M3 FALLING / CASEY´S DAILY DISPATCH ( RECOMMENDED READING )

M3 Falling

By Bud Conrad

Recently, an analysis showing M-3 falling steeply has been making the rounds. Some observations.

First, to state the obvious, the monetary aggregates are not growing, because we are in serious economic slowdown. The biggest component of lending is in the private sector and was mortgage lending. That has dropped back with consumers more fearful of borrowing and banks requiring higher standards for making loans. Job losses and defaults keep borrowing smaller.

In this recession, private debt is declining. When there is less lending, bank deposits do not grow as fast. Also with interest rates at zero, money market funds have been in decline. Some have looked for better returns investing in items outside the traditional categories that are collected by the money time series.

On the other side, the public deficits and the attempted Fed bailouts are trying to replace the collapse in the private sector and are propping up the banks. So government debt is expanding rapidly.

This is the Keynesian/Friedmanite solution that is not working. The private sector is not multiplying the government stimulus. The huge excess reserves at the Fed are the best evidence of the banks not loaning money into the system. Banks, facing big write-downs, are not expanding their leverage and loans for fear of insolvency.

As our economy stays weak and internationally uncompetitive in basic manufacturing, the low demand for private credit will keep monetary aggregates from expanding, and that provides cover for the politicians to continue the spending spree that makes their lobby-supported special interests rich. ($100 B in bank bonuses still makes me angry!)

Of course government spending and deficits don't contribute much to economic growth, so the feed back to more stimulus programs, like Larry Summers $200 billion request, piles on the government debt.

It is the increase in government debt that worries currency holders and traders. If confidence is shaken, the vigilantes can attack a country's debt and currency to drive the exchange value down and rates higher. That is the serial attack on the PIIGS that the eurozone is trying to prevent after the Greek example, using the "shock and awe" of a $1 trillion more government-initiated debt to fight back. Markets gave a day of respite to the eurozone package, but the confidence is still shaky.

My view is that the government/central bank/monetary authority printing press will win out as it almost always has, and that inflation is about to start in the loss of confidence in governments to keep from issuing too much money.

As a footnote, there are difficult measurement problems with the M1, M2, M3 money supply methodology, which focuses on the aggregate liabilities of banks' balance sheets. There are many other near money measures that are not included, that go beyond commercial bank credit.

Treasuries are not considered money, and the Fannie/Freddie debt issuance is certainly a process much like what commercial banks do. Derivatives are a form of purchasing power that no one knows how to evaluate but certainly do provide a measure of financial assets, and they have exploded but are not part of traditional money definition.

Ambrose Evans-Pritchard quoting Shadow Stats M3 is just one of many possible measures. That is a theoretical topic that is hard to pin down to what is the "real" definition of money. I think the most important component of a money system today is the CONfidence of the participants, and that is a fleeting concept to nail down.

Here are more charts of money supply (Click on: http://www.shadowstats.com/charts/monetary-base-money-supply) , and if you look at the grey totals rather than the annual changes, the amount of decline appears less dramatic.