Saturday, September 26, 2009

Pritchard Discovers the Crashing Money Data

Ambrose Evans-Pritchard has joined the team that is aware that there is no growth in money supply and that many loan numbers are crashing. He writes:

Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise...

We are moving into a phase when most OECD states must retrench to head off debt-compound traps.

Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.
If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.

Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.

The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world.

Yet hawks are already stamping feet at key central banks...

Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."

M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.
Pritchard is a bit of a Keynesian here. He would like to see central banks, including the Fed start printing money again. This would be an error. In fact, if the central banks continue along their current path, they would wipe the scourge of inflation off the map.

But, first will come a period of pain, it is at this point that Bernanke and his overseas cronies will start printing money again, in panic. That panic period is not likely to be very far away. Pritchard talks about early next year as the beginning of panic. I don't think we have that long. My analysis says, we are likely talking weeks, not months---given the that the tight money period started in late February/early March. This is a very long period to have a no growth money supply with the stock market going up. It won't last.

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