Sunday, October 17, 2010

M2 Up for 14th Consecutive Week and Robert Reich Predicts a Stock Market Bubble from Quantitative Easing

A threefer. First up, ZeroHedge:

M2 Update: 14th Consecutive Weekly Increase Even As Main Street Accelerates Cash Withdrawal From Banks
The only thing mirroring the relentless outflow from stocks these days (now in their 23rd week) is the increase in the M2 money supply: the week ending October 4th was the 14th consecutive weekly increase in the broadest money aggregate compiled by the Fed which hit $8,752.4 billion, an increase of $20 billion from the $8,732.8 billion the week before.

Curiously, the Fed decided to massively revise all previous numbers (as if the amount of money that goes in and out of a bank, and should be recorded electronically the second it happens is subject to change). Yet the strangest number to come out of the huge revision had to do with with the flow of money in and out of Small Denomination (under $100,000) time deposits, or in other words the place where the bulk of Main Street America parks their money for some pursuit of nominal yield. The kicker - since the beginning of the year there has not been one weekly inflow into small denomination time deposits! (go ahead and check it) It appears either the less than richest Americans need to constantly pull money out of the bank, as they give up yield (and in a Zero Interest Rate environment there is no yield to be given up) in order to pay their bills, or simply have decided to no longer keep their money with the big (and small) banks (as this includes both commercial banks and thrifts). Could the "starve the banks: campaign be working? If Americans succeed in pulling enough money from their banks via deposit redemption, coupled with the stock trading boycott, it will be the end of Wall Street post haste....MORE

From Robert Reich's blog:

The Fed’s New Bubble (Masquerading as a Jobs Program)
The latest jobs bill coming out of Washington isn’t really a bill at all. It’s the Fed’s attempt to keep long-term interest rates low by pumping even more money into the economy (“quantitative easing” in Fed-speak).

The idea is to buy up lots of Treasury bills and other long-term debt to reduce long-term interest rates. It’s assumed that low long-term rates will push more businesses to expand capacity and hire workers; push the dollar downward and make American exports more competitive and therefore generate more jobs; and allow more Americans to refinance their homes at low rates, thereby giving them more cash to spend and thereby stimulate more jobs.

Problem is, it won’t work. Businesses won’t expand capacity and jobs because there aren’t enough consumers to buy additional goods and services.

The dollar’s drop won’t spur more exports. It will fuel more competitive devaluations by other nations determined not to lose export shares to the US and thereby drive up their own unemployment.

And middle-class and working-class Americans won’t be able to refinance their homes at low rates because banks are now under strict lending standards. They won’t lend to families whose overall incomes have dropped, whose debts have risen, or who owe more on their homes than the homes are worth — that is, most families.

So where will the easy money go? Into another stock-market bubble.

It’s already started. Stocks are up even though the rest of the economy is still down because money is already so cheap. Bondholders (who can’t get much of any return from their loans) are shifting their portfolios into stocks. Companies are buying back more shares of their own stock. And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.
This, of course, echoes another ZeroHedge headline, from Friday:
Goldman Sachs Admits The Truth: "The Economy Is Not The Market And QE2 Is Not A Panacea"