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Ambrose Evans-Pritchard has
a bold headline US Money Supply Plunges at 1930s Pace that is sure to
provide much referential action for the UK Telegraph.
I like to read AEP, but have to admit that he is given to sensational
headlines on rare occasion. That is because it sells papers, and also draws
blog clicks, as posters on the web are sometimes wont to emulate. Fear sells.
The financial sectors also thrives on rumours and panic selling. It clears
the decks for new Ponzi rallies. And it seems as though fear has become an
inseparable partner and helpmate to central governments these days.
But there were some mildly disappointing elements to this particular piece in
addition to its somewhat overstated headline. The US stopped publishing M3
several years ago. At the time I was not happy about this, and complained
quite a bit.
Several enterprising fellows, including my friend Bart over at Now and
Futures, as well as John Williams at Shadowstats, have been attempting to extrapolate the M3
figures, and doing a fine job given what they have to work with. In an added
footnote, AEP says he is using John Williams' service. He also incorrectly
states that the still Fed publishes all the components. They do not disclose
eurodollars. The basis for discontinuing M3 was to eliminate the 'inordinate
expense.' Obviously if they still published all the components, that could
not be a credible case. This is not just being picky. Eurodollars are a
remarkably volatile component these days, and also a method of buying
Treasuries via London if one were so inclined to monetize US sovereign debt
that way. Could the BoE and the Fed be scratching each other's backs as they
say? The BoJ has already paid for one false US recovery, so they deserve a
break.
Here is a quick review of the components of the Monetary Supply figures
including M3 for your review. You may also wish to refresh your knowledge
here: Money Supply a Primer.
The chief component that is 'missing' these days which must be estimated is
"eurodollars," which as you may recall are US dollars being held
overseas. You know, those dollars that Bernanke has been sending over to
Europe en masse lately through the swaplines.
The fellows can estimate this, but the reporting of eurodollars lags by a
quarter or more, the only reliable source of information being the forex
commercial banking reports from BIS.
I would very much like to have M3 back, but in particular I would like the
Fed to be releasing a more accurate and contemporary measure of Eurodollars,
the dollar overhang overseas, particularly in light of the huge swings in the
DX index, and its almost undeniable relationship to the recent dollar short
squeezes on the European banks. The Dollar Rally and the Deflationary Imbalances in the US Dollar
Holdings of Overseas Banks.
But alas, we do not have this, so we can only estimate M3, particularly the
eurodollar component. But the good news is that we still have both M2 and
MZM.
Here are the most recent figures for MZM and M2 from the St. Louis Fed,
expressed as a percent of change YoY, not adjusted for seasonality. For good
measure I have added GDP and PPI Finished Consumer Goods in the mix.
It might also be wise also to keep in mind that after a period of sharp
growth in response to a developing recession that flattens out afterward, the
year over year percentage growth can fall precipitously and look quite
impressive on a growth chart without necessarily providing a meaningful decline
in the nominal values. This can be seen in the M2 chart below.
And it is also true that
during a period of slack growth in GDP the demand for money is lessened such
that normal or even flat money supply growth would seem to the Fed
monetarists to be 'inflationary.' This does not mean that they have forgotten
where the 'ON' button to printing press is located. Of all the things that
might concern us about the Bernanke Fed, the least of them is that they will
be too stringent in supplying liquidity when and where it might be needed, in
substantial volumes, at least to the banking system.
MZM is the broadest measure of liquidity, and is very much a creature of the
Adjusted Monetary Base. As one can see from the chart, the Fed, using their
various policy tools, jams the short term money supply higher in response to
a lagging economy, and the broader measures like M2 tend to follow with a
lag.
The Fed then backs off, and waits to see the effect of their actions, as well
as any accompanying fiscal programs, on the real economy as measured by GDP,
with an eye on inflation. In this case I am using PPI, but I greatly prefer
John Williams' unadulterated CPI measure. Unfortunately I do not have it in
the proper format for this study. But PPI finished goods will do.
Now, looking at this chart, it appears that the Fed is following their usual
gameplan. The excess reserves that the banks are holding, at least indirectly
in response to the balance sheet expansion and interest rate payments on
their own deposits by the Fed, are enormous and unprecedented. If the Fed
were to start pulling some levers to motivate those reserves into the real
economy through loans, the impact could be dramatic. The Fed will do this if
their fear of inflation begins to be overcome by their fear of deflation.
For the moment, the great bulk of liquidity is being used by the banks to
bolster their reserves, and their unresolved bad debt, as if the bad debt
itself was the cause of the problem. The problem is that a credit bubble left
consumers with the inability to pay their debts, and while nothing is done
for the median wage, and the bad debt is not written off, the problem
continues. This was the story of the zombie economy of Japan's lost decade,
because their kereitsu
corporate combines would not take the 'hit' for their land bubble.
Right now it appears to me that they are overly preoccupied with the status
of the biggest of the banks and their asset quality problems an under
stimulating the real economy. I think this will be regarded as a policy error
as were the actions of the Federal Reserve in 1932 wherein the Fed
overreacted to a spike in CPI and tightened prematurely. The Fed may be
engaged now in a policy error of a different sort.
I am not saying what MUST or WILL happen. I am not arguing from theory. I am
just attempting to demonstrate what is happening now based on the data. And
right now Ben is indeed printing money, and figuratively dropping it from
helicopters. The problem is that the helicopters are hovering over Wall and
Broad Streets, and not Main Street. And so we obtain asset bubbles in paper
favored by the denizens of the Street.
If you want to know the theory, in a perfectly fiat system (no external
standard constraint) deflation and inflation are always the outcome of policy
decisions amongst a number of variables and competing interests. Period. That
is how it is, and that is why central banks prefer it to the discipline of an
external standard like gold.
Once the US relaxed its adherence to the gold standard and devalued the
dollar, deflation became a moot point. What was not handled well was the
continuing lack of organic aggregate demand, and velocity of money, because
of the resistance of the Republican minority in Congress to jobs creation,
and the overturning the New Deal minimum wage initiatives and labor reforms
by the US Supreme Court. Consumers cannot generate healthy demand when they
are unemployed, or being paid near starvation wages. But if you are in a
well-to-do minority, things couldn't seem better, unless of course you were
living in Germany, Italy, or perhaps even Japan.
I am not saying what the 'right thing' to do is. But what I am attempting to
get across is that one way or the other, excess financial sector debt is
going to be liquidated, either through default, or through inflation, or
through a mixture of higher taxes and sluggish growth with a disparity of
income that increasingly resembles 19th century serfdom and political instabilty,
the rise of demagogues, and some vicious ghosts from the past.
At some point this dynamic is going to become less 'economic' and more
political and the equilibrium will be reached. A good leading example of this
is found in Iceland.
See also The Case for Deflation, Stagflation, and Implosion
For those relying on the Output Gap and slack Aggregate Demand please see Price, Demand, and Money Supply as They Relate to Inflation and
Deflation
People tend to become very emotional over this sort of topic. There are many
who are afraid that what they have will be taken, and there is even a vocal
minority of the self-identified elite who wishes to obtain greater power and
riches by leveling the middle class and the poor to improve their own supreme
vistas. The funny thing is that to the genuinely powerful these 'elites' are
about as significant as a bug on the wall, and their turn will come if that
is the way it goes.
The most touching example of delusion that I have witnessed recently was an
unwavering prediction about what will happen in the future because 'the
majority of the people on the this chatboard have agreed on it.' Well,
perhaps history gives a hoot. But I suspect that we are in His hands now more
than ever. And you might do well to prepare yourself accordingly.
By the way, and this is just a stab at my own theory, a strawman as opposed
to an examination of the data, I think the US is hammering the ECB to devalue
the Euro, because they wish to further devalue the US dollar. If the major
fiat currencies can be devalued in a relatively uniform manner, and some
other statistics and prices controlled, the people can be subtly relieved of
their savings and wealth, and be none the wiser. But those stubborn Germans
had to be brought to heel first. And so it is.
Here is something from an old trading acquaintance of ours. Stage Set For Another Bernanke
Adventure - Brady Willett of FallStreet
Jesse
Please visit Jesse’s Café Américain
for refreshing news on the markets
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