US credit shrinks at Great Depression rate prompting fears of double-dip recession

[Francois Cellier]

From the Daily Telegraph

US credit shrinks at Great Depression rate prompting fears of double-dip recession

Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

By Ambrose Evans-Pritchard
International Business Editor
Published: 11:59PM BST 14 Sep 2009


Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

[Justin]

The reduction of credit is overall a good thing for our economy, even if it hurts pretty badly in the short term. Unfortunately, the worse the deflationary second dip is, the more money the Federal Reserve will pump into our system, potentially causing an inflationary third dip.

[jfuh]

Originally Posted by Justin

The reduction of credit is overall a good thing for our economy, even if it hurts pretty badly in the short term. Unfortunately, the worse the deflationary second dip is, the more money the Federal Reserve will pump into our system, potentially causing an inflationary third dip.

What inflation? You're still singing that tune?
Deficit Hawks Wrong
U.S. Economy Gets Lift From Stimulus

[Tom Joad]

Originally Posted by Justin

The reduction of credit is overall a good thing for our economy, even if it hurts pretty badly in the short term. Unfortunately, the worse the deflationary second dip is, the more money the Federal Reserve will pump into our system, potentially causing an inflationary third dip.

How are we going to get inflation?

For that you need demand, ie. spending.

Right wing economic policies have funneled 95% of the wealth to the top 1%.

The American middle class is tapped out and up to their ears in debt.

They have nothing to spend.

The goose that layed the golden egg is cooked.

The fed can pump all they want.

Even if they gave away the cash directly to the lower and middle class it would just go to paying off debts.

[clownboy]

And yet, US Stocks Slightly Higher As Bernanke Says Recession Is Over.

[Tom Joad]

Originally Posted by clownboy

And yet, US Stocks Slightly Higher As Bernanke Says Recession Is Over.

Yeah, I saw that but I've heard too many lies from economists to believe anything they say.

However, if it's true it would be horrible news in deed for the Obama haters.

[Francois Cellier]

Originally Posted by clownboy

And yet, US Stocks Slightly Higher As Bernanke Says Recession Is Over.

Unfortunately, the stock market has lost its relationship with real production. The stock market reflects the subjective belief of buyers and sellers in the value of a stock, a belief that can be easily manipulated, especially with market participants who don't do their homework, i.e., who no longer look at the products of a company before buying their stock, but only look at market movements.

In the last few months, artificial volume of stock trading was achieved by computers that buy and sell at split second intervals. Also, companies started buying each others' stocks and selling them back in short sequence to generate an impression of a high volume in trade, as this drives the value of their stock up.

It is estimated that up to 75% of all stock trades were short-term trades, i.e., trades by market participants who hold on to their stock for a very short period, often less than a day, rather than by market participants with a long-term perspective.

For this reason, I don't trust the Dow Jones Index any longer to offer me useful information about the health of the economy.

Instead, I prefer to look at unemployment numbers, because they tell me how much goods are actually being produced with the money invested in the market. The unemployment numbers in the U.S. are unfortunately still rising.

[potter]

Originally Posted by Francois Cellier

Unfortunately, the stock market has lost its relationship with real production. The stock market reflects the subjective belief of buyers and sellers in the value of a stock, a belief that can be easily manipulated, especially with market participants who don't do their homework, i.e., who no longer look at the products of a company before buying their stock, but only look at market movements.

In the last few months, artificial volume of stock trading was achieved by computers that buy and sell at split second intervals. Also, companies started buying each others' stocks and selling them back in short sequence to generate an impression of a high volume in trade, as this drives the value of their stock up.

It is estimated that up to 75% of all stock trades were short-term trades, i.e., trades by market participants who hold on to their stock for a very short period, often less than a day, rather than by market participants with a long-term perspective.

For this reason, I don't trust the Dow Jones Index any longer to offer me useful information about the health of the economy.

Instead, I prefer to look at unemployment numbers, because they tell me how much goods are actually being produced with the money invested in the market. The unemployment numbers in the U.S. are unfortunately still rising.

This is an interesting assessment. I sidelined my stocks as much as I could recently in money markets. Since then stiocks have continued to climb, so I'm doubting my decision which was made on a odd gut feeling. (BTW, I've managed to gain back about 60% of my loses from last year)

[Justin]

Originally Posted by jfuh

What inflation? You're still singing that tune?
Deficit Hawks Wrong
U.S. Economy Gets Lift From Stimulus

As we come out of this downward cycle, spending has already begun to rise again (LINK). The key numbers to look at are money velocity and money supply. Currently, the money supply is at an all time high....the result of money being printed by the Federal Reserve. While velocity is quite low. As velocity begins to rise, the increased money supply will begin to take its toll on prices, and inflation of the price of goods will begin to pick up. This is what I've been saying for quite a while.

For that you need demand, ie. spending.
Right wing economic policies have funneled 95% of the wealth to the top 1%.
The American middle class is tapped out and up to their ears in debt.
They have nothing to spend.
The goose that layed the golden egg is cooked.
The fed can pump all they want.
Even if they gave away the cash directly to the lower and middle class it would just go to paying off debts.

Every heard of "Cash for........(insert product here)"

Retail sales rise 2.7% in August - Sep. 15, 2009

NEW YORK (CNNMoney.com) -- Retail sales surged in August, with the Cash for Clunkers program giving auto sales an extra boost, the government reported Tuesday.


The Commerce Department said total retail sales jumped 2.7% last month, compared with July's revised decline of 0.2%. Economists surveyed by Briefing.com predicted August sales increased 2%.


Sales excluding autos and auto parts rose 1.1%, compared to a 0.6% decrease in July. Economists expected a gain of 0.4% in August sales, excluding auto purchases.


"With broad-based gains, it's hard to say any sector is a standout, which is great," said Adam York, analyst at Wells Fargo Securities. "We had promising core numbers, but we don't want to call a trend out of one month."

And yet, US Stocks Slightly Higher As Bernanke Says Recession Is Over.

You trust Ben Bernanke?

YouTube - Bernanke: Why are we still listening to this guy?

This is an interesting assessment. I sidelined my stocks as much as I could recently in money markets. Since then stiocks have continued to climb, so I'm doubting my decision which was made on a odd gut feeling. (BTW, I've managed to gain back about 60% of my loses from last year)

Potter, there may be gains left to be made in stocks...but they will all be nominal...all inflation-based. Buy gold stocks if you can.

[Tom Joad]

Originally Posted by Justin

Potter, there may be gains left to be made in stocks...but they will all be nominal...all inflation-based. Buy gold stocks if you can.

Right Potter, get your financial advice from a 20 year old right winger.

Quoted for posterity.

[potter]

Originally Posted by Justin

Potter, there may be gains left to be made in stocks...but they will all be nominal...all inflation-based. Buy gold stocks if you can.

Unfortunately Justin my remaining investiments are in a 401K plan where I do not have an option for this.

I can't do anything in fact except keep it in the market and hope for the best or money markets which chip away at the balance a little at a time with small losses. In other words I'm fucked.

Under the terms of the plan I can't cash it out unless I quit my job or die.

[Justin]

Potter, I'm far from an expert on the stock market. But you might talk to Francois or Fred about stocks of gold (and other precious metal) mining companies.

[potter]

Originally Posted by Justin

Potter, I'm far from an expert on the stock market. But you might talk to Francois or Fred about stocks of gold (and other precious metal) mining companies.

That's the problem, I really don't have a choice. I have a set menu of plans that include a variety of companies. I wan't really looking for advice however...seeing how I'm stuck. I have a penchant however for alwasy doing the wrong thing when it comes to this 401K....which is why I don't think people should be so reliant on them.

[jfuh]

Originally Posted by Justin

As we come out of this downward cycle, spending has already begun to rise again (LINK). The key numbers to look at are money velocity and money supply. Currently, the money supply is at an all time high....the result of money being printed by the Federal Reserve. While velocity is quite low. As velocity begins to rise, the increased money supply will begin to take its toll on prices, and inflation of the price of goods will begin to pick up. This is what I've been saying for quite a while

One thing at a time, can you now admit on being wrong that the stimulus and bank bail outs have worked?

[Justin]

Jfuh,

I think there is a difference in the way you and I define "worked". I never denied that the stimulus and bank bailouts would blunt the immediate economic recession. What I have and continue to believe is that a severe US recession (much worse than what we've experienced) is inevitable, and that the stimulus efforts will make that recession much worse than it would have been.

So I guess my question for you is, what was the purpose of our governments efforts to stimulate the economy? If the purpose was to make the situation better short-term, while prolonging and deepening the coming economic collapse, then yes, it "worked".

[VanishingPoint]

Originally Posted by potter

Unfortunately Justin my remaining investiments are in a 401K plan where I do not have an option for this.

I can't do anything in fact except keep it in the market and hope for the best or money markets which chip away at the balance a little at a time with small losses. In other words I'm fucked.

Under the terms of the plan I can't cash it out unless I quit my job or die.

Me too! Same thing.

[jfuh]

Originally Posted by Justin

Jfuh,

I think there is a difference in the way you and I define "worked". I never denied that the stimulus and bank bailouts would blunt the immediate economic recession. What I have and continue to believe is that a severe US recession (much worse than what we've experienced) is inevitable, and that the stimulus efforts will make that recession much worse than it would have been.

So I guess my question for you is, what was the purpose of our governments efforts to stimulate the economy? If the purpose was to make the situation better short-term, while prolonging and deepening the coming economic collapse, then yes, it "worked".

What economic collapse? the collapse was staved off because of the continued spending by the government. You didn't read the WSJ article I cited for you did you?
You've been trumpeting the same debunked inflation fear for as long as I've been aware on this forum and claimed that the stimulus wouldn't work, that bank bailouts wouldn't work. You've been wrong and wrong on 2/3 as proven by actual events.
As for inflation, there is no inflation, what we are seeing now is indifferent from what Japan saw. In WWII our national debt was 120% of GDP and was there massive inflation afterwards to absorb the deficit? No.
You simply can not save your way out of a recession.

[Fredfredson]

What economic collapse? the collapse was staved off because of the continued spending by the government. You didn't read the WSJ article I cited for you did you?
You've been trumpeting the same debunked inflation fear for as long as I've been aware on this forum and claimed that the stimulus wouldn't work, that bank bailouts wouldn't work. You've been wrong and wrong on 2/3 as proven by actual events.
As for inflation, there is no inflation, what we are seeing now is indifferent from what Japan saw. In WWII our national debt was 120% of GDP and was there massive inflation afterwards to absorb the deficit? No.
You simply can not save your way out of a recession.

Jfuh

It is a matter of time only here.

There is no way the collapse has been staved off permanently only deferred.

I agree with Justin in that most of the main stream financial system's actions are actually making the situation worse.

Frankly I would have preferred a complete meltdown last fall simply because by now the worst would be over and we could start to rebuild from the ashes. Instead everything we do is simply rearranging the deck chairs on the Titanic.

F

[jfuh]

Originally Posted by Fredfredson

Jfuh

It is a matter of time only here.

There is no way the collapse has been staved off permanently only deferred.

I agree with Justin in that most of the main stream financial system's actions are actually making the situation worse.

Frankly I would have preferred a complete meltdown last fall simply because by now the worst would be over and we could start to rebuild from the ashes. Instead everything we do is simply rearranging the deck chairs on the Titanic.

F

Could you be more specific as to how the systems are worse off now rather than allowing a complete collapse of the system in the last year?

[Francois Cellier]

Originally Posted by Justin

Potter, I'm far from an expert on the stock market. But you might talk to Francois or Fred about stocks of gold (and other precious metal) mining companies.

I don't know about gold stocks, but the real commodity is luckily quite compact, i.e., can be stored at home, if you have a safe place for it. Gold has increased its value by roughly 10% every year for the last six or seven years; platinum is even a bit better.

If you keep the precious metals in metal accounts in the bank, it is safer (cannot be stolen as easily), but only as long as your bank doesn't go belly-up.

As long as our financial markets hold together, there isn't really any good reason to take your precious metals home, and if the markets should crash beyond recovery (which is at least a possibility), you may have a problem to trade your precious metals for something that you can use.

Thus, I don't really know how to advise you. I would certainly not invest a large fraction of your total wealth in precious metals or other commodities. Investing a small portion may make you feel good if you watch these commodities appreciating over time.