Wednesday, December 23, 2009

A Major Warning on the Slowed Money Growth

I am not alone in my warnings that the slowed money supply will send the economy into a double digit recession.

Professor Charles Goodhart, a former top official at the Bank of England now at the London School of Economics, said policymakers have neglected the flashing danger signal of the monetary data, writes Ambrose Evans-Pritchard.

"What has happened to all the monetarists? Growth in money holdings and lending has plummeted. Thirty, or 40, years ago they would have been forewarning doom and destruction at this juncture, and casting anathemas at the authorities," he wrote in a consultant report for Morgan Stanley.

Indeed, it is quite bizarre that economists have some how blocked money growth from their minds, when in the early 1980's markets hung on edge waiting for the Fed money supply reports that are issued every Thursday afternoon.

3 comments:

  1. interest rates are record low compared to 70s or 80s. DO u want more money growth? why?

    I thought the last 25 years rise in cheap money has been the problem for bubbles. so Lack of money growth would be a good thing right ?

    Probably not in current depression, but for long term we need to deleverage.

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  2. My position has been that the Federal Reserve should not manipulate the money supply at all that it should be fixed.

    Occaisonally I do not make this point in a specific post just to keep the flow of the blog going. But if you read regularly, you will get the my positon on money supply growth.

    My emphasis on money growth in this post is as a forecasting tool.

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  3. Quality loan demand at these low rates is pretty soft now--can't imagine the economy and inflation taking off from that platform.

    Government spending will be the driver, not Main street, that will plunge us into the dreaded price inflation, when and it comes down the road.

    I do see a bit of a paradox here:

    1. If the Fed stops the MBS buying and mortgages rates shoot to 6% and over, then the housing bubble deflation begins again and blood starts flowing down the street in the financial system, with collateral values vaporizing. 30-year mortgages are at 5.125% today. They were 4.875% this time last week.

    2. The Fed keeps the MBS buying going and stays the reckoning for a little longer and the balance sheets grows further. The wild borrowing and spending continues to stay the demand reckoning. This scenario fuels our inflation fears--the Fed's buying and the Administration's borrowing and spending.

    We haven't talked about deflation in a while--I don't think the deflation genie ever got back into the bottle. I just feel that somewhere along the line deflation will have a second act before the anticipated inflation rushes back in.

    Jmho, but I think the "full" deflation reckoning has only been postponed--pushed off to a later, more bitter date. I just don't see these asset values holding up. I do believe, however, the inflation will come like the whirlwind sometime in the future.

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