Friday, January 2, 2009

No shortage of money (6)

Continuing with this important theme, all measures of the money supply are at new all-time high levels. Since the Fed began its new "quantitative easing" program last September, the M2 measure of money supply has grown by over $400 billion, which is an annualized growth rate of almost 24%. That's a big deal, since annual growth in M2 has averaged about 6% a year.

A good part of the reason M2 has grown is that demand for money has surged. But it's equally important to note that the Fed has been very willing to accommodate this increased money demand. And by telling us that it will remain accommodative for "some time" the Fed is actively encouraging money growth. Borrowing costs for many people are now lower than they have been in a lifetime. "Come and get it!" the Fed is telling us.

We may still be in the throes of a credit crisis, but this is most definitely not a credit crunch. That's an important distinction. A credit crunch implies an actual shortage of money, like we had in the early 1980s when the Volcker Fed clamped down on the growth of money and interest rates spiked. But a credit crisis implies a shortage of confidence, a reluctance to lend. Confidence can return almost as fast as it vanished. The market's rally over the past week is one sign that this is now happening.


Donny Baseball said...

This is great stuff and I appreciate you staying on this theme, but I worry about what is happening on the ground. I have canvassed alot of folks and I am hearing that projects just can't get the lending. Bank examiners are riding herd on banks and many have "no new customers" policies. Very few aggressive banks swooping in to claim market share. Asset backed lenders are attempting to fill the gaps, but I don't sense that this is moving the needle. Sadly, it seems the regulators are working at cross-purposes to the Fed's liquidity actions. Your thoughts?

Scott Grannis said...

Good points. The money supply data tell us that on average there is more money out there than ever before, but the credit spreads tell us that people are still very reluctant to lend. So I don't think it's strange or inconsistent that some people are having trouble borrowing money while other people are awash in cash. It's all part of the same picture.

Nevertheless, I would expect that credit will become more and more available as time passes, especially now that confidence appears (finally!) to be on the mend.

Shalom P. Hamou said...

Sorry! Quantitative Easing Won't Work.

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings it doesn't create $1 of investment.

It does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on savings.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order


This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

A Specific Application of Employment, Interest and Money

Scott Grannis said...

I believe quantitative easing can absolutely prevent deflation. With time we'll find out who is right.