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zugzwang

Us Money Slump Flashes Warning Of Japan-Style Trap

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Escape velocity? More like terminal velocity. Abenomics next?


The US economy contracted sharply in the first quarter and bond yields have been falling at the fastest rate since the recession scare two years ago, in signs that bond tapering by the Federal Reserve is biting more than anticipated.

The slowdown comes as a key indicator of the US money supply flashes slowdown warnings, though the picture remains murky after extreme weather conditions over the winter.

Output fell at an annual rate of 1pc, led by a 7.5pc fall in business spending following the expiry of tax concessions. The tax rules had brought forward investment in 2012 and 2013, leading to a cliff-edge drop this year.

“We think there is more to this than just weather. Our leading indicators were already weakening late last year,” said Lakshman Achuthan, from the Economic Cycle Research Institute (ECRI).

“We may get a snap-back in the second quarter but I don’t see us reaching escape velocity. The economy is below stall-speed, according to the Fed’s own model,” he said.

ECRI said the housing recovery has rolled over and is now in a “cyclical downswing”, with the building permits for single-family homes falling to a three-year low. There will be less “fiscal drag” this year as austerity fades but this is more than offset by the drag of excess inventory.

Mr Achuthan said the economy may muddle through, but recoveries have been getting weaker with each cycle for the past 40 years. The US now seems caught in a Japan-style trap, endlessly masking the effect by stealing a little extra growth from the future with artificial stimulus.

Data from the Centre for Financial Stability in New York show that growth of the “Divisia M4” money supply slowed abruptly to 1.6pc in April, down from 6pc in early 2013.

Divisia M4 is a dynamic measure that aims to capture shifting uses of money. It is has been one of the best weather vanes over recent years, signalling economic health a few months ahead.

Professor William Barnett, a former Fed official now at the University of Kansas, said the weak M4 figures are a sign that the US is not recovering properly, leaving the Fed with a grim choice as it tries to wean the economy off emergency policies that are themselves causing havoc. “The Fed faces a 'Catch 22' decision. I am glad I am no longer on the Board's staff,” he said.

The Fed has cut its bond purchases from $85bn to $45bn a month, and is expected to halt quantitative easing altogether by October as it pares back $10bn at each meeting. The taper is clearly chipping away at a key prop of the economy. The stock of narrow M1 money has not grown for four months, and M1 velocity has fallen to an all-time low of 6.3.

John Hathaway, from the Tocqueville Gold Fund, said the Fed may find it cannot extricate itself from QE without aborting the recovery. “The US economy is quite anaemic. There's a good chance that they may have to reverse their course on tapering,” he told CNBC.

http://www.telegraph.co.uk/finance/economics/10863888/US-money-slump-flashes-warnings-as-economy-contracts.html

Edited by zugzwang

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Basically the system is unfixable without drastic cuts and a long drawn out recession. That is something that will never be allowed to happen so expect the QE taps back on within 12 months.

Sorry but this is nonsense. The problem is economic imbalances, which are continually giving rise to bubbles and a deficit of demand. A recession/depression will do absolutely nothing to fix those, and quite likely make them worse. The only way out is through drastic action by governments to fix the internal/external imbalances. Thus we need activist governments rather than ones that simply attempt to paper over the cracks with QE.

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You have wonder why the ancient civilisations had debt Jubilees every so often- did they understand something basic that we have forgotten?

Mesopotamian economic thought c. 2000 BC rested on a more realistic mathematical foundation than does today’s orthodoxy. At least the Babylonians appear to have recognized that over time the debt overhead became more and more intrusive as it tended to exceed the ability to pay, culminating in a concentration of property ownership in the hands of creditors.
"Neoclassical economists do not understand how money is created by the private banking system—despite decades of empirical research to the contrary, they continue to cling to the textbook vision of banks as mere intermediaries between savers and borrowers.

http://georgewashington2.blogspot.co.uk/2011/07/we-have-forgotten-what-ancient.html

Kind of ironic that people who had nothing more sophisticated than an abacus to work with may have had more insight into the nature of financial reality than today's economists equipped with super computers- but to be fair- the whores of ancient Babylon were not on the whole employed by 'think tanks' and Universities- unlike present day academia, whose job security depends not upon delivering the correct conclusions, only the desired ones.

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Basically the system is unfixable without drastic cuts and a long drawn out recession. That is something that will never be allowed to happen so expect the QE taps back on within 12 months.

The system is not fixable without negative nominal interest rates. That's what a debt jubilee is, albeit a controlled one.

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The world is turning Japanese.

I look forward to all the women being slim, cute and dressing like anime characters. I look forward to all the geeks staying in their bedrooms playing on their playstations and the rest of the male population taking part in TV programmes where they dress up as women in order to win dates with singers from boy bands.

If only Yamamoto could see what has happened to Japan.

We could do with some TV make-over shows where some would-be Syrian freedom fighter from Birmingham is dressed up as a Bin Laden bearded mini skirt wearing female who only dreams of winning a date with One Direction. (I only know who One Direction are because they are in the news today.).

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Points taken, but unless government spending is reined in or we have a business led recovery it's just not going to happen. GDP at the moment is being driven by HPI all the while whilst we go deeper into the red as a country. By the time it's over we'll be struggling to meet our interest payments let alone paying it down!

Can you please elaborate how we will eventually emerge unscathed? Inflation by stealth? A loaf of bread at £5+ perhaps?

The country is betting on winning the lottery.

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Don't knock the National Lottery. It's our governments' sole social mobility policy.

Admittedly it is not based on merit...but that makes it even more fair does it not?

True. When I win the jackpot tomorrow night I aim to send postcards to all my local EAs from my new home in some exotic sunny location.

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Kind of ironic that people who had nothing more sophisticated than an abacus to work with may have had more insight into the nature of financial reality than today's economists equipped with super computers- but to be fair- the whores of ancient Babylon were not on the whole employed by 'think tanks' and Universities- unlike present day academia, whose job security depends not upon delivering the correct conclusions, only the desired ones.

La Bella Figura ..

Drugs and prostitution to be included in UK national accounts

http://www.theguardian.com/society/2014/may/29/drugs-prostitution-uk-national-accounts

"It's a model-based estimate but one that serves a purpose for the picture of the overall economy."

He said the ONS would attempt to "fill in the gaps" left by available studies

As idle as a painted ship Upon a painted ocean.

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Points taken, but unless government spending is reined in or we have a business led recovery it's just not going to happen. GDP at the moment is being driven by HPI all the while whilst we go deeper into the red as a country. By the time it's over we'll be struggling to meet our interest payments let alone paying it down!

Can you please elaborate how we will eventually emerge unscathed? Inflation by stealth? A loaf of bread at £5+ perhaps?

Do you worry daily about colliding with anti matter. No I thought not, then you need not worry about debt as the financial equivalent. It will all end up on the books of the central banks and be lost down the back of the sofa, for if they do not, nearly all money will cease to exist in a deflationary armageddon.... 1s and 0s are somewhat easier to contain

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