Bank lending collapses; money supply shrinks

(9 am. – promoted by ek hornbeck)

   Today the Federal Reserve began raising interest rates. Quantitative easing efforts (read: monetization) are also coming to an end.

  The central banks are worried about inflation due to the massive money printing of the past two years. Should they be worried? Probably not.

 David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline,” he said.

  Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature,” he said.

 Bank lending is the money multiplier in a fractional-reserve banking system, and banks aren’t lending.

  All those trillions of dollars bailing out Wall Street was meant to fix the credit markets, which means to get the banks lending again. This effort was a complete and total failure…unless you count banker bonuses.

 The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed’s “Monetary Multplier” has dropped to a record low of 0.81, evidence that the banking system is still broken.

  Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.

  “It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money,” he said.

  “The reason the Great Depression became ‘great’ was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this,” said Mr Ashworth.

 Right in middle of the Great Depression, in the fall of 1931, the Federal Reserve raised interest rates in order to protect the currency. This was the last straw for the credit markets, and the economy went into free-fall until spring 1933.

  Fed Chairman Ben Bernanke pointed out this mistake five years ago. It was his promise that the Fed would never do this again.

 Yet, here we are. The difference this time is that unlike 1931, we aren’t the ones calling the shots.

 China has also been calling for a halt to QE, accusing Washington of “monetizing” its deficit in a stealth default on Treasury bonds.

 America today is in the same position that Latin America was in back in the 1980’s – down on its knees, deep in debt, desperate for a hand-out, creditors are still demanding their pound of flesh.


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  1. gjohnsit
  2. AmericanRiverCanyon


    The animals that depend on instinct have an inherent knowledge of the laws of economics and of how to apply them; Man, with his powers of reason, has reduced economics to the level of a farce which is at once funnier and more tragic than Tobacco Road.

    -James Thurber

  3. Youffraita

    (mostly from Paul Krugman), deflation is what we should fear more than inflation.

    Of course, nobody wants hyperinflation…but I definitely remember Krugman warning about the dangers of a 1930s-esque deflationary spiral, and that’s what you’re alluding to also, is it not?

    My sig line at Big Orange is GOP: Turning the U.S. into a banana republic since 1980 and I suspect the 43-era holdovers — that is, the Chicago School — are just about to finish the job Reagan started…oy vey.

  4. joeshwingding

    If it was Bernanke’s decision then huh?

  5. Youffraita

    Unfortunately, I think he’s right.

  6. Joy B.

    Began in October of 2008, was to have been completed by sometime this year.

  7. gjohnsit

    I’ve looked over the IMF website and done searches. There isn’t a word to be found on the internet about it. Kind of curious that this is one piece of news that doesn’t get leaked.

  8. gjohnsit

    One thing that economists will agree on is that a shrinking monetary supply is a good indicator of an approaching recession (usually with a 6 month delay).

      Yet when I posted this on the Big Orange I got told that I was stupid. There was nothing to be worried about.

      These are the same people who preach Keynesianism, who cautioned against a shrinking money supply during a recession.

  9. TocqueDeville

    Not your lies, I’m happy to say. The Fed and Obama administration’s lies.

    Honestly, do you really believe that anyone but the Fed has an accurate accounting of M3? And even the Fed stopped reporting M3 back in 2005 when it became clear what was coming down.

    The entire economy is a fantasy. The markets are a fraud. Currency supplies are a fraud. It’s all a fraud now.

    This isn’t a theory. I just don’t have the desire to waste the energy linking to all of it here. Here’s a tease.

    And while I’m at it, please get something straight: What brought on the recession was not the collapse of the housing market, or the banks. It was $4.00p/g gas prices. Your analyses always omit that.

    They had to squeeze the people to create a climate of desperation to get the bailout. Oil speculation was the primary method. This “climate” peaked in in the summer of 2009 with gas lines. It felt like Armageddon was coming. Did you somehow forget that?

    The entire economic plays of the last 4 years were to get the bailout. They saw it coming years ago and had been preparing ever since. The timing was planned all along, as was having Secretary Sachs in Treasury at the end of Bush’s term.

    Obama cut a deal back during the primary with the banking establishment. That is why Hillary lost, not the laughable “netroots”. Obama was cheaper. All he wanted in return was that the owners of Wall Street would give him health care reform. They burned him and now he’s powerless to do anything about it. This happened because he’s an idiot who was in over his head. Fucking Bambi, surrounded himself with jackals.

    I should change my username to deep throat. That how I feel. But believe me, I have over a thousand clipped news and blog articles on just the financial coup alone. My notes are organized into 16 categories, many with sub-categories. They include things like “The Cause” and “The Plan” and “The Coverup”.

    History has never seen anything like it. And running around quoting Fed stats as though they’re credible is tantamount to quoting GOP talking points.

    All that said, your point about interest rates is spot on. I have to wonder if the banksters aren’t going to play some hardball with the Democrats. That is, after all, almost certainly why you saw the markets tank over the last few weeks. A message to Obama: “Go ahead. Make my day”

    Finally, food for thought. One thing that distinguishes the 30s from today is the central banks now are far more coordinated and consolidated. They didn’t have that before. Not to the degree we have now. This adds several extra dimensions to any monetary analysis.

    In 1930, the US was still, for the most part, a sovereign nation. It is not now. We are merely a face on an international monetary system. That system is in peril now. But the US Fed is not acting alone – for now at least. At least not completely.

  10. banger

    Do you have plans to publish it anywhere?

    What you say is very plausible mainly for one reason. If you hear anything in the mainstream media you can assume it is propaganda. I’m often surprised at the audacity of the lies and distortions I read — it’s almost a joke. They seem to have some central Ministry of Truth where they get a series of “lines” that they can circle around and put a slightly different spin on it. Of all the media the business media is the only media that allows dissidents a voice.

    Be that as it may, we have to grasp that we live in a global imperial system that is based on an oligarchical “system”, i.e., a means of governing that uses a strong systems approach. This oligarchy is not of a single purpose but it knows that its existence depends on maintaining the current system at all costs. They fight it out within closed doors and none of us has any say whatsoever in their deliberations.

    Clearly the U.S. and other central bankers are arranging the economic sphere on a neo-liberal model which is actually a neo-feudalist model that give absolute authority economic authority to oligarchs — meaning that they can, whenever they want, have absolute control over every part of our lives — power is the greatest high known to mankind and that’s what we are facing and what the Founders of this one-time Republic tried to create until it was gamed out of existence.

  11. joeshwingding

    was not the run up tp $4 gas but the sudden decline. What caused oil to go from $147 barrel to $32 barrel? There were no giant discoveries, no new refining techniques … what brought on this 500% collapse in prices?

  12. gjohnsit

    And while I’m at it, please get something straight: What brought on the recession was not the collapse of the housing market, or the banks. It was $4.00p/g gas prices. Your analyses always omit that.

     I’m not going to say that $4 gas wasn’t an issue, but the fact is that the credit markets froze up in the summer of 2007, while we didn’t see $4 gas until 2008.

      When it comes to consumer wealth and spending, housing dwarfs transportation. The crash in housing cannot be understated. The pyramid of derivatives that is built upon the old housing bubble is enormous, much larger than anything built upon energy.

      No matter how I look at it, it all comes down to housing. And speaking of housing, I notice how the media has stopped talking about it so much despite the fact that the housing market has continued to get worse.

    Honestly, do you really believe that anyone but the Fed has an accurate accounting of M3?

     True, but the Fed is still gathering all the M3 inputs. Several organizations are still doing the calculations. Are they reliable? I don’t know. But is the Fed reliable?

  13. Joy B.

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