Seems there’s a lot of data that seems to be pointing to one outcome. The outcome which shall not be named. First, there was a piece by Ambrose Evans-Pritchard discussing the decline in M3:
Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. “Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched,” he said.
*Gasp!!* Ashworth said it: deflation. But M3 isn’t kept track of by the Fed anymore. What is kept track of by the Fed, though, is MZM – money of zero maturity. And, um, it’s well, deflating:
This was a monthly chart. But when you take a look at it on a quarterly basis, which is how you need to align the MZM data with GDP data to perform a calculation of velocity, the change looks even more compelling:
Which, given the downward revision in GDP…
Is not that encouraging…
So I recalculated the velocity of money based on the revised GDP data. The supposed rebound in velocity is looking more and more distant. This is really a flat-lining. An absence of decline.
We’re not cheering rebounds or snapbacks. We’re just happy to not be falling. If you want to see the data I used, it’s here:
Then Zero Hedge comes out with this whopper:
SocGen’s Albert Edwards chimes in with an observation from a slightly different angle, namely that the collapse of global FX reserves, whose explosion until 2007 “fuelled both global GDP growth and the credit bubble,” which are simply indicative of global imbalances and are a very useful measure of total liquidity, are now plunging. This merely reinforces the deflationary pressures of the plunge in money supply, and forces the Fed into a corner from which there is no escape except by activating another multi-trillion QE program.
There’s also this chart in the post, which I find to be quite interesting:
The thing to note is the amplitude/size of movements in the time series. Earlier parts of the series have less jumpiness but now we’re clearly in a period with more volatility. I’ve commented on rising volatility in an earlier post, that fittingly enough, featured some more of Albert Edwards’ charts:
What will the Fed do the next time an easing is needed? Whatever it is, the response will have to be stronger and possibly more unorthodox – more unconventional – than it was before. People in Austin, TX like to say “Keep Austin Weird” and that’s fine. They can keep their weirdness. I sure as hell don’t like seeing my central bank engage in it, however…
But what I wonder is this: are we in for more volatility in economic indicators as Fed monetary policy response looks more and more like a” Twilight Zone” episode and less like central banking? And with what effect? What if all this stimulus, all this unorthodoxy in central banking does is – as a best case scenario – get us back to our last cyclical peaks in 2007? We would’ve replicated Japan. Richard Koo would be trying to convince us that was a good thing while I look at him like he is a three-headed cyclops. The image of a three-headed person just wouldn’t capture my level of bizarreness well enough.
And with interest rates near zero, well, I had this observation:
The credit market is not just priced to perfection: it’s priced to the hilt. At these funding costs, credit creation could be almost unlimited. Yet what are we seeing? The charts I presented above. Illiquidity. Possible bank runs. Carry-traders getting the gas-chamber treatment as Euro-Yen trades blow up. Then there’s the stimulus to stave off bank failures, which gets recycled through abnormally high levels of risk-taking (i.e. moral hazard). The bailout machinery will be running 24/7. Kind of like the Shit Sandwich Deli was 3 years ago.
In short, this can only lead to one thing, and it ain’t pretty. Zero Hedge put it pretty succinctly:
The bottom line is that in attempting to fix one problem in a suddenly broken system, another one develops, as everything is interrelated and interconnected in the global economic system, linked up through channels of liquidity, or lack thereof. M3, global imbalances, declining wages, all these are indications that the Fed is certain to lose the war. But not the the next battle, which will be fierce: expect a massive, unprecedented, and record reflation attempt yet by the Fed and the global central banks, that will make all stimulus to date pale in contrast.
Which means that the quantity of money can only go up if the central banks are going to try and foist “stability” on us. I think there’s plenty of folks that would agree with us. Where I diverge from Tyler is the ultimate result: a run on gold versus bigger drawdowns on currency. The dollar funding pressures we’ve seen recently tell me there’s still widespread (and possibly growing) fear that there’s still a lack of liquidity out there. Frankly, I don’t think the central banks can shovel it out there fast enough in enough channels.
The question is why. Simply put, repos, reverse repos, currency swaps, etc. are just credit instruments. Credit is deflationary. You have to pay back more than you borrow. That only makes sense if you can make more than what you’ll owe. But if you can’t, it leads to a restructuring or austerity. Take your pick. Real Bureau of Engraving and Printing madness is all that’s left, where M1 would essentially swallow up MZM and M3 levels of money creation. But the minute that occurs, the run on hard commodities will be on in full force. Everyone will know the whole gig is up.
Which is why the central banks won’t do it.