Money Supply Plunging Toward Depression?
By Staff News & Analysis - May 27, 2010

US money supply plunges at 1930s pace as Obama eyes fresh stimulus … The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The stock of money in the US fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6percent. The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened. The assets of insitutional money market funds fell at a 37 percent rate, the sharpest drop ever. … "It's frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said. – UK Telegraph

Dominant Social Theme: Regulation making a bad situation worse.

Free-Market Analysis: The talk in the United States, especially, and Britain, too, is one of recovery. Even in Europe, we noted recently, there are digital maps available that show much of the Eurozone is coming out of "recession" and various indicators are turning positive. We have never, however, believed in the "green shoots" theory. In fact, we would note that green shoots have been perceived by the powers-that-be – and their pet econometric economists – for at least two years now, making this the longest springtime ever. Maybe it has something to do with global warming – er … wait, that's not exactly proving out either.

Even articles like the above in the Telegraph are not reporting the full nature of the problem – which is not merely banks being over-regulated and "over-capitalized." The numbers in this case may in fact tell part of the story. The only way debt-based money begins to circulate is if banks (the sacred repositories of central bank fiat money) lend it, but banks simply aren't lending – they are not putting central bank, debt-based money into circulation. But the culprit is not just over-regulation (or even the failure of Keynesian deficit spending), in our humble, opinion – no, not at all.

The real reason that banks STILL aren't lending much may also have to do with the depth and breadth of the downturn. We've written in the past this is no ordinary downturn but a fiat-money blowoff. Western paper currencies, in fact, have all failed at once, including king dollar. They have failed because incessant credit stimulation has so distorted Western economies that even after two years, these economies have not yet returned to a point where banks and other investors can tell the difference between a legitimate opportunity and one that has been kept alive by various forms of governmental chicanery. This is why "stimulus" and "bailouts" are ultimately so counter-productive. They actually retard economic recovery.

Economic ignorance also plays a part in the current crisis. After more than 100 years of concentrated power-elite propaganda, people are rightly confused about money, what it is, and how it works. In a normal-money economy (one with silver and gold) money would gain in value (deflation) gradually over time (rather than lose value to "inflation") because technology would gradually make most goods and services more efficient. During an economic downturn, money might even appreciate faster – cushioning a recession by making savings that much more valuable.

But in a pure fiat-money environment with mercantilist central banks and their governments spewing money like the BP oil leak in the Gulf, the money economy becomes increasingly distorted along with the real one. The issuance of debt-based pure fiat currency is an invitation over the long-term to disaster. Initially, the phony dollars fool businesspeople into thinking they are richer than they are. Eventually, the economy becomes so distended and distorted that price signals break down, stock markets crash and a recession – or depression – takes hold.

At this point, money is seen to shrink – to evaporate. Initially, money is seen to disappear because it is locked into non-performing assets that are suddenly seen as irretrievable. And then, banks (the only large entities allowed to lend in a traditional sense) won't lend because it is not possible to make a distinction between what is valuable from what is valueless.

For monetarists – and other types of non-free-market economic-oriented journalists inhabiting the mainstream media (see above article excerpt) – the inability of banks to lend and the subsequent shrinkage of the money supply is cause for alarm. It is actually the most natural thing in the world. What many economists and financial journalists are calling for in the midst of a downturn is for the printing presses to reignite and for yet more faux-money to enter the economy in order to reinflate. But in really bad downturns, it may take a long time. The economy is just too mixed up.

None of this stops the powers-that-be from launching endless amounts of happy talk – along with new bailouts. In fact, the talk of recovery – especially in the midst of a bad downturn – in our estimation is yet another power elite spun dominant social theme. It is a promotion that has been employed to great effect in the past 50 years or so even as the Anglo-American industrial base especially has been hollowed out.

Bloomberg News recently reported the following: "Warren Buffett, chief executive officer of Berkshire Hathaway Inc., and money managers such as Jerome Dodson, president of Parnassus Investments, and Jeff Rubin, director of research at Birinyi Associates, say stocks are a good buying opportunity. Stocks are attractive because of corporate earnings forecasts and favorable valuations, said Rubin of Westport, Connecticut-based Birinyi Associates, a money management and research firm."

While the financial elite participate in happy talk, investors, even savvy investors, simply aren't buying it. In fact, the title of the Bloomberg article just mentioned above, is: "Investors Seek Shelter in Cash, Shun Buffett's Advice."

Here's another excerpt from the article: "Howard Gellis, former head of the corporate debt group at Blackstone Group LP, isn't taking Warren Buffett's investment advice to pick stocks over cash. 'The events of the last month have reinforced why I'm absolutely not putting any new money in the stock market,' said Gellis, 56, who's retired and lives in Palm Beach Gardens, Florida. 'You shouldn't put any money in the market you can't afford to lose.'" Here's some more from the same article:

Investors pulled an estimated $14 billion from U.S. stock and bond mutual funds in the week ended May 12, the first net withdrawals since March 2009, according to the Investment Company Institute, a trade group in Washington. The Standard & Poor's 500 Index has declined 5.2 percent this year and has gained 59 percent since the market low in March 2009. The May 6 market rout that drove the Dow Jones Industrial Average to an almost 1,000-point drop before recovering has contributed to the aversion to risk. The VIX, as the Chicago Board Options Exchange Volatility Index is known, surged as much as 128 percent since the beginning of the year to a high of 45.79 on May 20. "Trust in the market is elusive at best right now because of erratic economic news and the role greed and avarice played in the market meltdown," said Helen Modly, a fee-only planner at Focus Wealth Management in Middleburg, Virginia. "Folks naturally wonder who exactly is behind the curtain here."

Central banks and their government and private-sector apologists always talk up the economy after the initial economic shock wears off. Even if the happy talk accomplishes nothing specifically, it provides the controlled mainstream media with talking points. Central banks and fiat money virtually destroy economies over time. The pernicious monetary system hollows out industry and ruins entrepreneurship. Each recovery, even in the normal course of things, should be seen as a little bit less healthy than the previous one. This is why one can drive through vast sections of "red-state" America and see nothing but ruined factories and abandoned towns. Detroit is actually trying to return major parts of the city to grasslands.

It is very important to the power elite to maintain the facade of a recovery during a downturn, especially a deep one such as this. So long as the rhetoric remains positive, the mainstream media has a steady flow of quotes and reports to write about that provide a perspective for the average reader that "things are coming around," even when they are not. In this way, invisibly and over time, fiat-money economies lose their vitality and citizens lose their jobs, houses, hopes and dreams. This has already happened in America, and it will happen in Europe too as "austerity" takes effect. What needs to be changed is the monetary system itself.

After Thoughts

If we are correct, the system will change because it has too, this time round. The damage has been too great. That's why we've been predicting recently that the power-elite itself with eventually attempt to install some sort of honest money standard. Alternatively, a gold and silver-based standard of some sort may simply ignite spontaneously if economic crisis continues long enough and remains deep enough. Either way, we believe that the results of this financial crisis will generate something different than what has come before. In the meantime, precious metals could move higher – much higher, even in the face of the ongoing deflation the Telegraph worries about.