By Mike Whitney
-- - Sharp contractions in the money supply and recession
are two spokes on the same wheel. When the money supply shrinks,
there's less economic activity, and the economy slows. An
article in this week's UK Telegraph by Ambrose Evans-Pritchard
removes any doubt that a deep recession can still be avoided.
From the UK Telegraph:
"The US money supply has experienced the sharpest contraction
in modern history, heightening the risk of a Wall Street crunch
and a severe economic slowdown in coming months. Data compiled
by Lombard Street Research shows that the M3 ''broad money"
aggregates fell by almost $50bn in July, the biggest one-month
fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has
almost collapsed," said Gabriel Stein, the group's leading
monetary economist." (Ambrose Evans-Pritchard,"Sharp US Money
Supply contraction points to a Wall Street crunch ahead", UK
The Telegraph confirms what many of the doomsayers have been
saying for more than a year now; we're facing a severe bout of
deflation. The persistent credit-drain from rising foreclosures
and deleveraging financial institutions is shrinking the money
supply. Now it's visible in the data. Bernanke's low interest
rates haven't stopped the hemorrhaging; deflation is spreading
like Kudzu. According to Evans-Pritchard, "The growth in bank
loans has turned negative" (while) "the overall debt burden in
the US economy is currently at record levels, raising concerns
that a recession - if it occurs - could set off a sharp downward
The under-capitalized banking system has slowed its lending and
consumers have stopped borrowing; all the main economic
indicators are pointing down. In fact, according to the
Conference Board, "weakness among the leading indicators
continues to be widespread" and dropped more than 0.7% in July
alone. The report is a composite of selected indicators that
show the overall direction of the economy. At present, they're
all in negative territory.
The Fed lowered interest rates to 2 per cent hoping to help
recapitalize the banks and stimulate consumer spending, but it
hasn't worked. The banks still don't have the capacity to lend,
so the main artery for credit distribution remains clogged and
GDP is dropping off. A python has wrapped itself around the
financial system and is gradually cutting-off the oxygen supply.
Naturally, when the credit system is broken, the money supply
contracts. That's true here, as well. What's troubling is the
speed at which it is all of this is taking place. It's "the
biggest one-month fall since modern records began in 1959". The
process is accelerating and will require the Fed to slash rates
at its September meeting.
Economist Nouriel Roubini puts it like this:
"Over time inflation will be the last problem that the Fed
will have to face as a severe US recession and global slowdown
will lead to a sharp reduction in inflationary pressures in the
U.S.: slack in goods markets with demand falling below supply
will reduce pricing power of firms; slack in labor markets with
unemployment rising will reduce wage pressures and labor costs
pressures; a fall in commodity prices of the order of 30% will
further reduce inflationary pressure.
The Fed will have to cut the Fed Funds rate much more as
severe downside risks to growth and to financial stability will
dominate any short-term upward inflationary pressures. Leaving
aside the risk of a collapse of the US dollar given this easier
monetary policy the Fed Funds rate may end up being closer to 0%
than 1% by the end of this financial crisis and severe recession
Interest rates are going down not up as the futures market
Federal Reserve chief Bernanke understands the problem, but
has no way to fix it. The market is simply correcting from
massive credit imbalances. The economy needs time to cool off
and rebalance. Bernanke's various "auction facilities" were
created to keep the banking system afloat while the government
delivered "stimulus checks" to working people. The plan was
designed to bypass the dysfunctional banking system and give
money directly to taxpayers. Unfortunately, the strategy failed
and added to the bulging fiscal deficits. Martin Feldstein
summed it up like this in the Wall Street Journal:
"Recent government statistics show that only between 10% and
20% of the rebate dollars were spent. The rebates added nearly
$80 billion to the permanent national debt but less than $20
billion to consumer spending....Here are the facts. Tax rebates
of $78 billion arrived in the second quarter of the year. The
government's recent GDP figures show that the level of consumer
outlays only rose by an extra $12 billion, or 15% of the lost
revenue. The rest went into savings, including the paydown of
debt....Consumer outlays increased to $36 billion from $24
billion. So the additional $12 billion of consumer spending was
less than 16% of the extra $76 billion of disposable personal
income. By comparison, savings rose by $62 billion, or five
times as much....This experience confirms earlier studies
showing that one-time tax rebates are not a cost-effective way
to increase economic activity."
The whole "stimulus" plan backfired. Americans did the
responsible thing and used the money to pay off debts or stash
it in savings instead of than wasting it Walmart or Target on
more useless knick-knacks. It just goes to show that average
working people can change their spending habits and making
prudent choices when they see that times are tough. The culture
of consumerism is the result of Madison Ave.
saturation-campaigns and propaganda; there's nothing inherently
wrong with the American people. Workers are constantly being
blamed for "living beyond their means", but the real problem
originates from flawed monetary policy and destructive
commercialism. It's the prevailing "sicko" corporate culture
that has created a nation of spendthrifts and speculators.
Ordinary people are not at fault.
Fiscal stimulus can work if it is used properly, like if it
was applied to the payroll tax. That would be the same as giving
every working man and woman in America a sizable raise in pay
that could used to give the economy a boost. (Couples making
under $70,000 per year spend 100% of their earnings. They
represent 50% of total GDP) The problem, however, is that that
would violate a central tenet of neoliberalism which dictates
that the payroll tax be used in the General Fund as a de facto
flat tax levied against the poor and middle class to ensure that
the ruling elite don't not have to pay their fair share for the
maintenance of the empire. Bush and his ilk would rather run the
economy off a cliff than compromise on their core values. The
real reason we are faced with the current economic downturn is
because wages have not kept pace with production which means
that workers have had to increase their borrowing to maintain
their same standard of living and keep the economy growing. If
wages are flat the economy can't grow; it's as simple as that.
That's why banking elites have lowered standards for lending;
it's just a way to generate profits and create growth without
giving workers the raise they deserve. It has the added benefit
of pushing people into a life of debt-peonage. Americans are
deeper in debt than anytime in history and are struggling just
to make the interest payments on their loans. As a result, more
and more homeowners are walking away from their mortgages and
leaving the banks with huge, unanticipated debts. The architects
of America's debt-slavery system are turning out to be its
Currently, billions of dollars are disappearing in the secondary
market where bets were placed on mortgage-backed securities that
are now virtually worthless. As market volatility increases,
frazzled investors are moving into cash. Credit is being wrung
from the system while the money supply continues to contract.
Mike Shedlock of Mish's Global Economic Trend Analysis gives
this technical analysis:
"The recent plunge in M3 (ed.--M3 is the broadest measure of
money used by economists to estimate the entire supply of money)
makes it likely that credit lines have been fully tapped and/or
banks have simply turned off the spigot. Liquidity shrinks by
the day. Banks scrambling to refinance long-term debt are going
to have a very tough go of it. Weekly unemployment claims are
soaring. Consumers out of a job are going to have a tough time
paying bills. Those looking for a bottom in these conditions are
simply barking up the wrong tree."
The prospects of a deep and protracted downturn are now greater
than ever. Financial institutions are either pulling back and
preparing for the storm ahead or taking advantage of existing
credit lines while they last. The herky-jerky market action
suggests that a growing number of CEOs and CFOs can see that the
walls are closing in on them. The crash-alert flag is about
half-way up the pole.
Author Ellen Hodgson Brown's new book "The Web of Debt",
points out some of the parallels some between our present
predicament and events leading up to the Great Depression:
"The problem began in the Roaring Twenties when the Fed made
money plentiful by keeping interest rates low. Money seemed to
be plentiful, but what was actually flowing freely was 'credit'
or 'debt'. Production was up more than wages, so more goods were
available than money to pay for them; but people could borrow.
...Money was so easy to get that people were borrowing just to
invest, taking out short-term, low interest loans that were
readily available from the banks".
Brown continues: "The Fed began selling securities in the open
market, reducing the money supply by reducing the reserves
available for backing loans..The result was a huge liquidity
squeeze---a lack of available money. Short-term loans suddenly
became available only at much higher interest rates, making
buying stock on margin much less attractive. As fewer people
bought, stock prices fell, removing the incentive for new buyers
to purchase stocks bought by earlier buyers on margin...The
stock market crashed overnight."
The money supply contracted dramatically during the first few
years of the Great Depression. Free-market guru, Milton
Friedman, went so far as to blame the Central Bank for the
disaster. He said, "The Federal Reserve definitely caused the
Great Depression by contracting the amount of currency in
circulation by one-third from 1929 to 1933."
As a result, interest rates rose and credit became scarcer. To
some extent, these things are taking place already. Long-term
interest rates and LIBOR have been rising and are headed higher.
These are much more accurate gages of the "real" price of credit
than the Fed's artificial Fed Funds Rate (2 per cent) which is
just a give-away to the banks.
Brown does a good job of connecting the dots and showing how
the Federal Reserve engineered the Depression with their failed
monetary policies and serial bubble making. In another chapter,
she quotes Louis T. McFadden, Chairman of the House Banking and
Currency Committee, who is explicit in his condemnation of the
(The Depression) was not accidental. It was a carefully
contrived occurrence. ...The international bankers sought to
bring about a condition of despair here so that they might
emerge as rulers of us all". (Ellen Hodgson Brown; "The Web of
Debt", page 146)
Whether the present economic crisis was deliberate or not is
irrelevant. The ultimate responsibility for our economic woes
lies with the Fed; that's who created the speculative bubble
that is now wreaking havoc on the broader economy. Millions of
people will lose their homes, trillions of dollars of equity
will be wiped out, and hundreds of banks will fail. Eventually,
there will be more consolidation among the banks and greater
concentration of wealth among fewer people. An self-regulated
system run by unelected businessmen naturally gravitates towards
monopoly and, yes, tyranny.
Charles Lindbergh summed up the role of the Federal Reserve like
"The financial system has been turned over to ...a purely
profiteering group. The system is private, conducted for the
sole purpose of obtaining the greatest possible profits from the
use of other people's money." (Ellen Hodgson Brown; "The Web of
The impending global recession has nothing to do with crafty
mortgage lenders, opportunistic loan applicants, dodgy rating
agencies, or crooked home appraisers. That's like blaming Lindy
England for Abu Ghraib. The source of the troubles is the
Federal Reserve and monetary policies that are designed to rob
people of their life savings.
Abolish the Fed.
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