Remember M3? It’s a measure of the money supply, one that in the case of the US hasn’t been published by the Federal Reserve since 2006. Fortunately, the components of it can be, and has been, pieced back together by other parties. So, what is this lost measurement saying now?:
The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.
“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said. (emphasis mine)
Interesting interpretation here. Basically he’s saying that banks are hoarding money that should be out in the system circulating. The rub here is that the reason for the higher ratios is a response to why the financial crisis started in the first place: large financial sector players made huge, ridiculous bets on debt & didn’t have the money to cover. The process of how debt became a commodity is a story in and of itself (here’s a quick summary I floated over at Talking Points Memo), but let’s focus on this particular part. M3, prior to being discontinued, was resembling an unfinished child’s drawing of Mt. Everest.
Now, according to recent measures, M3 is coming back down — despite trillions in stimulation, between the TARP bailout, the stimulus, and the direct injections of money by the Fed. The type of people that made the aforementioned ridiculous bets are, for the most part, humming along as if nothing happened. Meanwhile, unemployment is huge and wages still haven’t caught up with even previous inflation. If money goes into the economy at the point of the big banks, capital ratios are going up, and the resources of most of the public are flat or worse, well, where do you think the money is going?
Clearly what has been done thus far isn’t working. Yet…onward!
The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.
In theory, deficit spending stimulates the economy by filling in gaps where the private sector normally would be, until conditions otherwise blow over. But in practice, I’m not seeing a difference between this and the deservedly maligned “trickle-down” economics, to be honest.