Tuesday, February 9, 2010

Ben Bernanke,M3 Collapsing and What It Means

John Williams of Shadow Stats puts out some solid data.

His latest subscriber based newsletter shows a huge plunge in inflation adjusted M3 (Yes, the Fed stopped tracking it but he hasn't). His compilation for real M3 is that it has declined by 5.2% from Jan '09 to Jan '10.

His conclusion:
This particular signal on looming economic activity rarely is seen, but once it is generated, it is solid. The weaker economy ahead will be particularly disruptive to a system that assumes positive economic growth will be seen in all of 2010.
Williams also comments on my favorite indicator M2:

Year-to-year change in M2 is estimated at a 1.9% gain in January — a contraction after inflation adjustment — following a 3.4% annual gain in December. Month-to-month, January M2 dropped about 0.8%, following a 0.2% gain in December...With slowing growth in M2 (the broadest money measure published by the Fed) and continued credit contraction, the Fed has to know that conditions are not healthy or appropriate for economic expansion. These conditions also are suggestive of ongoing difficulties in the U.S. banking system. Continuing to act as though such were the case, the Fed pushed the St. Louis Fed’s Adjusted Monetary Base measure to $2.059 trillion in the two weeks ended January 27th — its second highest level ever — 1.0% shy of the December 2, 2009 period peak and up at an annualized 56.1% rate of growth since the near-term trough in the August 12, 2009 period. The monetary base is currency in circulation plus bank reserves. At present, banks are leaving extreme levels of excess reserves on deposit with the Fed, instead of lending those funds into the normal stream of commerce.

Judging by comments made by Bernanke and Kansas City Fed President Thomas Hoenig, I wonder if they understand how tight things are. They continue to talk as though low interest rates are Fed easing, which I have emphasised is not the case. Clearly, Williams agrees with my thinking that it is money supply that has to be watched. Hoenig appears to really believe the Fed is easing because of low rates, with Bernanke you can't really tell. I tell you, I wouldn't want to play poker against him.

The possibilities are that Bernanke:

1. Also believes that low interest rates are easing

2. He doesn't really believe such when he states it and knows he is about to crash the economy again as part of some secret agenda of the elite.

3. He is a secret Austrian and wants to maintain as close to a stable money supply as he can to ultimately squeeze the distortions of previous money inflations out of the system.

Number 3 is a possibility though not a very strong one. My bet is that with Bernanke we are dealing with possibility 1 or 2.

Fortunately, as investors we don't have to guess what is in his mind. We just have to see the results of his action, which at this point is very slow money supply growth. This of course means much trouble ahead for the economy.


  1. "Year-to-year change in M2 is estimated at a 1.9% gain in January — a contraction after inflation adjustment"

    Isn't M2 growth one measure of inflation? Also, the number here seems like 3.8% (seasonally adjusted) though falling from December's levels.

  2. I really enjoy your blog, Robert. However, I got a good chuckle at your suggestion that "Helicopter" Ben might be a closet-Austrian.

    I'm firmly a believer in option #2: that Bernanke's rhetoric is part of his "marching orders" from Wall Street - and he doesn't believe a word of his own BS (like Greenspan before him).

    When he was continuing his "Goldilocks economy" mantra right up to the day of the housing-crash, he obviously couldn't have believed that.

    When he followed that up with his "soft landing" propaganda campaign, he obviously couldn't have believed that either.

  3. Covert in Vienna: An Autobiography, by Ben S. Bernanke, PhD.

    Now THERE'S a book that will never see a publishing date!