“Money Multipliers Have Collapsed Everywhere…Confidence Is Missing. I Don’t See Any Way To Stabilise M3 In Such Circumstances”

Former officials are often more honest than current ones, since they aren’t under pressure to spread happy talk.

Former European Central Bank chief economist Otmar Issing recently said what current officials aren’t addressing:

Nobody can be sure that we have a self-sustaining recovery. The challenges facing the ECB are tremendous. “Money multipliers have collapsed everywhere. What M3 is telling us is that confidence is missing. I don’t see any way to stabilise M3 in such circumstances.

As Ambrose Evans-Pritchard notes:

Data from the European Central Bank shows that the M3 broad money supply has contracted over the last six months, confounding expectations that ultra-low interest rates would soon boost monetary growth. Loans to the private sector fell 0.3pc from a year earlier, the first such decline since the data started in 1983.

The M3 figures include a wide range of bank accounts…

The picture is even starker in America where M3 has shrunk at an annual rate of 6.5pc over the last three months, a pace of contraction not seen since the 1930s. US bank loans have plummeted since May.

(While the Fed stopped reporting M3 in 2006, people are still tracking it).

How can M3 have collapsed when governments world-wide are printing money faster than IHOP can cook pancakes?

Well, professor Tim Congdon from International Monetary Research says:

A key reason for credit contraction is pressure on banks to raise their capital ratios… “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.”

But isn’t it good that governments are requiring banks to raise their capital rations?

Sure, but unless they force the banks to write off their bad debts, they will remain giant black holes, and will never be adequately capitalized. If they are never adequately capitalized, they will never release money out into the economy through loans and other economic activity which increases M3.

As just one example, remember that the nominative amount of outsanding derivatives dwarfs the size of the global economy. As another example, remember that several of the too big to fails have close to a trillion dollars each in toxic assets in off-book SIVs.

IMF chief Dominique Strauss-Kahn says that the history of financial crises shows that “speedy recovery” depends on “cleansing banks’ balance sheets of toxic assets”. “The message of all financial crises is that policy-makers’ priority must be to stop the quantity of money falling and, ideally, to get it rising again,” he said.

As many people have repeatedly written (including me), the world’s governments must restore sound economic fundamentals – which includes forcing banks to write down their bad assets – instead of cranking up the printing presses and trying to paper over all of the problems.

Moreover, as Mish, Michael Rivero, and many others have pointed out, governments can create all the credit they want, but if people do not have jobs, they will not borrow that money.

In addition, the amount of credit and wealth destroyed exceeds the amount of money pumped into the system.

When will the politicians listen? Will they wait until after the next huge market crash? When there are tent cities everywhere? After their governments default and they essentially lose sovereignty under “austerity measures” imposed by the IMF, World Bank or other agency?

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  • "Moreover, as Mish, Michael Rivero, and many others have pointed out, governments can create all the credit they want, but if people do not have jobs, they will not borrow that money."As the most cogent and widely read moral philosopher today, I am telling everyone -it is categorically immoral to borrow money for any reason.When you spend -borrowed money-, you cause credit inflation -and thus- you detract from the potential for the future.Credit inflation creates the bubbles that cause all this common economic distress.Credit inflation also allows for all the common excesses of the credit economy.The credit economy is dead.The old justification -that the credit economy allows more people to purchase more things -and thus- we live a better life for it, -is baseless.Open your eyes -and- look around -for your proof of this assertion.There are no free lunches, -just the endless apologists excusing all manner of human stupidity.

  • "When you spend -borrowed money"Wait, there's another kind?ALL money is borrowed money doofus, even if you didn't borrow it, someone else did, THAT'S WHAT MONEY IS!Except for gold and silver of course, and if you can find a way to use them to buy anything in a modern economy I'd love to hear it.

  • First the money supply is falling not because the banks aren't lending money it's falling because as houses are foreclosed on, businesses shut their doors money is being destroyed. So you can pump all the money in the world into an economy that is destroying it's assest base and no recovery can happen with no jobs and your assests being destroyed.I don't believe credit is some Satantonic device that creates inflation , I understand the principle alright I just don't think a man working for wages can save the money to buy houses or cars on the wages paid today. They can afford the payments interest included over time. A house will last well beyond it's mortgage and a car will probably last longer than the payment maybe even twice as long.In my book it's not credit that brought us down it's banksters robbing the poor to give it to the rich. Robin Hood where are you when we need you.

  • "I don't believe credit is some Satantonic device that creates inflation , I understand the principle alright I just don't think a man working for wages can save the money to buy houses or cars on the wages paid today."Oh, Grey Tiger… Let's start over.Nothing is ever cheaper with the bank adding interest, loan application fees, the requirement of insurance, and late fees…The price of a house requires a mortgage -exactly- because the credit economy sets the price of a house. Get it?You are right, -few could pay the credit-economy-price of a house in an upscale neighborhood. But why?-Because people who borrow pay way more than something is worth to those who will not borrow.That's also where the bubbles come from, -in everything- the credit economy.Buyers pay more for housing, BECAUSE they can borrow the money. But borrowed-money is funny money, and it's too easily spent, and lost too.I'm not a religious sort -of any kind. I'm a moral philosopher.But look… Credit is what creates the wage-slave, -all the borrowing.Live within your means.Do you want everyone to grow up to be a wage slave?If so, just keep borrowing for all your purchases -so no one else can afford anything without borrowing for all their purchases.Stop borrowing, and you make for -and- leave a better world for the future.It's funny about making for -a better world for the future-.Most of what we can do towards that end, requires us to STOP doing the immoral things.Borrowing is one of those things. Borrowing is categorically immoral. Face the moral facts.—>>The Libertarian dufus doesn't require a response. He just wants all the other Libertarian dufuses to accept him into their colorful, outspoken rabble.Manure is generally a better investment than gold or silver.If you have some business sense, you can buy manure on the cheap, and sell it more dear, -to someone who will appreciate your thrift when it makes their own product grow.

  • Good article by Washington above, bar one point. It is suggested that banks toxic assets must be cleansed before economies will recover. To use taxpayer money to cleanse these filthy corrupt institutions is not right. Isn't it better to pump plenty of monetary base into the econmy and channel it straight to households. That will get things moving ( yes, there's an inflationary danger – we all know that).If this results in relatively wealthy, solvent households and impoverished banks, who cares? S*d banks. I've seen evidence of an increase in the extent to which bob-bank firms are lending direct to each other – ie. by passing the middle men (banks). If the middle men are incompetent, why bother with them?I expand on this point in my own blog: http://ralphanomics.blogspot.com/2009/10/start-your-own-bank.html

  • The Earth is 4.6+ billion years old. Fifty years from now, a mere speck of time by geological standards, all of the arguments and issues expressed herein will no longer matter. I might also add that most of you folks (and especially ewe folks) will be dead in fifty Earth years. So… what is important in your life? Give it some thought. You/ewe don't have a lot of time to live your life… and young survivalists today become old and feeble tomorrow.Old Coyote Knose! Old Coyote Knose your fate and mine.Stocking up on food and weapons? Eh? Putting gold and cash in a bank $afety [sic] deposit box? Maybe burying a $tash of $tuff in the backyard (or a forest glen) where nobody can find it after you/ewe die? How foolish you/ewe are.