Monetarists warn of crunch across Atlantic economies
By Ambrose Evans-Pritchard
Last Updated: 11:40pm BST 11/07/2008
The lifeblood of countries’ economies is draining away – with grim consequences for us all, writes Ambrose Evans-Pritchard
The money supply data from the US, Britain, and now Europe, has begun to flash warning signals of a potential crunch. Monetarists are increasingly worried that the entire economic system of the North Atlantic could tip into debt deflation over the next two years if the authorities misjudge the risk.
The key measures of US cash, checking accounts, and time deposits – M1 and M2 – have been contracting in real terms for several months. A dramatic slowdown in Britain’s broader M4 aggregates is setting off alarm bells here.
Money data – a leading indicator – is telling a very different story from the daily headlines on inflation, now 4.1pc in the US, 3.7pc in Europe, and 3.3pc in Britain.
Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc.
“The money supply is crumbling in the US. There was a very sharp lending contraction in the second quarter lending. If the Federal Reserve is forced to raise rates now to defend the dollar, it would be checkmate for the US economy,” he said.
Leigh Skene from Lombard Street Research said the lending conditions in the US were now the worst since the Great Depression. “Credit liquidation has begun,” he said.
The Fed’s awful predicament does indeed have echoes of the early 1930s when the bank felt constrained to tighten into the Slump in order to halt bullion loss under the Gold Standard. Investors – notably foreigners – dictated a perverse policy. Over 4,000 US banks collapsed. This time a de facto “Oil Standard” is boxing in Ben Bernanke. Benign neglect of the dollar has started to backfire. It is pushing up crude, with multiple leverage.
The monetary picture is highly complex. The different measures – M1, M2, M3, M4 – have all given false signals in the past. Each tells a different tale, and monetarists fight like alley cats among themselves.
The Federal Reserve stopped paying much attention to the data a long time ago. It has abolished M3 altogether. The US economic consensus is New-Keynesian (dynamic stochastic general equilibrium model). Delving into the money entrails is derided as little better than soothsaying.
That attitude, retort monetarists, is the root cause of the credit bubble. The money supply almost always gives advance warning of big economic shifts. Those who track the data are now calling on central banks to move with extreme caution. If the rate-setters overreact to an inflation spike caused by oil and food – or confuse today’s climate with the early 1970s – they may set off an ugly chain of events.
“The data is pretty worrying,” said Paul Ashworth, US economist at Capital Economics. “US lending is shrinking dramatically in real terms, and we know from the Fed’s survey that banks want to tighten further. People are clamouring for higher rates but we think deflation is now the biggest threat. The idea that the Fed should tighten with unemployment soaring is preposterous,” he said. The jobless rate jumped from 5pc to 5.5pc in May.
From The Bad To The Really Sinister
By The Mogambo Guru
10/07/08 “The Daily Reckoning. ” –08/07/08 – The first half of the year is over, and now all those brokerage accounts and retirement accounts will be sending out statements to hapless account holders, and it is bad news in spades. This is why (I assume) the Plunge Protection Team (composed of the US Federal Reserve, the Treasury and bank insiders) tried to drive the stock markets up on Monday, June 30 – to make those account statements look not quite as bad, and, hopefully, prevent people from dumping all of their stock and bond holdings in a desperate attempt to save something before the whole idiotic, fiat-currency, unlimited-fractional-banking thing just collapses.
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And the stupid banks (always the cause of all of economic troubles) are suffering from their own stupidity, and Bill Buckler of The-Privateer.com newsletter notes that “US banks have suffered US$391 billion of losses and write-downs from mortgage-related securities since the start of 2007, according to the data compiled by Bloomberg. US banks could lose another $300 billion on real estate loans during the year ahead.”
What makes this $691 billion loss so special is that “such losses could jeopardize balance sheets because the US banking system had only $1,350 billion of equity capital”. Hahaha! They’ve lost two-thirds of the banks capital! Hahaha! Morons!
Since all things are connected to all things, he says, “The sum of it all is that the entire US banking and financial system is so threadbare, fragile and short of capital that a collapse or crash in one place could knock the underpinnings out from under several other US financial sectors which would take even more down with them. A systemic crash – at any time – is today a distinct possibility.”
WASHINGTON — Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
Bringing Down Bear Stearns
by Bryan Burrough August 2008
….Even among the circle of top executives who lived through that frantic week, no two people see the crisis at Bear the same way. Many, though, agree with some version of the scenario Alan Schwartz has come to believe. Yes, Schwartz tells friends, mistakes were made. Yes, the firm was financially weakened. But the more he learned about what had happened behind the scenes that week, the more Schwartz came to believe that Bear’s collapse was a pre-meditated attack orchestrated by market speculators who stood to profit from its demise. According to those Schwartz has briefed, these unnamed speculators—several now being investigated by the S.E.C.—employed a complex scheme to force a handful of major Wall Street firms to hold up trades with Bear, then leaked the news to the media, creating an artificial panic.
“Something happened Monday that triggered this mess,” says one Bear executive who has spoken to the S.E.C. “It was as though a computer virus had been launched. Where the hell was this coming from? Who started it? We tried, believe me, but we could not track it down. We know lots of big hedge funds were spreading rumors, but how can you pursue that? Only the S.E.C. can, and they’re all over this.”
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Maybe the S.E.C. will figure out whether Bear was murdered. But maybe it won’t. Even those who believe the firm was the victim of a predatory raid have their doubts it can ever be proved.
“Even with subpoena power, I’m not sure the S.E.C. will get to the bottom of this, because the standard of proof is just so difficult,” says a vice-chairman at another major investment firm. “But I hope they do. Because you can look at this as just another run on a bank or as a seminal point in the financial history of this country that could bring about a change, perhaps a drastic change, in the way we govern financial markets. If there is a solution to this kind of thing, it must be found in the roots of what happened at Bear Stearns. Because otherwise, I can guarantee you, it will happen again somewhere else.”
A BEDTIME STORY…..
Granddad, Tell How Capitalism Committed Suicide: Mark Gilbert
Commentary by Mark Gilbert
July 10 (Bloomberg) —
“Granddad Benny, is it true that capitalism committed suicide?”
Granddad looked up from the fire he was stoking with bundles of 2006 and 2007 vintage mortgage-backed bonds. “In a way, Joel, yes. In developed countries, people got too greedy, especially bankers, and everyone borrowed too much. In less developed countries, people racing to improve their living standards reawakened the slumbering inflation monster.”
Joel put down the stick he was using to scratch the dirt. “Why did the Gigantic Global Bubble Burst of 2008 catch people unawares? Weren’t there any warning signs, Granddad?”
“With hindsight, Joel, water should have set alarm bells ringing. Before the Giglobubu, wealthy people paid $15 per liter for Cape Grim bottled water from Tasmania, at a time when the Asian Development Bank estimated that 700 million people in Asia lacked access to clean water. Investment banks even started to invent securities betting that water shortages would arise. Even so, when the Water Wars started, the world wasn’t prepared.
“Cyprus started buying water from its neighbor, Greece, because its dams were down to 7.5 percent of capacity and its desalination plants couldn’t meet demand. Spain drew up plans to build a pipeline to funnel water from the Ebro River to Barcelona, the nation’s second-largest city, amid the worst drought in half a century.”
