been testifying the truth for years - that you should be able to get credit unless you don't need it. In other words, you can't borrow $100,000 unless you have that much sitting in a bank somewhere that you don't touch until your loan is paid off. Borrowing shouldn't create capital, it should be there so that you can grow existing secured capital with hard work and entrepreneurial discipline. You borrow, you have an imagination and creativity and a work ethic and the ability to sacrifice, and you increase value. Giving people who have nothing money and hoping for the big kill works some of the time, but certainly not even most of the time. Certainly not enough to justify the policy and philosophy. The crisis we see is a tribute to that fact. |
| Posted by: no mo uro 2010-05-27 08:16 |
| #6 phil_b Money in savings accounts IS credit (just the other side), it should be netted off with debits. |
| Posted by: Bright Pebbles 2010-05-27 07:40 |
| #5 Talk to those who remember the depression. When the cash gets very very tight then were in the stinky stuff. |
| Posted by: Dale 2010-05-27 07:35 |
| #4 regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly WRONG. The US is recovering properly, after the porkulus stops. It is not recovering painlessly. Cleaning up the banks' balance sheets is a necessary condition for return to responsible financial health. But as no mo implies, many Americans understand that we have been living beyond our means and that readjusting will be painful and take time. And the more the government interferes, the longer it will take to return to growth. This is just like the liberal desire for equality of outcome. How it happens doesn't matter, only the result. To them, prosperity is a matter of what you get, not what you earn. |
| Posted by: Nimble Spemble 2010-05-27 07:15 |
| #3 I have had my own small business for more than 20 years, and work with several others who have as well. I can tell you that outside of rent-seekers whose businesses only exist due to government regulation, and except for statisticaly insignificant exceptions otherwise, small businessmen, given the choice, would take a reduced tax load and regulatory burden over bailouts and handouts every time. Keep your money, Summers, and leave me alone. THAT is what will stimulate my business. |
| Posted by: no mo uro 2010-05-27 05:58 |
| #2 M3 excludes credit. M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency. M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts). M2: M1 + most savings accounts, money market accounts, retail money market mutual funds,and small denomination time deposits (certificates of deposit of under $100,000). M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements. |
| Posted by: phil_b 2010-05-27 05:52 |
| #1 Calling M3 money is (literally) a bit of a stretch. M3 = Credit i.e. a measure of stretch of M0. |
| Posted by: Bright Pebbles 2010-05-27 05:22 |