Friday, October 17, 2008

SIGNIFICANT DEVELOPMENT: Money Supply Climbing, Again

The fuel that sparks the economy, money supply growth, is climbing again.

As recently as September 15, money supply growth was nosediving.

In September, money supply [M2] growth [three month-annualized] bottomed at 1.5% annualized growth.

In the 3 to 4 weeks since then, money supply has shown sustained growth. This week M2 three month annualized money growth is at 4.1%. Money growth has more than doubled. Though, it is still nowhere near the 12.1% growth in March of this year.

But the change in growth to the upside suggests that Ben Bernanke has opened the floodgates to fill the system with money. This will throw off all the forecasts made by economists who are making projections of a deep and long recession. The recession should be short and brief. The true long term threat is likely to be inflation. That said, Bernanke has run one of the most unpredictable erratic Fed operations ever. IF Bernanke slows printing again, all bets are off and we are back into major recession mode.


6 comments:

  1. But the change in growth to the upside suggests that Ben Bernanke has opened the floodgates to fill the system with money. This will throw off all the forecasts made by economists who are making projections of a deep and long recession. The recession should be short and brief.

    Do you subscribe to the Austrian theory of the business cycle? It seems like you are saying recessions are a matter of people not "spending" enough, as opposed to real imbalances in the capital structure.

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  2. Bob,

    The way I understand ABCT is that the imbalances to the capital structure are caused by the Fed pumping money into the system. Thus, Fed pumping money now will prop up the current mal-investments and prevent a deep and long recession at this time.

    Thus in my view the great threat is what I wrote in the sentence following what you quote:

    The true long term threat is likely to be inflation.

    Naturally, "not spending enough" has nothing to do with it. And, I never say that it does. When I say the Fed is pumping again and this will make any current recession short, I believe this is accurate ABCT. Note: I am not talking here about longer term (over a year) repercussions, only those that are of immediate consequence to market traders.

    These are blog posts. If I had to lay out all of ABCT and all the repercussions across the timeline on every post, it would make the blog quite cumbersome.

    To be clear,this is what I expect if the Fed continues to print money:

    1.A shorter recession, now, then most expect.

    2.A fairly rapid increase in inflation.

    3. Further long-term (more than a year) repercussions: Possible hyper-inflation, possible severe recession, possible stagflation.

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  3. What do you think about the "pushing on a string" argument? I.e., the Fed can print the money, but if banks hoard it (to rebuild their capital ratios), it won't have any impact on asset prices.

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  4. @notgreat

    The Fed can print and print until the system is stuffed with money. Further, the Fed can buy Treasury securities direct from the Treasury---the Treasury won't have any compunctions about spending the money.

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  5. I am no theoretician but I think the “you can’t push a string” has to do with the private sector, not the public sector or even the private sector who are being given orders by the public sector.

    While some people claim different, the market produces failure. However once failure is recognized it is punished. The recognition is sometimes slow but the end result of punishing that failure is pretty sure. Nobody wants to invest or own money-losing investments over the long term. Government on the other hand, not only has a bad habit of not recognizing and punishing failure, they often reward it.

    So while the private sector was slow in recognizing that huge numbers of “luxury” condos in South Florida were a bad investment, now they recognize the problem and refuse to invest in them unless the prices drop down to where they are actually affordable to those who might want to buy. Government on the other hand is trying to prop up RE prices which will lock up the market or cost the taxpayer huge amounts of money.

    Also expect to hear a lot of talk about government “investing” in infrastructure to “jump start” the economy. This will be the government pulling the string. Now improved infrastructure can be an economic benefit, but only when done on an economic basis, doing it on a political basis will probably be more of a cost then a benefit. Especially since once started these projects are almost impossible to rein in or kill. Think “Big Dig” in Boston.

    So I agree that inflation is a danger, especially if the government tries to “pull the string” with lots of projects of dubious economic benefits since the debt and printing of money will still be with us long after the “pull the string project” has failed or even worse proves to be a long term liability.

    Also these “public/private deals that are now going on with the banks are another “pull the string” deal. In some ways they are even worse then the pure public ones since it blurs the lines between public and private and allows both to deny responsibility for their actions. The government will blame the banks, the banks will blame the government and the taxpayer will end up with the bill and the dollar holder will end up with the inflation.

    DJ

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  6. One problem I can foresee with "printing & printing" is that our foreign creditors can look at the monetary base level as well as I can. Given the jump in the last month or so, I'm sure the Chinese are already concerned about their $1T+ in reserves. As a nation which depends on the kindness of foreign creditors, do you think we're restricted in the extent of printing the Fed can do? If they stop buying our paper, do you believe the Fed will buy Treasuries directly to keep interest rates down & can it succeed?

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