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Us Credit Shrinks At Great Depression Rate Prompting Fears Of Double-dip Recession

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http://www.telegraph.co.uk/finance/finance...-recession.html

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

If accurate we appear to be heading off a cliff.

Considering lending has driven the global economy can we expect huge falls in GDP to follow shortly? A 14% collapse in lending in 3 months is huge and just makes you wonder where the money has come from for the car buying scheme? Or in the US was in trade-ins funding the purchase price?

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What I still find a little bit unexplained is surely with US unemployment growing, the way that profligate borrowing has left many people so stretched, means that the demand for borrowing must be going down as well. Is it the banks really restricting credit or is it people applying for less credit.

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Exactly what I said would happen since mid-2007. Even lowering interest rates to 0% has only slowed the process down. The only way out of ever growing deflation is QE on a massive scale, which the authorities have been unwilling to really do. They did enough to stave off collapse but weren't prepared to go much beyond that.

Most people still don't understand that debt is money in our system. So as debt contracts so does the money supply. Deflation has taken almost everyone by surprise, including many super bears who correctly predicted the meltdown.

I still think few appreciate how powerful the deflationary forces are, both in terms of credit forces and because of falling production prices. And how long deflation could go on. I personally think deflation could go on for decades.

I'm just not sure if western nations as currenlty setup can survive sustained deflation.

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Exactly what I said would happen since mid-2007. Even lowering interest rates to 0% has only slowed the process down. The only way out of ever growing deflation is QE on a massive scale, which the authorities have been unwilling to really do. They did enough to stave off collapse but weren't prepared to go much beyond that.

Most people still don't understand that debt is money in our system. So as debt contracts so does the money supply. Deflation has taken almost everyone by surprise, including many super bears who correctly predicted the meltdown.

I still think few appreciate how powerful the deflationary forces are, both in terms of credit forces and because of falling production prices. And how long deflation could go on. I personally think deflation could go on for decades.

I'm just not sure if western nations as currenlty setup can survive sustained deflation.

Deflation is part of the natural economic cycle, continually trying to ramp up the economy like you suggest defies economic logic and will ultimately cause an even bigger economic collapse. You can't inflate forever, the economy needs to contract and deflation is not something to be feared in a properly run economy. However in a banana republic style economy with huge debts deflation is a killer.

I'm afraid it's the idiots in charge who have attempted to create a new paradigm that debt is money whilst the invisible hand is now intend on delivering a bitch slap from hell explaining that debt is not money.

Game on about who's paradigm is the strongest.

Edited by interestrateripoff

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http://www.telegraph.co.uk/finance/finance...-recession.html

If accurate we appear to be heading off a cliff.

Considering lending has driven the global economy can we expect huge falls in GDP to follow shortly? A 14% collapse in lending in 3 months is huge and just makes you wonder where the money has come from for the car buying scheme? Or in the US was in trade-ins funding the purchase price?

What happens in the US usually comes next to the UK. Debt secured against over priced houses has given us an illusion of wealth in the UK and allowed us to live beyond our global means/ From my perspective this problem can not be fixed by more debt/ Not sure what the cure is though.

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I think the central bank should try to keep prices rising at ~2% year to year. If it goes higher than that I say, got to reign in the growth of the money supply.. if it is lower than that I say got to expand it faster.

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"It is unclear why the US Federal Reserve has allowed this to occur."

what? force people to borrow? silly economist.

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I think the central bank should try to keep prices rising at ~2% year to year. If it goes higher than that I say, got to reign in the growth of the money supply.. if it is lower than that I say got to expand it faster.

You will hit the problem of exponential growth.

2% YoY is impossible.

It would take a house around 300 years to reach a value of over a £1bn.

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I think the central bank should try to keep prices rising at ~2% year to year. If it goes higher than that I say, got to reign in the growth of the money supply.. if it is lower than that I say got to expand it faster.

You are just spurting out what you have read without thinking this through.

Why do you think any manufactured inflation is desirable? - it only forces people to consume today what they would have been happy to consume tomorrow - storing up problems in the future. Business cycles happen because excess consumption is brought forwards which is then forceably unwound.

Inflation is also a failed governments best friend - allowing them to make promises and then break them without people noticing who the culprit was.

You are supporting failed governments and you are supporting excess consumption which is a scurge on the planet. The ony people who make out like bandits are the people in the know - your friendly banksters and politicians.

Edited by IMHAL

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You will hit the problem of exponential growth.

2% YoY is impossible.

It would take a house around 300 years to reach a value of over a £1bn.

Twice in that 300 years you do a 100 to 1 conversions.

But its the power of exponential growth too.. if our economy grows at just 2% a year, in 300 years the economy will be like 5,000 times larger than it is now. Of course that wouldn't be possible with technology available in 2009, but with technology available in 2309, which we can't even really speculate on.

The US economy has grown by over 1,000 times since 1800.

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Exactly what I said would happen since mid-2007. Even lowering interest rates to 0% has only slowed the process down. The only way out of ever growing deflation is QE on a massive scale, which the authorities have been unwilling to really do. They did enough to stave off collapse but weren't prepared to go much beyond that.

Most people still don't understand that debt is money in our system. So as debt contracts so does the money supply. Deflation has taken almost everyone by surprise, including many super bears who correctly predicted the meltdown.

I still think few appreciate how powerful the deflationary forces are, both in terms of credit forces and because of falling production prices. And how long deflation could go on. I personally think deflation could go on for decades.

I'm just not sure if western nations as currenlty setup can survive sustained deflation.

We all know that the politicians would love to magic away the debt but it is not as easy as many lead people to believe. One of the key reasons why I am not in the hyper inflation camp is because of the quote from the article below.

"however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetization."

My belief is pain will be felt but also that monetization will continue for a decade, it will go in waves as the deflationary fears become too apparent to ignore so even the creditors agree to printing. We are going to lurch from inflationary periods such as the one we are in now to the deflationary periods necessary to deleverage the economy. This process can not occur in one step without a complete collapse of the system, their best hope is to manage this crisis in waves of fear and optimism over the next decade or so.

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surely we need a cycle of deflation to return to normality?

overinflated assets need to return to a long term trend, so anything done to keep an artificial high is merely pushing the problem into the future?

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Twice in that 300 years you do a 100 to 1 conversions.

But its the power of exponential growth too.. if our economy grows at just 2% a year, in 300 years the economy will be like 5,000 times larger than it is now. Of course that wouldn't be possible with technology available in 2009, but with technology available in 2309, which we can't even really speculate on.

The US economy has grown by over 1,000 times since 1800.

Why do the conversion at all? Is it too embarassing to admit that savers have had their wealth stolen?

You are missguided.

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I'm afraid it's the idiots in charge how have attempted to create a new paradigm that debt is money whilst the invisible hand is now intend on delivering a bitch slap from hell explaining that debt is not money.

:lol::lol::lol:

Love it! Top stuff sir!

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Can someone explain this in numpty terms please - is it that the decline of M3 simply means that there is less and less money in circulation in the economy (Must mean the banks are hoarding all the QE dosh from us) and hence that means there is actually no stimulus for the economy meaning...

...that it will all collapse in on itself sooner or later?

I heard some chap talking about it last night on the radio and he was saying that it is very alarming and is declining at rates not seen since the Great Depression.

Anyhow, is my above numpty explanation right?

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Why do the conversion at all? Is it too embarassing to admit that savers have had their wealth stolen?

You are missguided.

This whole theft of wealth thing has me a bit confused.

As long as after tax returns on savings exceed the rate of inflation, how are savings stolen by inflation?

I full agree that after tax returns on savings are more likely to exceed the rate of inflation during a deflationary period than during an inflationary period. If people fear inflation, there are assets like linkers etc which are likely to generate positive real returns.

To my mind, the real theft occurs when taxes are imposed on nominal returns rather than on real returns.

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Can someone explain this in numpty terms please - is it that the decline of M3 simply means that there is less and less money in circulation in the economy (Must mean the banks are hoarding all the QE dosh from us) and hence that means there is actually no stimulus for the economy meaning...

...that it will all collapse in on itself sooner or later?

I heard some chap talking about it last night on the radio and he was saying that it is very alarming and is declining at rates not seen since the Great Depression.

Anyhow, is my above numpty explanation right?

I think that you are right.

It is made worse by the fact that the velocity of money is probably slowing down in addition to the shrinking in the stock of money which forces the size of the QE program to be even larger than it would otherwise have been.

All told, we are sinking into a deflationary nightmare which the QE policy is designed to withstand. The scary thing is that if QE fails, we are doomed to suffer a deflationary collapse. If it succeeds and if the velocity of money accelerates, we are in for an inflation boom which will also be very destructive.

I think that it will be very unlikely that policy makers will catch the cusp of the market just right and get us out of this mess without any dire consequences for the real economy.

All that QE has done is exchange certainty about one miserable path that we could all adjust to over time for uncertainty about two miserable paths without letting us prepare for the outcome now.

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Very interesting... why is M1 shrinking? Shouldn't this be (more or less) fixed in "normal" times or growing when using QE?

I am not surprised that M3 is shrinking though, as I think people/companies are saturated with debt and worried about taking on any more. As existing debt is repaid, M3 will shrink.

IMO, QE isn't about retaining the current situation, but more about managing the deflation. Credit must deflate as we are suffocated with it, but a deflationary collapse could be very harmful too. As has been said in this thread already, it could be a long, drawn out process.

Recapitalising the banks and then enforcing stiff reserve ratios (and hopefully capital adequacy requirements too) should attempt to stop the situation reoccurring again, but it suggests (to me) that rampant FRB is flawed either way. A free banking model (and better still, competing bank currencies) would be a better solution.

I am partly in agreement with AA3 too, although some credit deflation (at least 50% for, say, property prices) would be healthy too. Beyond that, and prices would start to get a bit surreal. I think going back to 70s/80s prices would kill off almost any business with a loan. Although the infrastructure could be reallocated (via liquidation), there would be a period of very high uncertainty, which would be bad in general.

People need to remember that credit inflation has debased the currency already. Replacing credit with fiat just puts a floor under deflating prices at some point. Unless you start printing more narrow money (M0+M1) than the banks are "loaning" in broad money (M3), then you aren't going to increase the money supply (credit is money, as far as the real economy is concerned). So, they cap the reserves for banking to, say, 50%, then print say, £250bn and let asset prices fall by, say, 60% and we would be approaching equilibrium... we would have M1 £300bn, M3 £600bn (down from £1.5tr), resulting in 60% off asset prices, with solvent (and restrained) banks. Ok, it's back of fag packet stuff, but I hope it makes my point (and it's not to say that 60% credit deflation wouldn't hurt - it's needed though).

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QUOTE

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

The Federal Reserve is the reason this has occurred

and Bernanke doesnt understand the cause of the depression - if he did he would abolish the Federal Reserve and then resign

Economic Depressions their cause and their cure

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Exactly what I said would happen since mid-2007. Even lowering interest rates to 0% has only slowed the process down. The only way out of ever growing deflation is QE on a massive scale, which the authorities have been unwilling to really do. They did enough to stave off collapse but weren't prepared to go much beyond that.

Most people still don't understand that debt is money in our system. So as debt contracts so does the money supply. Deflation has taken almost everyone by surprise, including many super bears who correctly predicted the meltdown.

I still think few appreciate how powerful the deflationary forces are, both in terms of credit forces and because of falling production prices. And how long deflation could go on. I personally think deflation could go on for decades.

I'm just not sure if western nations as currenlty setup can survive sustained deflation.

thanks

Could they expand QE even if the wanted to ? (It sounds like monetising the gov' debt but I'm thinking this would affect the yield curve driving it steeper)

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Can someone explain this in numpty terms please - is it that the decline of M3 simply means that there is less and less money in circulation in the economy (Must mean the banks are hoarding all the QE dosh from us) and hence that means there is actually no stimulus for the economy meaning...

...that it will all collapse in on itself sooner or later?

I heard some chap talking about it last night on the radio and he was saying that it is very alarming and is declining at rates not seen since the Great Depression.

Anyhow, is my above numpty explanation right?

QE IS being held on deposit by the banks. they have to keep it because other financial assets have no or little value.

QE loses no value. it therefore props up the balance sheets of banks that would otherwise be insolvent.

NONE of the rescues are for the public...they are ALL for the banks.

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Why do the conversion at all? Is it too embarassing to admit that savers have had their wealth stolen?

Surely that depends on real interest rates.

It's not clear to me that savers should be able to go away for 50 years, and return to find the value of their savings intact. Stored wealth in the form of goods is naturally subject to rust, rot, ruin and robbery -- why should stored monetary wealth be different?

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You make the point yourself. Regardless of whether the exponential effect is on bringing forward future consumption or whether it is productively used to grow the economy like you say, the compounding effect would mean the earth would resemble one big slag heap within a few centuries of this.

Thats if the economy grew 5,000 times by increasing say coal plants by 5,000 times. But economic growth can take many forms. I see people running around with £400 cell phones and paying like £80 a month on their expensive cell phone plans. Yet the physical materials in the cell phone are quite small.

People are also spending money on software and monthly software subscriptions which take nearly no physical resources. Another is medical innovation.

It is hard to speculate on what people might be spending money on in 2309. Like it would be hard to see in 1800 that a large part of the consumer economy 200 years later would be video games.

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Very interesting... why is M1 shrinking? Shouldn't this be (more or less) fixed in "normal" times or growing when using QE?

I am not surprised that M3 is shrinking though, as I think people/companies are saturated with debt and worried about taking on any more. As existing debt is repaid, M3 will shrink.

IMO, QE isn't about retaining the current situation, but more about managing the deflation. Credit must deflate as we are suffocated with it, but a deflationary collapse could be very harmful too. As has been said in this thread already, it could be a long, drawn out process.

Recapitalising the banks and then enforcing stiff reserve ratios (and hopefully capital adequacy requirements too) should attempt to stop the situation reoccurring again, but it suggests (to me) that rampant FRB is flawed either way. A free banking model (and better still, competing bank currencies) would be a better solution.

I am partly in agreement with AA3 too, although some credit deflation (at least 50% for, say, property prices) would be healthy too. Beyond that, and prices would start to get a bit surreal. I think going back to 70s/80s prices would kill off almost any business with a loan. Although the infrastructure could be reallocated (via liquidation), there would be a period of very high uncertainty, which would be bad in general.

People need to remember that credit inflation has debased the currency already. Replacing credit with fiat just puts a floor under deflating prices at some point. Unless you start printing more narrow money (M0+M1) than the banks are "loaning" in broad money (M3), then you aren't going to increase the money supply (credit is money, as far as the real economy is concerned). So, they cap the reserves for banking to, say, 50%, then print say, £250bn and let asset prices fall by, say, 60% and we would be approaching equilibrium... we would have M1 £300bn, M3 £600bn (down from £1.5tr), resulting in 60% off asset prices, with solvent (and restrained) banks. Ok, it's back of fag packet stuff, but I hope it makes my point (and it's not to say that 60% credit deflation wouldn't hurt - it's needed though).

10 out of 10 post imo.

Thats what I see too if we go back to 70s/80s prices which I think is possible, every business with a loan will go down. Which is almost every business. Its already happening in commercial real estate. How do small businesses make the monthly £7k rent, selling trinkets or clothes that are rocketing downwards in price.

Its one thing to make £40 profit on a pair of £150 shoes.. its another on a pair of £20 shoes. The shoe chains are already breaking down or bankrupt in Britain. The clothing retailers can't be far behind.

I also totally agree with your strategy to constrain the lending growth later on if neccessary, by changing the reserve requirement. The Chinese successfully did this as their economy was overheating in 2007/2008, they pushed the reserve requirement up to 16.5%.. one reason their banks are so strong is they were forced to hold that in reserves.

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