Monday, October 5, 2009


More Fed Charts as Fine Art

I am going to hang this in my office so visitors can ponder.

I don't have the time to get into the data and see which components are responsible for the decidedly different trends. Just be careful when you start talking about what Bernanke is doing with "the" money supply. If you use M2, then it's been flat for several months and is arguably back in line with the long-term trend. But if you use the narrower M1, then things are much different. (I am guessing a lot of the above graph has to do with people shifting into more liquid assets, but I haven't actually looked at the components.)

One thing is clear: Those who are talking about the great "deflationary forces" upon us, need to realize that thus far Bernanke has entirely offset them. Yes, it's true that the fractional reserve banking system has a harder time creating money out of thin air, when loans are decreasing. But as the chart above shows, the standard monetary aggregates have thus far stood up against this pressure.

I think this has something to do with the fact that banks are not lending. Instead they are piling up cash at the Fed. Total reserves at deposit taking institutions are up from $45.5bn Aug 08 to $915bn currently.
This is very bad news. Those dumbos at the Fed reduce interest rates to zero, and they freeze savings activity. As a result, people are paying down debt, rather than saving. The banks are retaining some balance in their books by reducing lending to match the decline in their deposits.

In a nushell, zero interest rates are screwing up the whole situation.

Kind regards

As a result, people are paying down debt, rather than saving.

Isn't paying down debt a form of saving? If interest rates were 20%, I think you'd see credit card balances etc. going down a lot more quickly than they are now.

Only on a net effect basis to the debtor. The alternative is to keep credit lines open and accumulate some savings, not attractive at zero per cent.
Paying down debt contracts the banks' balance sheets.

I am surprised your eminent self can't see the balance sheet difference.......

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