Throwing Good Money After Bad
If you were hoping the economy was due for a turnaround soon, prepare to batten down the hatches instead. The money supply is shrinking at a rate not seen since the Great Depression — and the White House seems intent on repeating history:
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….
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.
The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.
Having spent almost $1 trillion to no effect, Larry Summers has apparently convinced President Obama that another $200 billion will “keep growth on track.”
Last year, Democrats ignored those who criticized the “stimulus” bill for not actually being designed to stimulate the economy and foisted a massive boondoggle on us that seemed intended more to ensure Democratic Party dominance of electoral politics than to address our economic woes. Now they appear more concerned about the short-term political consequences of a double-dip than the long-term catastrophe that will come from repeating the same mistakes. They’ve already announced they intend to run against George Bush again. Presumably they believe they can keep blaming everything on him. But the sell-by date for that excuse has long since passed; they took a serious mess and turned it into a genuine fiasco.
“Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty,” he said.
Mr Congdon said the dominant voices in US policy-making – Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke – are all Keynesians of different stripes who “despise traditional monetary theory and have a religious aversion to any mention of the quantity of money”. The great opus by Milton Friedman and Anna Schwartz – The Monetary History of the United States – has been left to gather dust.
Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use. This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 – just as the Fed raised rates – gave a second warning that the economy was about to go into a nosedive.
As Prof. Reynolds is so fond of saying, “The country’s in the best of hands.”