Join Dylan and Nima and they break down the details behind what most people have already caught themselves saying at one point or another… Mortgages are bullshit!
Mortgages Are Bullshit lesson by Dylan on Youtube: youtu.be/6dF0buznl4M
As explained before, inflation and deflation within a certain territory are defined as increase and decrease of the total volume of money plus credit in that territory.
Probably the best approximation on the development of total credit outstanding in the US is the Federal Reserve’s so called Flow of Funds report’s data series “Total Credit Market Debt Owed“.
The long term series shows us the historical relevance of 2008’s credit event:
As I predicted before, I believe that the US has reached peak credit in 2009 and is now on a long term path of credit contraction. I would consider the 2010 bump an anomaly, one that was brought about and fueled by massive and unprecedented government stimulus and bailout programs, and a general yet tentative mood of things potentially looking up again.
As I also predicted, it will be those stimulus and bailout programs that will be aggravating the agony and sluggishness, and prolonging the duration of this necessary correction:
Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.
Zooming in, we can see that as of Q2 2011 (the latest quarter available in the data series) it looks like all these countermeasures have run out of steam and total credit has begun contracting again, from around $52,650 billion to around $52,550 billion, a contraction of roughly $100 billion:
I have recently come to realize, mostly based upon this article that the Treasury’s Supplementary Financing Program really seems to be nothing but another sort of checking account that the federal government holds at the Fed, in particular it is actual spendable money, not just a reserve balance that would still need to be loaned out in order to become spendable money. And as you can see, the Treasury does spend the money, since it obviously regularly draws upon that account, to the point where now the balance on there is zero again. Thus I will from now on include it when adding up the different components to come up with theTrue Money Supply.
Based on that we can see that the true money supply is currently at $2,592 billion, and that so far its been able to maintain its growth through 2010 and 2011 for the most part:
The growth rate is currently at around 6.19% and has been recovering from a low 1.28% around April:
During the period from Q1 to Q2 2011, which is the one we observed credit growth for above it has risen from $2,417 to $2,458, so by about $41 billion, which is less than the volume of credit contraction. And since then through now the money supply has roughly risen by another $140 billion (we’ll have to wait for the Q3 Flow of Funds report to see by how much this may or may not have been counteracted via credit contraction).
Overall it seems as though it is still a pretty close call between inflation and deflation, with inflation having certainly been the dominating force during 2010 and maybe also 2011, but slowly coming to a halt as credit expansion seems to have come to an end at this point.
We’ll have to wait and see what the next few months bring.
M1 in in China has most recently begun to fall:
The growth rate has now slowed to around 10%, coming closer to that in the US:
Money supply in China is slowing most likely as a result of contracting credit as a correction from prior government stimulus malinvestments.
As I said before, the Chinese housing bust is underway, the Chinese economy is headed for a severe recession, and that’s what the slowdown in the money supply growth rate may very well be indicating at this point.
Are the current price increases we see across the board inflation? Well, price increases are never in themselves inflation, but they can be signs of inflation.
Let’s see what’s been happening in the US over the past year.
Total Loans and Leases still had their peak in 2008. In early 2010 there was a big spike and they have been declining since then.
Total Bank Credit at Commercial Banks:
A similar pattern can be observed with Total Bank Credit ad Commercial banks as you can see above.
Together those two numbers give you a pretty good and complete indication as to how private credit has contracted in the in US and still continues to contract from peak credit.
However, the most complete picture of credit in the US is, as always, a number in the Fed’s Flow of Funds Report “Total Credit Market Debt Owed”:
Here we can see that indeed through 2010 there has been a resurgence in credit, in spite of a contraction in private credit. The reason is that public credit, that is money owed by governments, has soared:
Yes, we have been back in inflation mode indeed, but without the private sector playing along on a long term basis, I don’t think that this one can last very long. All that this has done is fuel speculation and bubbles again in commodities, junk bonds, and stocks. A few jobs may have been created as a result of that, a few more may get created. However, these developments are completely unsustainable. Government intervention in the past crisis has ensured that this will be a long, ongoing, and painful period, and we are witnessing it right now.
We are now in a desperate repetition of what I already warned about in 2007 when I wrote “Credit Expansion Policy“:
The policy of credit expansion has been pursued by governments time and time again. It has become prevalent in the United States under President Woodrow Wilson after the establishment of the Federal Reserve Bank under the Federal Reserve Act during the Christmas Holiday of December 1913. Since then, it has caused major credit booms and crunches in the form of asset booms and subsequent crashes and economic booms and subsequent recessions. In particular this has been the case in the years of 1929, 1987, and 2001, and will be visible in 2008 and the following years. It has always precipitated precisely the effects outlined above. Its workings and effects have been fully explained by this theory of the business cycles. No one has ever refuted the correctness of this theory.
Yet, to date economists and politicians appear completely riddled as to what causes booms and crashes. It is claimed to still be a matter of discussion amongst experts. It has been attempted to impute it upon humans’ greedy nature and natural exuberance. Whenever a crisis emerges the pundits, experts, central banks and politicians will try and regulate the market to stave off the impending crunch. They forget or don’t have the intellectual capacity to understand that it has been their own policy that has caused the crisis in the first place.
As long as the central banks keep pursuing this policy, there is no need to be surprised when the next credit crunch occurs. Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.
The only difference now is that private sector credit is not playing along anymore. In fact, private sector credit is doing precisely what it should be doing: contract.
When the next crash comes, I expect that we’ll be back in deflation mode again in no time at all, snapping back into the long term pattern of this contraction. Like I said before:
Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.
And most importantly … when the next crash comes, I sure hope people will point their finger at the root causes, and not at whatever lying politicians and media minions will tell them to.
Total credit and loans have now contracted by $1,218 billion (source stlouisfed.org):
The annual rate of decline has now reached 7.2%:
This is still deflation in full swing. It is an ongoing credit contraction of record proportions and it is now more rampant than ever during the financial crisis.