Let's All Panic...

Straight from the Department of "Gee, you never coulda seen that coming!" Department:

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.

And why would this be happening? Well, let's go to the Department of The Obvious Department:

"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.

A couple of things to note here.

• First, this isn't "frightening". At least it isn't to me. That's because M3's contraction can be explained. And if you understand the linkage between effect and cause, you could have very easily predicted something like this.
• Second, the cause isn't necessarily a bad thing. If you buy into the idea that much our current crisis is a result of reckless behavior by the financial industry, then a dose of caution and some retrenchment is exactly what is called for.

And of course the Obama Administration wouldn't be the Obama Administration if it didn't react with its usual bizarre mixture of panic, incomprehension and recklessness:

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.

You could make it up, but I doubt you'd have found any believers.

So the story line for Barack Obama is this: You come to office in the midst of a severe recession and spend your first 16 months attacking large sections of the business community, comtemplating or passing legislation that increases the burdens on business, and specifically the burdens of hiring new employees, pressure the financial industry to adopt risk-adverse lending practices, and then you're shocked that spending $800 billion on pork designed to benefit Congressional re-elections and unions doesn't bring about nirvana.

Yeah, you never coulda seen it coming...

Comments

[animal crackers]

The only M3 figures this administration reacts to are the Marx brothers-- Krugman, Summers and Bernanke.

[BillT]

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction.

"US authorities" these days is a euphemism for "transplanted from Chicago and clueless."

[I.B. Wright]

Any talk that "we have to get spending and budgets under control soon before it's too late" is no different than the anal-ysts who said in 06 that "the real estate market may be a little overheated, but it's fundamentally sound".

Anyone who can't see that our countries finances are already screwed and there is virtually nothing that either can be or will be done about it living their real estate fantasy all over again.

[richard mcenroe]

" "You truly cannot make this stuff up. The US governnment Obama Campaign is freaked out about the prospect of a double-dip," he said."

Fixed that for you.

[Eric Blair]

Heh.

[Tim Worstall]

I know Tim Congdon and he's very sound indeed.

Essentially what he's saying is that the same mistake is being made now as was being made in 1930-32. As Friedman and Schwartz pointed out in their "Monetary History of the United States". As Scott Sumner is saying over at his blog all the time now.

Falling M3 is really, really bad news. It doesn't particularly matter what you do with "stimulus" and all the rest for if you've got a falling money supply you're going to get economic contraction anyway.

What's really weird about all of this is that it's exactly the subject that Bernanke made his academic bones on. So why isn't more being done about it? I think the answer to that is that the Fed have already done pretty much all they can, they need Congressional approval to do any more and those boneheads still don't get it.

[King Obama]

No dumbasses - I'll handout more stimulus money then people will have more money to spend - I'll say it slower if it helps

[Dennis the Peasant]

Tim-

If the answer is to borrow more money to spend more money in a wholly futile attempt to purchase economic growth, then I choose economic contraction.

The real issue here is that federal, state and local governments are increasing, rather than decreasing, the number of disincentives for people to create new businesses and for existing businesses to expand. It's going to take a lot of pain for people to figure this out. I vote for the pain to commence sooner rather than later.

[Wm T Sherman]

Ow.

[bilejones]

Where are these M3 numbers coming from? The Fed stopped releasing them in 2005.
http://www.federalreserve.gov/Releases/h6/discm3.htm

[Dennis the Peasant]

bilejones-

There are private firms that now provide M3 figures, as much of the information needed for the calculation is published by a variety of governmental sources. The private source figures would not be quite as accurate as those provided by the Fed (if the Fed was still providing M3 figures), but it's better than nothing.

[TmjUtah]

An attack. Not an administration.

See? Makes sense now, doesn't it?

[richard mcenroe]

TMJUtah -- I have no time for Truthers and not much more for Birthers (I don't know what the deal is with the freaking birth certificate, but it pisses me off that this SOB has refused to release ANY documentation of his life and the press gave him a pass on it, while John Freaking McCain is forced to prove his citizenship). Paranoia's always just a short walk away in politics.

But it scares me that the only way this Administration's actions seem to have ANY internal consistency is if you look at them as attempts to deliberately hamstring this country economically, militarily and culturally...

[bilejones]

The numbers I have the most faith in are William's Shadowstats

http://www.shadowstats.com/alternate_data/money-supply-charts

He's showing a decline of about 5%, coming off a rate of Plus 18% in early 2008 that's
a. To be expected
b. Not such a bad thing.

These rabid inflationists like congdon and Summers have destroyed 96% of the value of the dollar in the past 90 years. They seem determined to go for the final 4 points.

[Tim Worstall]

"If the answer is to borrow more money to spend more money in a wholly futile attempt to purchase economic growth, then I choose economic contraction. "

No, we're talking money supply here, not fiscal action.

We're not talking about borrowing, taxation or spending here at all.

It's the old MV equals PQ equation.

Money times the velocity of circulation equals prices times quantity.

If M or V fall then either P or Q must also fall. If we've a falling money supply (which can get a tad complex, as there's interaction between both M and V) then we will either get deflation or a fall in production....that's what we call recession or depression when it gets more serious.

This is simply the flip side of the inflation problem: if we have too much money and Q isn't growing as fast as that then it's P, prices, which rise.

As a monetary problem the solution is also monetary. Print more, lower bank reserve requirements, quantitative easing (ie, Fed buys Treasuries off banks) and at the extreme, just throw money out of helicopters.

The great insight that Freidman and Schwartz had about the Depression was that while there were low interest rates, money supply was falling. The price deflation/fall in production naturally followed from that falling money supply.

We really, really, don't want to go through all of that again when we know what an effective solution would be.

My reading of it is that all of the leftist economists who do actually know and agree with this stuff (while "monetarism" isn't something people tend to admit to these days it is standard stuff, there's pretty much no school of economics which doesn't accept the basic ideas) aren't talking about it because they're so excited about being able to call for "stimulus". When the real problem is that you can do all the stimulus you like and if you still have a falling money supply you're still going to have recession/deflation.