US Monetary Aggregates Update - Failure to Reform - At the Edges of the Policy Continuum

Dude, where's my deflation?

It may seem a little counter-intuitive, that the money supply measurements are growing strongly, at the same time that the growth of consumer credit and spending remains sluggish, with GDP lagging.

Well, perhaps not so sluggish as some might wish to portray, as show in the last chart, but certainly not with enough force to bring back jobs.  The Fed can create money but not real growth.

As a reminder, the changes in money supply are not independent, and must be judged in relation to other things in the real economy to determine their nature and its effects. Growth must match growth, and decline, decline, over some reasonable period of time and trend, in relation to population, real transactions ex-financial, or some other measure of genuine economic activity.

That is one of the better arguments, by the way, against the use of a gold standard.  To say that there is not enough gold is ludicrous, since it is just a relative thing, a matter of valuation.  The drawback is that the supply of gold seems to grow stubbornly slow, and may not keep pace with the growth of the economy in response to some event like the industrial revolution.  This could be handled by the revaluation of the gold and the currencies, so again one wonders how real the objection is.  Its greatest opposition is from those who wish to exercise a more flexible and stealthy monetary control.  

As I said I am not in favor of such a standard now, as the economies of the west are too weak to support their rigor, and they would be quickly corrupted.  A bi-metallic standard holds more promise, but that too is a discussion for another time.  These are remedies best used before the fact, and not ex post facto in response to long years of monetary abuse and distortions.

Increasing the money supply in response to a credit crisis, which the Fed is doing with historic vigor, is a blunt instrument. And despite all the so-called proofs and theories to the contrary, they said they would do it, they could do it, and so they are doing it.

There is certainly no lack of people who remain obstinate in their errors and illusions. I have a little more respect for those who try to maintain their theories while at least accepting the obvious. But unless they can create a whole of it, their theory is found to be lacking.

Money is a little esoteric I admit, but the mindsets of those who have been wrong for so long is even more mysterious to me, unless one assumes some misinformed, cultish adherence. And as forecast, their rationales and arguments are becoming increasingly hysterical, in every sense of the word. They are even reluctant and resistant to accepting any 'existence proofs.'

"...we stood talking for some time together of Bishop Berkeley's ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal. I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it. I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it -- I refute it thus."

Boswell, Life of Johnson

Deflation and Inflation in an otherwise unconstrained fiat currency regime is a policy choice. The restraints come from any external standards including the acceptance at value of the currency by those outside the system. This is what the proponents of Modern Monetary Theory, those sons of Zimbabwe, fail to understand. At the end of the day, money printing at will must always resort to continual expansion and the threat of force to maintain its value. And when that force fails, the money fails.

The Fed certainly can do more to curtail speculation and incent real money into productive activity rather than speculation in a web of financial instruments. The Fed as bankers have rarely done well with their regulatory functions. And it would be denounced as 'political' and interfering with the [rampant fraud and looting in the] markets.

Rather it is to the governance of the nation, and fiscal and legislative policy, that the nation must turn. Unfortunately that segment of governance is caught in the same credibility trap as the rest of the country's fortunate ones who profited abundantly from the status quo and the financial bubble, and are feeling very smug about it, rationalizing self-proclaimed genius in their delusions, and 'winning.'

Make no mistake, as a policy choice deflation is possible. And for debtor nations to voluntarily choose deflation, in the artificial constraint of money and debt in pursuit of a stronger currency, without systemic reforms to address what specifically caused the recent credit crisis, is an act of national suicide. Minds fixed to extremes either can not or will not see or find the via media, the middle ground. They pass from extreme to extreme without ever finding a balance.

If one considers the Political and Economic Continuum I have constructed before, it is easier to understand this, and how the neo-liberals can become neo-conservatives, seemingly overnight.  The energy to cross the boundary from one extreme to another is less than the required energy and effort of returning to the center.  

At that end of the scale one sees only their extreme counterparts, and loses the ability to view the more distant middle ground, the vast center of society.  It is more than a willful blindness; it is a pathological disconnect from reality and the particular, an implosion of the self into a dissolute abstraction of slogans, symbols, and ideas.

And the extremes will tend towards distortion and delusion, as life does not flourish naturally on the tails of probability.  The far Left is as noxious and rarefied as the far Right.  At the end of the day, there is relatively little distance between them in terms of what it means to be specifically human.  The others, the great mass of humanity clustered at the center, becomes fully objectified, stereotyped, and statistical.  The far ends of the continuum are the well springs of the cults of death.

From a practical standpoint, central planning, whether it is performed by faceless bureaucrats or the monoplies of oligarchs, will tend to corruption and failure.
The path being pursued by some Western nations today seems to be untenable and lacking balance, and so the bleeding begins.  Crony capitalism has the momentum to create ever bigger losers and winners.  They are unwilling, and seemingly incapable of, discussing and investigating the frauds, much less correcting them. They fear to implicate themselves, and to disturb their 'good thing.'   And so they keep pressing forward to the hard stop, and the precipice.

The governance of old has tolerated the occasional bloodbath, so long as the few might personally benefit, as corrupt governments, mad rulers, and empires are wont to do. I pray not for that tragedy there, or anywhere.

Reform is the hard medicine that the governance of the country refuses to take. The failure is with the establishment as they once quaintly called it, the monied interests in a former age, and as always, the venality, blind ambition, and vanity of the privileged.

Monetary Aggregates - Dude, Where's My Deflation? Better Yet, My Job, Savings, Economy?

Plenty of money printing, and therefore money supply growth, but little of it is from organic expansion. Printing money in low growth environments creates asset bubbles and a top down wealth effect for the upper crust. It also facilitates speculation and fuels soft frauds.

The US economy is a broken machine, burdened by an oversized financial sector and policy failures abounding in taxation, trade, and regulation.

Unfortunately the governance failures have their roots in crony capitalism and a variety of white collar crimes, disinformation campaigns, and public ignorance, so they are going to be difficult to surmount.

The recurrence of evil, whether it be in physical or economic privation, never fails to surprise one with its lack of originality, if not its sheer banality. It is rarely elegant or complex, but merely dull and ignorant, a brutish force, self-centered, animalistic, and cruel. Beneath the surface the madness lurks, in dark places and hardened hearts, awaiting its hour to rise once again.

"The receptivity of the masses to information is very limited, their intelligence is small, but their power of forgetting is enormous. In consequence of these facts, all effective propaganda must be limited to a very few points and must repeat these until the lowest member of the public understands what you want him to understand by your slogans...The law of selection justifies this incessant struggle, by allowing the survival of the fittest. Christianity is a rebellion against natural law, a protest against nature. Taken to its logical extreme, Christianity would mean the systematic cultivation of the human failure."

Adolf Hitler

US Monetary Aggregates

It is easy to be misled by short term trending in money supply charts, especially those showing year over year growth as a percentage.  Money supply changes are seasonal and often very volatile, but nevermoreso during a credit collapse and quantitative easing.

A look at the longer term trends is most useful. And if necessary a review of Money Supply: A Primer.

The last chart is an index where 100 equals the M2 supply around the end of 2007, and the onset of the credit crisis. Since then it has grown almost twenty percent. 

Has GDP or the population grown 20 percent? So money per capita or per unit of productive effort is growing.   All one has to do is look at some reality based metric of money supply growth and negative real interest rates to understand the ten year bull market in gold and silver, and commodities in terms of US dollars. 

I understand people like to look at the various independent M3 estimates, but since the Fed no longer reports Eurodollars I have not seen what I could consider a credible recent estimate. And I doubt VERY much that M3 is underrunning M2 given the dollars that the Fed has been spreading around the world's banks.

Can the Fed keep this QE up? Will deflation set in, finally? It is a policy decision in a purely fiat currency. That could change, and I will know what to look for when it does. The Fed could be subjected to some external force, either from foreign creditors or domestic politics.   I expect that foreign shock to be inflationary rather than deflationary however.  As for the domestic forces, a choice for third world status is always an option.

The top five percent of Americans hold by far most of the country's wealth. And deflation may be in their short term interests, as in the case in the UK which seems to be going down that path. These policy decisions bring up a different set of considerations, many of which will stress the social fabric to the breaking point.  But a people grown coarse by war and ideology have done much odder things before. 
But for now the trend has not changed, and it would probably take a global economic collapse to change it. That is possible. And in such an event everything will get sold, for a time, as they were in the market crash of 2008.

Those who have been betting on deflation for the past five or ten years have been wrong. They could be right some time in the future. But one can be wrong on a mistaken principle for a very long, long time.

US Bonds have been in a long term disinflationary rally. There seem to be a number of 'name' people now looking for a trend change. That is the crux of Bernanke's short term focus, and the target of QE^n.

US Money Supply Figures: Dude, Where's My (Monetary) Deflation?

As a review or refresher please read: Money Supply A Primer if you need to remind yourself what these money supply figures represent.

Considering the high unemployment and sluggish GDP the fall off in year over year growth in the money supply figures is to be expected, especially after the bubbliciously high growth rates (11% and 16% respectively) just prior to the financial crisis. That is why one should look at both the nominal and the percent year over year charts.

There is certainly price deflation from slack aggregate demand fueled by stagnant wages and high unemployment, and it may get worse as the Fed and the government coddle their unreformed pet Banks, leaving the real economy and most Americans to twist in the wind. But there is no true monetary deflation yet, the kind which is supposed to stiffen the back of the dollar and all that.

There is also sufficient room for concern about the US dollar and its sustainability as the world's reserve currency. This would be familiar to most economists as Triffin's Dilemma. As the world shifts from the Bretton Woods II compromise to a less dollar specific regime the adjustment could be quite traumatic, especially to the financialization industry. Here is another description of the same phenomenon called the Seigniorage Curse. It is why I have called the US dollar and its associated bonds The Last Bubble.

"The Seigniorage Curse appears to hollow out the economy by the following manner: First, the premium charged to holders of dollars becomes a new source of accrued, aggregate revenue. This extra capital flowing into the economy is initially seen as a global honoring of our economy’s strength, and innovation. But when innovation falters and less value is created, seigniorage is maintained–and thus the unhealthy dynamic begins. From this point forward, whether the US economy either leads in innovation, or lags in innovation, the Dollar advantage grows regardless. It then becomes clear that manufacturing Dollars, rather than manufacturing goods, is a better value proposition. Once that dynamic is in place, then a long cycle of financialization ensues, in which innovation and talent moves from design and manufacturing to the financial sector. The financial sector then becomes rapacious, as it scours what’s left of the economy to monetize. Whereas manufacturing and innovation were once monetized, the financial sector begins to monetize itself...

Every inheritance starts out as a gift. Just as oil-cursed nations remain ever vulnerable to swings in the price of oil, the United States is now vulnerable to its own number one export–the value of the US Dollar and by extension the value of US Treasury Bonds."

True Money Supply is included for all you Austrian Economists, and it has enjoyed a bumper expansion under Bernanke's chairmanship. This is the money that is ready and able to be used as a medium of exchange, what the Austrians consider 'real money.' I am quite sure that Messrs Ludwig and Murray would be aghast at Bernanke's banking practices.

I include Eurodollars chart at the bottom. This is the 'missing component' from the M3 series. Several commentators seek to estimate M3 by obtaining the other M3 components from existing sources and then estimating eurdollars based on correlations and trending. See M3 Hysteria and a Look at M2, MZM, GDP and PPI.

The Eurodollar is a particularly interesting money measure to me be because of the two enormous dollar short squeezes which we have seen in Europe as customers demanded dollars based on dollar assets deposited in dodgy CDOs. It was on a parabolic trajectory BEFORE the squeezes, and one can only wonder where they are now.

I am still comfortable with my forecast for a severe stagflation, considering both a protracted monetary deflation and hyperinflation as less probable 'on the tail' events that almost certainly would reflect fiscal and monetary policy errors. What also concerns me is the failure to reform and address the grossly imbalanced economy. I am less confident today however, that Bernanke and the Congress will not make these errors because of the blind greed of the oligarchy and their influence over the country.

M2



M2 Year over Year Growth



MZM



MZM Year over Year Growth



True Money Supply (aka Rothbard Money Supply)

"The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply. The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count. MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed. For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak (2000). The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions."

Eurodollars

I think a case could be made that the US is exporting its monetary inflation overseas, particularly to Asia. At some point these eurodollars may come home to roost, and the arrival could be quite memorable. I try to recreate some sense of Eurodollar growth from the BIS reports, especially when verifying these eurodollar short squeezes, but the lags of over a quarter in reporting are quite tiresome.