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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    • gjohnsit on February 19, 2010 at 00:26
  1. ….

    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

  2. (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.

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