Wednesday, 26 May 2010

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

I have 3 issues with the article the Telegraph put out this evening by the same title as this post (link below).

1) Obama needs to get monetary policy the hell away from Larry Summers:
Mr Summers said it would be "pennywise and pound foolish" to skimp just as the kindling wood of recovery starts to catch fire.
Mr Summers is in thrall to the banks, and he is just saying what is good for the banks so they will continue to look after him, not saying what is good for the remainder of the US. I don't care who you are, a deadbeat family or the "richest nation on earth" -- if your problem is you owe too much money, stop borrowing and pay off that debt as quickly as you can, any way you can. That is the only rational answer, and it is the complete opposite of what Summers is proposing.

2) Contrary to what Tim Congdon says in this article, Bernanke totally does look at the quantity of money in the US financial system. It is just preposterous to seriously suggest that the Fed do not take any notice of monetary aggregates. He stopped the Fed reporting M3 because he didn't want to continue drawing high-profile attention to the message the M3 numbers were about to tell and continue to tell to this day. The M3 numbers have been telling everyone the US (and therefore, by extention the rest of the world since the US dollar is the overwhelmingly dominant world reserve currency) we are heading for deflation as a result of widespread credit destruction, and they continue to do so. If the Fed are not looking at the aggregates at all, why didn't they stop publishing all of them? Why just M3? I'll tell you why, because it's the broadest measure of money (cash + credit) and the likes of M1 and M2 are much narrower because they do not include credit, only cash and near-cash items like money market mutual funds, bonds, and certificates of deposit. The problem we were headed for was a massive round of debt defaults, such as residential and commercial property mortgages for example. That is why M3 ceased to be reported, nothing to do with Bernanke not wanting to see this number personally.

3) Paul Ashworth at Capital Economics surprised me with his ignorance at the end of this article when he stated:
Mr Ashworth warned against a mechanical interpretation of money supply figures. "You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets," he said.
It seems to me that if someone takes money out of their account and buys stocks, property or other assets, then they buy them from someone else. At the end of the chain of transations what will happen is that someone will take the cash and put it in their account — so how can that alter M3? All that happened is the "money" moved from one party's account to another party's account. I am totally amazed that someone at a respected outfit like Capital Economics would publicly say something as basic and indisputably wrong as that. What hope is there for the rest of the financial world if even gurus like that don't understand what they're talking about at such a rudimentary level..?

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