US money supply plunges. A lot!!!


Inquiring minds are closely studying data that shows the US money supply (M3 to be specific) has plunged a lot in the last year if you think that the last time this happened was the 30’s. The tagline says is all:

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

Unfortunately, the opening 2 paragraphs are not any more reassuring:

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.

If this doesn’t scare you, then you need to wake up. This data is in line with what the direst analysts predictions. With all the talk about the US following Japan’s lead from a decade ago, it appears the this new data shows the US re-walking a path it walked in the 30’s under another Democrat President, FDR. Massive government stimulus is the exact opposite of what’s needed if we are in a deflationary bursting of a debt bubble. Cited in this article is yet another stimulus package:

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.

This is what was done in the 30’s under Roosevelt and has been shown to have lengthened The Great Depression by 7 years. Never fear, though, because the man who never saw the real estate bubble, our intrepid Fed Chairman Ben Bernanke, says not to worry:

Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 – just as the Fed talked of raising rates – gave a second warning that the economy was about to go into a nosedive.

Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called “creditism” has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

On the otherside:

“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.

Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. “Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched,” he said.

“…not much margin for error here.”

Makes me feel confident. NOT.

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