Sludge: U.S. Gorilla Economy On A Diet

[Dirty Hippie]

This from Scoop NZ


http://www.scoop.co.nz/mason/stories/HL0311/S00217.htm


...
Sludge has spotted a large gorilla in the room that is not getting sufficient attention. When looking at the US economy there is one aspect of the picture that is definitely very very odd.

Since September US aggregate Money Supply has been in decline. Sharp decline.
...

As one who has a limited understanding of economics, I cannot comment but would appreciate the comments of others in order to further my own understanding.

Thanks

[Petrodollar Warfare]

1. It means the "kindness of others"(foreigners) is drying up...

....but with only September numbers showing the massive decrease in net inflows, we can't be conclusive - yet. If the Oct 03' numbers shows another net-inflow of only $5 or $6 billion (as opposed to $50+ billion), then I would expect the dollar to really begin to drop-off. Our trade and current accout deficit requires borrowing of about $60 billion per month. It appears that foreigners may be losing their appetite for US investments and US debt instruments.

If Oct net-flows are bad, The Fed would have to increase interest rates in order to attract foreigners at that point, but given that refi/housing market is what is holding up the economy, the Fed does not want to raise the rates.

The basic problem, our gov't, our corporations, and we as individuals have way too much debt to support our current consumption rates. We are dependent of the "kindness of strangers" to keep our addiction going, but this is not sustianable, and I pesonally am very interested in the Oct numbers (if they publish legitimate numbers...)

[rapier]

2. notes

The money supply shrinking is extremely unusual. It is three months long and counting now since it began.

Why it is shrinking I have an idea, but others will probably debunk it. At any rate the reason is the sharp drop off in mortgage borrowing, especially refinancing ever since rates spiked up off the bottom this spring.

What it means going forward for the economy is impossible to say. Traditional analysis would insist that it will slow the economy. Perhaps but I am not certain. Traditional macro economic theory in regard to monetary and credit issues has been thrown out the window in the new world of finance. Credit growth or shrinkage used to be strictly the result of banks propesity to lend. No more. Banks are now an almost minor player in the credit markets now. Supercedeing them has been Wall Street and it myriad avenues of securitization of loans, and most important of all perhaps, the mortgage lending jugggernaugt.

Will the money supply continue to shrink? Who knows? What does it mean for the future? That is not know either but in general one must guess that it will be a negative, in so far as the traditonal measures of 'growth' in our nutty culture of consumption will say.

<I should note that Econ 102 says that money is created only one way. That is by bank lending in a fractional reserve banking system. That was thought to be absurd in 1890, today it is dogma. What is considered absrud now, if considered at all is that all the non bank lending, the Wall Street secruitizations and the mortgage lending behemoth create money as well, and it is a zero reserve system. Debt backed by nothing but faith>

[althecat]

3. If you look up "Federal Reserve Money Supply" on Google

You get a good idea just how big this ex-bank money creation is.

http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html

Total indebtedness in the US.. which is another way of saying how much "money" or "wealth" there is in the system is $19 trillion. Of that only 8 Trillion (approx) is M3.... that leaves $13 trillion of "other money" some might call it "funny money"... not that it is necessarily going to be funny for much longer.

:)

[the_real_38]

4. The CBS link was telling...

... cheap consumer credit has come to a temporary end - so consumers may be confident, but they might not have any money. However, the banks are making money, but they're holding onto it.

Joseph Stiglitz (in "The Roaring Nineties") said that there was a fortunate occurence of the banks being "re-capitalized" in the 90's, when Clinton enacted his budget measures. There followed a splurge of business investment (too much in sectors like Telecom). Looks like something similar might be happening.

Problem is, the investment opportunities aren't there - like Warren Buffet said, there's "cash but no ideas", no internet star to hitch your wagon to. Might be why the foreign capital is drying up, too. The banks and investors are all dressed up with no place to go.