True Money Supply – September 09th 2008
November 18, 2008 · Posted in Monetary Economics
As you can see above, the intermediary money supply data for September 08 indicates a further slowdown in true money supply growth. The effects of the bailouts of Fannie May, Freddie Mac, and AIG are not yet included in the data available, as this is from 09/08/2008.
It will most likely be available with the next set of data.
Over the past three months the impact of the slowdown of the true money supply has finally reached commodities and consumer prices, in addition to the already declining home and stock prices.
The overall outlook for the next months is a further lowering of stock, real estate, commodities, stock prices.
The US is facing a major credit crunch and an unprecedented economic correction. Rather than allowing the correction to occur freely, the government has embarked upon a path that it will not be able to back down from. One financial institution after another is being bailed out with public funds.
The Federal Reserve Bank has already filled up close to 50% of its balance sheet with bad debt. Policymakers have realized this and hence suggested setting up a completely separate entity to do just that: Buy bad debt from troubled banks, backed by taxpayer money.
I assume their reasoning is that they want to avoid turning the FED, it being the supposedly trustful lender of last resort, into a junk deposit which would sooner or later have to write down delinquent mortgage loans and factually declare bankruptcy. Instead they are trying to spread the garbage evenly across different institutions: Large banks (BofA with Countrywide, JP Morgan with Bear Stearns), the FDIC (Indymac), the Federal Reserve Bank (AIG and various bad debt instruments acquired against treasury bills in the term auction facility), and presumably the soon to be established Treasury sponsored entity.
Of course all these measures are bound to fail. With every intervention the final shakedown is merely being postponed and aggravated.
The main actors involved are clueless about the essence of the problems of credit expansion, the credit boom, and the credit crunch: The President has completely extricated himself from the process; Hank Paulson, the Treasury Secretary has fully endorsed a policy of interventionism as the panacea to the crisis; Congress leadership is hopelessly lost (as Senate majority leader Harry Reid said: “no one knows what to do”) and will most likely go along with anything that the President’s Working Group on Financial Markets will suggest, no matter how much it will cost the taxpayer. The SEC is about to announce another pseudo measure tomorrow: banning short sales on financial institutions. More prestigious businesses will be in line for bailouts shortly, in particular Citigroup, General Motors, Ford Motors, and General Electric are likely candidates.
What has been keeping the dollar strong recently is the fact that the federal reserve has not yet resorted to the ultimate weapon: hyperinflation. The money supply, as shown here has been slowing down. Most likely the Federal Reserve officials are not even aware of this because they are using wrong data to monitor the money supply. The question is if this trend will hold up with the interventionist path that the government continues to move forward with. We will keep monitoring the money supply closely.
Events indicate that we are approaching the collapse of the global financial system as we know it. As Libertarians and Austrian Economists have been warning again and again, and have been ridiculed for again and again: A fiat money paper currency system, facilitated by a central bank, will ultimately lead to the destruction of the paper currency and the collapse of the financial system.
One can only hope that once all this is over and decision makers will have to get together and frame a new financial system, maybe, just maybe people will at least sit down for a second and listen to the common sense solutions that we have been asking for over the years:
- Abolish the Federal Reserve Bank
- Allow for free market competition in the money market
- Let the market return to a gold standard
- Significantly downsize the federal government
- Abolish the federal income tax
- Abolish unconstitutional (and wasteful) federal institutions, in particular the IRS, the SEC, the Department of Homeland Security, the Department of Education
- Phase out the federal social security and medicare programs and let people manage their money themselves (one can only hope that at this point people realize what the government will do to your money)
- Reduce US troop presence around the globe, strengthen the defense of the homeland against foreign enemies (which is the first and foremost task of the federal government)
- and finally: legalize the US Constitution
It is disturbing that the crisis is giving me hope that people will listen. Common sense should lead people to these conclusions. Unfortunately common sense has not been very popular over the past decades.
(This article was first posted on 09/19/2008)