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And Now For Some Really Bad Economic News…

 The U.S. econ­omy has a long way to go before the eco­nomic recov­ery will be either sus­tain­able or robust.  Mon­e­tary indi­ca­tors don’t look good and are once again get­ting worse.  I am con­cerned that the finan­cial sys­tem hasn’t recov­ered enough for the Fed­eral Reserve to with­draw from its pro­gram of quan­ti­ta­tive eas­ing. 

 While most of the large finan­cial insti­tu­tions seem to be cur­rently sta­ble, abet with hun­dreds of bil­lions of dol­lars of gov­ern­ment invest­ment and sup­port, they aren’t strong enough to ser­vice the needs of Main Street.  Almost all of the mon­e­tary and finan­cial indi­ca­tors point to shrink­ing lend­ing and con­strained credit.  The part of the bank­ing sec­tor that sup­ports busi­ness and con­sumer isn’t work­ing and, in many ways, is get­ting worse.  And, the shadow bank­ing sys­tem is con­tin­u­ing to dis­ap­pear and can’t be counted on to pick up the slack of banks. 

Until the charts pre­sented below start to point up, I don’t think there is going to be a real eco­nomic recov­ery (as con­trasted with tech­ni­cal bounces from inven­tory adjust­ments and changes in pop­u­la­tion). 

All of the data sug­gests that the U.S. remains in the grips of a liq­uid­ity trap, i.e., a period of time when inter­est rates are at or near 0% but yet tra­di­tional mon­e­tary pol­icy is inef­fec­tive.  The Obama admin­is­tra­tion needs to reex­am­ine its cau­tious approach to the big banks and think about whether or not the largest banks are sap­ping the eco­nomic strength of the rest of the econ­omy. 

Money Sup­ply and Bank Lend­ing Charts — Impor­tant Note — Each chart is a link to a full page view of the chart.  Sorry I am not bet­ter at pre­sent­ing graphics. 

The below chart indi­cates that, con­trary to pop­u­lar belief, money sup­ply is some­where between stag­nant to shrink­ing.  A grow­ing econ­omy requires an increas­ing money sup­ply and an increas­ing money sup­ply is a sign of a grow­ing econ­omy. 

Money Supply

The veloc­ity of money, i.e., the num­ber of times a year money is spent and re-spent, con­tin­ues to fall (which is very bad).  Sus­tain­able eco­nomic recov­ery can’t hap­pen until the veloc­ity of money starts to rise.  The cur­rent veloc­ity of money is sig­nal­ing money hoard­ing by banks, busi­nesses and indi­vid­u­als.  Hoard­ing is a type of sav­ings in cash and cash equiv­a­lents that is moti­vated by fear rather nor­mal sav­ings that sig­ni­fies a desire to invest in the future because tomor­row will be bet­ter than today.


The money mul­ti­plier is below 1x which means that as bank­ing reserves are cre­ated, money sup­ply is actu­ally shrink­ing.  I think that this is the first time in my life time that the money mul­ti­plier is less than 1x.  The money mul­ti­plier has fallen below 1x despite the Fed­eral Reserve’s quan­ti­ta­tive eas­ing pro­gram.  One way to think of the money mul­ti­plier is as a sort of eco­nomic ther­mome­ter.  As long as the money mul­ti­plier is below 1x then the bank­ing sys­tem (includ­ing the effects of Fed­eral Reserve quan­ti­ta­tive eas­ing) is sick.  With­out Fed­eral Reserve emer­gency mea­sures the dis­eased bank­ing sys­tem would prob­a­bly have been sick enough to kill the rest of the econ­omy.  Sick banks shrink, delever­age and cut back on loans (which are riskier than own­ing Trea­sury secu­ri­ties and cash equiv­a­lents).  The money mul­ti­plier needs to be well above 1x for the bank­ing sys­tem to be able to sup­port eco­nomic growth. 


All of the most com­monly watched mea­sures of bank lend­ing are trend­ing down (except for the pur­chase by banks of invest­ment secu­ri­ties which includes gov­ern­ment secu­ri­ties and cash equiv­a­lent secu­ri­ties).  The lend­ing trends are bad and sus­tained eco­nomic recov­ery isn’t hap­pen­ing until they start to look bet­ter.  More­over, non-financial com­mer­cial paper (a mea­sure of the shadow bank­ing sys­tem) isn’t look­ing very healthy either.  Credit Conditions #1Credit Conditions #2

For those read­ers who aren’t con­ver­sant in Fed jar­gon, some of the below charts refer to MZM which is M2 minus small-denomination time deposits plus insti­tu­tional money mar­ket mutual funds. 

All of the charts were com­piled by the St. Louis Fed­eral Reserve which has a great research web site and series of pub­li­ca­tions. 

Posted in: BANKS, Credit Crisis, Economic Statistics, economy, Federal Reserve, Finance, Liquidity Trap, M1, M2, Monetary Policy, Money Supply, Politics, Public Policy


  1. Pamela Wainscott

    I agree with this analy­sis of the mar­ket and the econ­omy. I do not think that the pub­lic will trust bank­ing, Wall Street investing–and espe­cially polit­i­cal think­ing and politi­cians for years and years to come. Obama has laid an egg and it is not made of gold.

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