Tuesday, September 15, 2009
Ambrose Evans-Pritchard writes in the Telegraph of the mounting concern (at least, in some quarters) about the rapid contraction in money supply and credit. Along with his Cheshire grin, Pritchard offers up something that we haven't heard for months now - a few comparisons to the Great Depression.
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.Not having looked at M3 for some time now, the broadest measure of money supply but one that is no longer reported by the U.S. government, the graphic you see below was something of a surprise when recently spotted over at NowAndFutures.
Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).
"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."
The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.
Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.
"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.
This is not what most cynics thought the Federal Reserve would be trying to hide when they discontinued this data series a few yeas ago.
The inflation/deflation debate is clearly not yet over, though, given the looks of asset markets and commodity prices all around the world, it looks like the former has the upper hand - at least for the time being.
Back to Ambrose...
It is unclear why the US Federal Reserve has allowed this to occur.That would appear to be a good bet at the moment, however, it is a matter of degree.
Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.
He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.
US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.
Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.
He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.
In the U.S., the Fed's purchase of up to $300 billion in U.S. Treasuries along with a trillion dollars or so in GSE MBSs and other agency debt hasn't brought the world to an end, however, the Chinese aren't all that happy about it.