Eric Fischl ‘Noonwatch’Credit is declining so the immovable object meets the irresistible force. Sez Mark Thoma:
Federal Reserve Governor Elizabeth Duke gave a speech today warning about the falling level of credit in the U.S. economy, but since she doesn’t have a Ph.D. in economics, should we listen to her? I’m going to:
Credit Still Tightening, Fed Governor Says, by Sewell Chan, NY Times: The level of outstanding credit in the American economy continues to fall as strong and weak banks alike pull back on lending, worsening the prospects for businesses and consumers to regain their footing, a Federal Reserve governor said Wednesday.
Credit has been slower to return to prerecession levels than in any downturn over the last 40 years, with the exception of the 1990-91 recession, Elizabeth A. Duke, one of five sitting governors on the Fed’s board, said … citing new research by the central bank. …
Total loans held by commercial banks fell by 5 percent, or more than $345 billion, last year, Ms. Duke said, and that trend, which began in the last quarter of 2008, has continued. …
“There really is no single step that can be taken to quickly unclog all lending markets,” Ms. Duke… Past declines in bank lending “could be traced almost exclusively to declines in the portfolios of weaker banks,” but Fed researchers have found that “something very different is happening this time,” Ms. Duke said. Strongly capitalized banks are cutting back on lending, not just more fragile ones. … Ms. Duke, a community banker who was named to the Fed’s board by President George W. Bush in 2008, added: “In no way do we want to return to the world where people could buy a house with no money down and no documentation. But where prudent loans can be made, we want to do everything we can to make sure those deals are struck.”
Thoma:
… as the article notes, we don’t want households to go back to their old “imprudent” ways. But we do want businesses to invest in worthwhile projects as they arise, and that is more than a supply-side problem. The Fed can loosen up the spigot as much as possible without causing irresponsible risk-taking, but if the demand isn’t there, then firms will not want to take out credit. We need firms to be optimistic about the future, that’s more important than anything the Fed can do to enhance credit supplies, and it’s not at all clear where that optimism will come from, especially with all the recent talk about the need for government to tighten its belt. If that talk turns to action, and let’s hope it doesn’t, that won’t help.
Optimism about the future is fine and dandy but Messrs Thoma and Duke don’t seem to realize that in today’s constrained energy- present there are few ‘good investments’ to advance lending to. Without a paradigm change that eliminates the almighty automobile from the equation the overhead costs of the transport platform as a whole make almost every kind of expenditure a money- loser.
Here’s another view of the incredible shrinking multiples from John Williams Shadow Government Statistics:
This is a monthly average growth chart which shows how M1 expanded with the Fed’s GSE/QE program. Interesting to note that M3 declined sharply at the end of 2007, several months before the crisis emerged later in 2008.
Here’s a look at narrow money or M0, also from Shadowstats:
You can see how currency has more than doubled in the middle of 2008 remaining at this level since then. Make a note of that date. The Fed/Treasury have not been adding currency nor have they been removing cash from circulation. Has it been removing itself? Where is the money? Elizabeth Duke suggests the banks are sitting on it – or it is parked as reserves @ the Fed itself or it has been shifted overseas to tax havens out of reach.
Here’s an interesting observation from Steve Keen:
You can see an inverse correlation between changes in narrow money and unemployment. Currency expands along with unemployment! One would think that the opposite would be true.
Here’s US unemployment from Shadowstats:
If you note the date on this chart and on the M0 chart above the start of the rise in unemployment begins in the middle of 2008, right at the point when the Fed started issuing more currency. Whichever set of unemployment stats you follow, unemployment began its sharp rise about the same time the Fed started to put more currency into ‘circulation’.
I’m going to be in New York next week to listen to a talk by Prof. Keen and I will certainly bring this to his attention with the question, “Where did all the money go?”
The possibilities are interesting. Since the demand for liquidity in 2008 as well as in the 1930’s was extreme at time, the appearance of liquidity in the markets may have triggered a panic for it, in other words the appearance of liquidity caused the crisis it was intended to cure.
Of course, none of that precious liquidity would trickle down to the marginally employed.
Another possibility is and was that much of the added liquidity was caught in currency traps such as large ‘safe’ investments paid for with cash, such as gold holdings in the 1930’s or Chinese speculative real estate – or commodities or other investments paid for in cash, today.
Any hoarding in general would have the contradictory effect of being both deflationary and inflationary simultaneously – the increased issue of currency by the central bank on one hand would represent inflation – while hoarding would take this same excess currency out of circulation; this would be – and was – deflationary.
This has certainly happened under specie or other hard currency regimes which has given rise to Gresham’s Law. Good money disappeared into savings of all kinds (even if there is no discount or interest earned) to be replaced by debased metal; the increase in debased money drove more of the good money into hiding.
At some point a reason is found to propel both good and bad into the markets; the flood of both results in devaluation.
Many analysts suggest the end of the deflation (hoarding) cycle will be hyperinflation and the foregoing is the mechanism. This may be taking place in China now.
For instance, the Beijing government might allow US dollars to circulate in China along with RMB. This might precipitate a rush to trade RMB (yuan) for dollars forcing hidden cash into the markets at once. The government must enter the minds of its citizens and anticipate both their deepest desires and fears … and play on them. It would seem that simply adding more currency would increase unemployment and encourage more hoarding … or trigger a panic.
The US attitude about dollars is different China’s attitude toward the yuan. A large public hoards the same dollars that another large public considers only with disdain as worthless, fiat toilet paper. One thing that is certain is that deflation has been uncaged and it is running amok across the countryside. This is not a ‘fiat’ vote.
I don’t expect any concrete answers from establishment economists. The establishment has turned economics into a growth cult. The ‘endless growth’ party line is adhered to by Fed, the governments of the world, businesses, Wall Street and the news media. The consequences of growth are ignored, as are the consequences of the blind pursuit of it.
In the real world, not only are multiples shrinking but energy prices are too. This is in the face of the expanding petroleum demand, particularly in economists’ darlings China and India. Perhaps fuel consumption is recognized by markets as an unproductive use of capital. It may also be a matter of the world becoming that much poorer.
Since energy prices (outside of natural gas) are still historically expensive it is not so much the dollar value of oil that is changing as it is that the dollar value of goods and services produced with the oil is declining.
Of course, I don’t have a PhD in Economics so what do I know?