Tag Archives: money supply

Lions, And Tigers And…

While some of the world’s most educated (not necessarily brightest) economists struggle to understand “what’s different this time”, there is no lack of articles portending the next economic shock. What follows are selections from the articles I’ve been reading recently. They do not necessarily reflect my views.

In The News

WSJ: The Bailout That Busted China’s Banks (Oct 23, 2011)

“But in reality the credit boom lasted a full two years.” Fitch estimates that new financing for 2011 will hit 17.5-18 trillion yuan ($2.7-2.8 trillion), equivalent to 37% or more of GDP. Financing expanded by an amount equal to 42% of GDP in both 2009 and 2010. As a proportion of the economy’s size, “that’s like having $6 trillion in new credit in one year in the U.S., but for two years running,” Ms. Chu points out. “In that context, Chinese growth no longer looks so stellar.”

Those numbers are roughly double official bank-lending numbers, and it’s important to understand why. The past two years have seen an explosion in shadow banking activity as Beijing tries—and fails—to strike some kind of balance between the recession-averting type of easy money and inflation-spurring variety.

This shadow activity shows up in Ms. Chu’s work as a proliferation of creative forms of credit that allow banks to participate in the lending boom while not exceeding their official loan quotas. Popular tactics include informally securitizing acceptance bills (which are normally merely short-term loans to companies made against anticipated income from a customer who has signed a contract); and “entrusted loans” by which banks facilitate loans made by one non-banking company to another, an activity that’s technically illegal.

SeekingAlpha: A Week Of Historic Reckoning (Oct 23, 2011)

As much as U.S. investors would like this whole “Europe thing” to go away so that they can concentrate on quarterly earnings reports and the latest indicators of U.S. economic activity, the fact of the matter is that the future of the U.S. economy and U.S. stock prices depends upon how the current crisis in Europe is resolved. Neither the U.S. nor the broader global economy (upon which the earnings of S&P 500 companies depend) can withstand a full-blown sovereign debt and financial crisis in Europe.

Washington Post: In Europe, new fears of German might (Oct 22, 2011)

“That’s the predicament of leadership,” said Joschka Fischer, a former foreign minister who has urged Merkel to do more to support the euro. “When Germany acts, there is the fear that Germany will dominate. If Germany doesn’t act, it’s the fear that Germany will withdraw from Europe.”

SeekingAlpha: Europe’s Large Banks – Are The Titans Crumbling? (Oct 21, 2011)

In the best of scenarios, a European meltdown would would still send shock-waves across the world. US banks have European assets. Europe is China’s largest export market. The $600 trillion derivative market may destabilize and counter-parties may fail as in 2008. James Kostohryz’s article Global Financial Disaster warns what might happen. Let’s hope he is wrong.

New York Times: The End of Cheap Chinese Goods (Oct 21, 2011)

The continued monetary stimulus helped push unemployment rates down to the levels of the late 1950s. The underlying assumption was that technological innovations had produced a new economy that could boom without inflation.

MarketWatch: Who’s right about recession: Wall Street or ECRI? (Oct 20, 2011)

My expectation is that ECRI will be proven right again, and that the stock rally we’re seeing now is a gift — and entirely in line with his forecast — ahead of a renewed collapse.

Consider that the last two times Achuthan leveraged his cycle research to make an out-of-consensus recession call were March 2001 and March 2008. After the first, the S&P 500 SPX +1.88% rose 14% to its 10-month average in May before falling 32% over the next 16 months. After the second, the S&P 500 rose 9.8% to its 10-month average in May before collapsing by 42% over the next nine months.

ZeroHedge: Ironic “Scariest Chart Ever” Redux – America Will Surpass 100% Debt To GDP On Halloween (Oct 19, 2011)

All Hallows E’en will be doubly scary this year: for the first time since World War II, US debt will officially surpass GDP on Halloween 2011.

Bloomberg: BofA Said to Split Regulators Over Moving Merrill Derivatives to Bank Unit (Oct 18, 2011)

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Porter Stansberry: The Greatest Danger America Has Ever Faced (Mar 10, 2011)

Today, UniCredit is the largest creditor to Eastern Europe. It owns, for example, Bank Pekao, Poland’s largest lender. It generates about half of its profit from Ukraine, Hungary, Romania, and Slovakia. JPMorgan estimates loans to Eastern Europe will generate roughly $40 billion of losses by the end of 2010.

…bears! Oh, my!

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Store of Value?

Krugman, the anti-monetarist, shows how little he cares for the store of value function of money in the following quote, taken from his blog post (Golden Cyberfetters, Sep 7, 2011) over at the New York Times.

What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich.

What Krugman, and those in control of the money supply want, is to make people holding money poor. He and other Keynesians have provided the academic veneer beneath which politicians seek to create profitable asset bubbles for themselves, erode private wealth through persistent inflation, and engage in rent-seeking among industries and organized labor by allocating the initial, asymmetric gains from inflation.

A recent article in Slate (Deflation Nation, July 3rd, 2010) attempted to describe the “positive” and “negative” affects of inflation and deflation. It argued that “there’s good deflation and bad deflation”.

Making a value judgment about deflation depends in part on which side of the balance sheet you sit and on what’s going on in the broader economy.

From this statement, one can argue that a government in debt will be predisposed toward inflation. There are problems with the Slate article (“consensus”, ie non-monetary definitions of inflation/deflation; complete misuse of “stagflation”), but at least it’s honest about inflation favoring the borrower.

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FRED Charts, Pt. 2 – Money, Velocity & Savings

St. Louis Federal Reserve Economic Data

St. Louis Adjusted Monetary Base (BASE)

Excess Reserves of Depository Institutions (EXCRESNS)

Velocity of M2 Money Stock (M2V)

Total Savings Deposits at all Depository Institutions (SAVINGS)

Updated 8/21: Added Excess Reserves of Depository Institutions

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Annual Federal Budget Deficit v. Jobs

Are people really this Keynesian? A New York Times/CBS News poll (Apr 21, 2011) asked the following question (among others):

What effect do you think a major reduction in the annual federal budget deficit would have on the number of jobs in the U.S.?

The results are not surprising, given some major problems with the question.

  • Create Jobs – 29%
  • No opinion – 15%
  • No effect – 27%
  • Cost jobs – 29%

The question’s greatest flaw is that it omits time scale, and in so doing, predisposes the respondent to assume the near-term, immediate, or first effects. (Now that’s thinking politically!)

If we borrow from the future to pay for jobs today, debt isn’t the only item that increases. Money supply increases in the short term, and so do prices if the economy does not grow commensurately. Contrary-wise, while the first effect of an immediate decline in government spending may be some lost jobs, the second effect would be a fall in money supply and almost certainly prices. The third effect would be falling wage rates (with greater purchasing power), followed by expanded employment.

Had the question asked what effect respondents thought major reductions in annual federal budget deficits would have on long-term stability of the job market, the answers would have been very different.

Further Reading:

Wikipedia: Irving Fisher (and his seminal work, Appreciation and Interest)

However Fisher believed that investors and savers—people in general—were afflicted in varying degrees by “money illusion”; they could not see past the money to the goods the money could buy.

Random study: NBER: Time Preference and Health: An Exploratory Study (PDF) Jul 1982

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