Milton Friedman must be turning in his grave as the Daily Telegraph reports that despite all of the federal stimulus, the U.S. Money Supply, M3 is contracting at an accelerated rate that matches the decline last seen since the Great Depression.
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.
Lawrence Summers, the White House economic advisor said that the U.S. needs to continue to support the economic recovery via another stimulus bill to the tune of $200 billion. Addressing job growth and boosting output first before addressing the issue of the growing budget deficit should be the concern of U.S. lawmakers. According to the article, Summers stated, “”We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on.”
The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.
Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.
Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors. Ultimately, “failure begets failure” in fiscal policy as the logic of compound interest does its worst.
However, Mr Summers said it would be “pennywise and pound foolish” to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy “faces a liquidity trap” and the Fed is constrained by zero interest rates.
If the U.S. is unable to spark significant job growth through future fiscal policies, an economic recovery may never get off the ground. Stagnant growth coupled with downward pressures in price levels could result in the U.S. following the path of the Japanese who have been mired in the “Lost Decade” for close to 20 years now. Japan who has attempted to use fiscal measures as way to ignite growth now has a debt-to-GDP ratio of nearly 200 percent, tops in the world.
“Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty,” he [Mr Congdon] said.
Mr Congdon said the dominant voices in US policy-making – Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke – are all Keynesians of different stripes who “despise traditional monetary theory and have a religious aversion to any mention of the quantity of money”. The great opus by Milton Friedman and Anna Schwartz – The Monetary History of the United States – has been left to gather dust.
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 raised 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.
With the collapse in the money supply, the threat of deflation as we have mentioned here on Bondsquawk a number of times is real and closer than most people think. Core CPI is dangerously low with little buffer and will continue to decline as prices decline in face of light demand from consumers who are dealing with job uncertainty. Furthermore, commodity prices are dropping along with markets that support it such as China and Australia.
The Daily Telegraph article warned against the mechanical interpretation of the M3 measure of money supply. Specifically, M3 could be declining due to people going out and purchasing stocks, bonds, properties, and other assets....MORE
A credit crunch may be starting to show up on the farm, says Agriculture Secretary Tom Vilsack. He told a group of agribusiness lobbyists today that he is hearing anecdotally about large-scale dairy operations and other farms that are having trouble getting operating loans.
Vilsack is concerned that the crunch is also going to reach medium-scale operations.
He said he has discussed the issue with Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., and is urging commercial lenders to work with their agricultural borrowers, as he said USDA is doing with its loan programs.
HT: Dr. Hazlett at the Climate+Energy Project blog.