AMBROSE EVANS-PRITCHARD: U.S. credit shrinks at Great Depression rate!
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.
By Ambrose Evans-Pritchard
LONDON, England - September 14, 2009 - Professor Tim Congdon from International Monetary Research said U.S. bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147 billion to $6,886 billion).
"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 5% 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" 9% annual pace, the M2 money supply shrank at 12.2% and M1 shrank at 6.5%.
"For the first time in the post-WWII 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 U.S. 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 U.S. is not trying to devalue its debts by stealth monetization.
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 U.S. 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."
By Ambrose Evans-Pritchard
LONDON, England - September 14, 2009 - Professor Tim Congdon from International Monetary Research said U.S. bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147 billion to $6,886 billion).
"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 5% 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" 9% annual pace, the M2 money supply shrank at 12.2% and M1 shrank at 6.5%.
"For the first time in the post-WWII 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 U.S. 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 U.S. is not trying to devalue its debts by stealth monetization.
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 U.S. 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."
