M3 and Public Debt Hit Record Highs - Refco Disaster Will Add Still More Liquidity

Saturday, October 15, 2005

So the Fed is tightening. Tightening? Can we be really sure that the Fed's last 11 rate hikes led to a tightening? A look at money supply figures shows that the last time M3 slowed down was in 2003 whereas the lowering of lending standards by banks since then seems to have offset the efforts of the Fed. Expect money supply to stay on its upward shooting path in the wake of the Refco disaster. As regulators have requested major banks to assist in the Refco clean-up according to the WSJ it can be assumed that they themselves will take part in it as well. Taking it from the past (October '87 and '89, LTCM 1998...) the Fed has always been best at throwing more - and more and more - money at whatever problem appeared on the horizon. How much longer will this work? The next problem in the financial sector may hit Deutsche Bank. AP reported on Friday that the Fed has ordered the bank to "take steps to prevent money laundering after finding deficiencies in its controls."
Back to the avalaunche of declining economic indicators.
Although Dr. Altig (macroblog) cautioned me in May, suspecting that money supply figures are also picking up trend velocity growth (see comments of the post "If it weren't that cheap to print them greenbacks..."), I still stick to my point that we see an awful lot of money being printed/electronically created at an increasing speed since Bush took office. To be fair, it was not much better under the previous administrations.
I would be grateful for any advice pointing to an event in history where a nation was successful in printing its way out of problems. I am pretty confident that I have not overlooked such a magical wonder. My common sense tells me it is - and will be forever - impossible.

Money supply M3 10yrs

GRAPH: US money supply M3 hit $10.035 trillion ($10,035 000 000 000) on October 3, rising $82 billion ($82,000 000 000) within four weeks.
Shocked by this record? Hold your breath. After a 25-year high in inflation (pdf) figures and a 23-year low in industrial production the world is ready for a new US record figure on Monday or Tuesday when America's public debt will reach the $8 trillion mark, roughly $2.5 trillion more since the Bush administration started signing the bills. And don't overlook that these dreadful numbers have overshadowed Friday's release of a 1.2 percent decline in real earnings (pdf) when most people were shocked to see the trade deficit approaching the $60 billion mark.
Declining Federal Deficit A One-Time Event
Last year's reduction of the federal deficit to $319 billion vs. a forecast of $419 billion will not be repeated in the running fiscal year that began on October 1 as corporate profit growth has begun to slow already. Citicorp issued a profit warning on Friday, citing mounting credit card delinquencies that will lead to 6 % less profit. These delinquents will not help boosting US GDP, I bet safely.
Being a fan of anecdotal evidence as a leading indicator I take note that CNBC has started running commercials by H.R. Block these days, where an 800-number offers free first advice for indebted consumers in trouble. So that is an area where we will see growth... Does anybody spot other growth areas?
Certainly not the majority of these bloggers (and this is only a selection.)
Econ Bloggers Zero In On Inflation
Angry Bear picks up on Econbrowser's post "Inflation's back?."
Calculated Risk suggests to look at "Fun CPI numbers" and points to Barry Ritholtz' "Look Ma, No Inflation," as well as to Dave Altig, who applies the most noble understatement with the headline "The CPI Report: Very Interesting," and has since come up with the highly recommended post "Household Inflation Expectations: No Improvement" which warns us not to expect any relief anytime soon on the inflation front, taking its clues from the decline in consumer sentiment.
Capital Markets & Economic Analysis weighs in on the inflation issue with the post "Inflation For Idiots."
The Capital Spectator says "A New Inflation Report, Same Old Debate" although this post would reward a sexier headline to attract more readers.
For some controversy opposing the afore-mentioned posts turn to ever-bull Larry Kudlow, who ignores the headline CPI figure and prays for rate cuts in his post "Irresponsible Fed."
LK's prayers will start Tim Iacono (The Mess That Greenspan Made)fuming, I am confident. He reminds us in "Inflation, Interest Rates, Game Theory" that core inflation only works for non-eating, non-driving consumers, a species quite hard to find on the new continent.
The Skeptical Speculator is as usual one of the best places to find a neutral sum-up of recent economic indicators.
William J. Polley concludes that we are already in an uncomfortable situation.
Elaine Supkis draws comparisons between 1929 and today in her post "Refco - Repro 1929."
Michael Shedlock (Global Economic Analysis) focuses on the stellar rise in personal bankruptcies here and here. He also picks up on the discussion about a possible move in oil markets that would bring us oil priced in Euros. While his post "Oil Priced in Euros. Would it matter?" starts with the Venezuelan perspective, I had discussed the Iranian perspective in the post "Iranian Oil Bourse Could Kill The US Dollar", republished in the Asia Times and at least another 116 times on the web.
If you look for some positive news on the global economic stage, surf to the New Economist who points to "China And India: A Visual Essay (pdf)" from DB Research.
Last, but not least I recommed the young blog Everyone's Illusion from bond market expert Jacob who started blogging on a high level in August and has kept up his quality since.
On a second personal note I may add that I will be spending Sunday and Monday night on a plane, returning to cold Austria and will not be able to continue blogging before Tuesday/Wednesday, depending on my foreseeable jetlag. I may add that I caught more gold and silver coins (must see that beautiful design!) than fish during my vacation that will end tomorrow.

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