Does the above relate to this?

Angst vor dem Dollar-Crash grassiert"

Adam: No one is yet really sure (or at least saying) what the M2 drop is about, but if it were connected to the Dollar's weakness against the Euro, it would mean that major personal savings were being moved to the Euro. Now I've actually been expecting this for some time (perhaps a year) for a number of reasons, but the suddenness and size of this drop would indicate that a whole lot of major players were acting almost in unison.

This of course suggests inside knowledge of some underlying future event. But what event? Off the cuff, a move by Russia to Euro-base its oil production comes to mind. Not a major blow to the dollar per se, unless of course others follow. If that happens, we'll all be able to stop in the bread lines on our way to the voting booth next fall.

Could it be that banks are hesitant to lend at low interest rates to companies whose balance sheets have a high level of indebtedness and rather would seek some margin in investment in extant assets, whereas businesses are hesitant to borrow for expansion rather than simply for purposes of repairing their balance sheets at lower interest rates? The Japanese disease?

The money supply would be falling (if these measures are correct, which is hard to say, because there's a lot of hocus-pocus to them) if the economy grows. The banks take more money and invest it, and keep less in cash reserves. This makes each dollar more valuable.

But I don't see this happening... the dollar is hitting $400 in gold, which means the Fed is probably inflationary. We'll see commodities rising at the expense of debtors and creators of intellectual property. Coming off a deflation as we are, everything is haywire though.

Nobody mentioned this little nugget:

As for companies, they aren't borrowing much from their banks these days, either, for a couple of reasons.

For one thing, they're generating lots of cash internally, since profits are soaring.

We workers are all lacking for income right now, and profits are soaring?

I think the most likely explanation in a liquidity trap. Paul Krugman at the NYT has been hinting at this as well. In a liquidity trap, lowering the interest rate can not spur additional economic growth because something else (often future expectations) is the limiting factor. In a liq-trap, the converse is also true, that contracting the money supply won't hurt the economy.

I think that the shrinking money supply is a symptom of low expectations for the economy. People don't see the recovery as imminent or sustainable and are not borrowing (dollars at least) to finance economic activity.

This explanation fits with the liq-trap story, both are consistent with low expectations. If so, the falling money supply is not cause for concern per se, since the real problem is a lack of faith in the recovery.

(I'm a microeconomist by trade and training, so my expertise lies in other fields, but this is the most compelling explanation I've heard so far.)

What does all this mean (liquidity traps) for the stock market?

What does all this mean (liquidity traps) for the stock market?

What does all this mean (liquidity traps) for the stock market?

What does all this mean (liquidity traps) for the stock market?

I found your article very interesting especially when the news I listen to indicates that the US is increasing the money supply at record levels. The fact that we are not and the US dollar continues to devaluate and the price of gold to rise is puzzling.

Would appreciate if you could tell me an internet site where I will be able to download M1, M2 and M3 money supply data.

I found your article very interesting especially when the news I listen to indicates that the US is increasing the money supply at record levels. The fact that we are not and the US dollar continues to devaluate and the price of gold to rise is puzzling.

Would appreciate if you could tell me an internet site where I will be able to download M1, M2 and M3 money supply data.

just stumbled on this very interesting site. i think that money supply growth has been sluggish because interest rates hitting historic lows in june 2003 and then subsequently increasing 150bps in july and august 2003 the mortgage refi boom has ended. as mortgages were refinanced mom and pop they took the money and placed the funds in checking accounts before buying cars boats and planes . that spigot has been shut off with rates higher and that source of money supply growth is no longer available. john jansen

Money supply growth is negative because interest rates are too high.

Wait! you say, Interest rates are at historical lows. This is true, in a nominal sense, but I offer an opinion that they are too high in a real sense. Interest rates represent the cost of money. When they are too high, the cost of money is too great and M2 diminishes to meet the equilibrium. When interest rates are too low, the cost of money is likewise too low, and M2 increases.

The trick is understanding that when it comes to interest rates, the terms "high" and "low" are relative to the natural equilibrium of real interest rates, no to historical interest rates.

An example: In the seventies, while the US economy was mired in inflation, nominal interest rates were much higher than they are now, but the real interest rate was low relative to the money supply. That's why prices continued to go up. Only Fed action to move the real interest rate higher could affect the change necessary to stop that inflation.

Now flash back to 2004. Nominal interest rates are historically low, but the cost of demanding money is actually too high. Perhaps the natural equilibrium point of the real interest rate is negative (below zero). While this is theoretically possible, and could be current reality, it would be a calamitous impracticality. A negative interest rate would imply that lenders pay borrows to take out loans, and is therefore never going to happen.

It is my opinion that our money supply is diminishing because we are paying off debts. Our debt burden has grown so large that perhaps even the lowest possible interest rate is too much to handle.

Could this explain why the Fed is reluctant to raise interest rates in the face of such monumental GDP growth? I think they are very scared.

regarding the above posting by danny bantu i would suggest that the fed is not raising rates because job growth is slow ,sluggish and subpar.the fed is terrified ofpost bubble syndrome and the japanese experience of the 90s . they will not raise rates,i believe, until monthly non farm payrolls are increasing for a "considerable period"( to steal their phrase) at a clip of about 250,00 permonth. that takes care of the 150,000 or so newcomers and subtracts about 100,000 from the bloated list of unemployed. until them rates will stay right where they are.jjj

Danny_bantu has an interesting view of this but I do think it boils down to demand. we are trying to emerge from a period of deflation. sustained low interest rates have moved money from bond to equity. What is disturbing to me is that M2 should have expanded to support the higher equity prices. This smells of the "sucker's runup following the 29 crash. If companies wish to restructure debt they would buy back callable debt, the investor would either A. Take a Cash position and increase monetary base or B. Reinvest in secondary markets. In either case it should show up in MB. Another disturbing issue is the Bank of Japan and its intervention. Buying Currency as opposed to buying US treasuries. Would this show up in MB? In either case Greenspan is more vocal than I have seen
since the irrational exuberance days. And when the markets heated then didnt he raise rates? This was around 96.
http://www.charleston.net/stories/021304/bus_13buck.shtml

Whould it be fair to theorize that continued and sustained devaluation of the dollar puts american power at a disadvantge within the power auctions of international trade? Could we one day pass a point where so many dollars have been bought by euros and other currencies whos value is rising that we first lose our assets and then at some point later in time we lose our global dominance too? If so then out biggest threat is probably not in the middle east!

A liquidity trap occurs when the 2 levers of monetary fiscal policy, interest rates and open market buying and selling of the federal bonds no longer effect any control over the financial system.

The fed lowers and raises interest rates essentially shrinking the cost of money for the banks who lend, and the borrowers. Note that banks pay a half-penny for a loan of one dollar, but will then turn around and assess 4.5 cents to 19 cents when used as loans and credit card financing.

The fed also buys and sells the federal debt bond paper on the open market in order to influence the amount of money in the monetary supply. Money however can come in countable different forms. Money can be the cash we keep in our wallet, a check that represents an account at a bank, or records of deposit. As opposed to tradeable commodities like securities(bundles of loans) and stocks, money is said to be fixed in the sense that it cannot be used as collateral. For instance, if you have a 100 dollar bill, nothing will change the value from $100. But a stock or bond that is worth $100 today, may be worth more or less numerically.

The purchase power of money does affect the value, but not the numerical amount. Thus an economy consists of 2 different types of measuring net worth.

The use of interest rates affects the costs of borrowing and loaning money but not the supply. Buying and selling government debt adds or subtracts from the liabilities section on the financials. Whereas buying decreases liabilities, selling soaks up "liquidity" but only in the sense of loanable cash because the bonds themselves can be used as collateral, at which point they become an asset. Such is the genious of accountanting.

The liquidity crisis occurs when lower interest rates do not stir business activity. The costs of debts are lessened, but the economic spurt does not workin a situation where companies have high debt burdens, and when there is a supply glut.

In a global economy, with financial markets able to quickly shift funds,with the sale of federal debt subject to the pressures of competition, the control of the federal money supply becomes ineffective.

The value of our money in the world is dependent upon the buying of the government debt. The salability of the debt depends upon the "spread" or profit margin made by buying less than 100% of the value in expectation of the interest payments. The smaller interest rates put pressures on these markets that force the interest rates upward to make the debt paper saleable. When there isn't enough of this debt paper purchased in the world, the price of using it in the world goes up.

Financial institutions have a whole range of paper they use to support their financial commitments and sustain the worth of their equity assets, whether they are property or securites assets. Having world-wide assets equated to denominations of financial paper involves having the resources available to meet the millions of daily financial transactions. Thus the buying and selling of national debt paper reflects the relative weight a nation has within the global supple network.

These price mechanisms are not tied to any one type of money. An example would explain the reason for the difference in prices between Honolulu, San Francisco, and Little Rock, although each urban center uses the same currency.
When the exchange occurs between two different currencies (such as between the Yen and the Peso) one nation's supply network is sort of measured against another nation's supply network.
Or rather, one distribution system against another.

A liquidity crisis is disasterous because the shortage of money due to the high burdens of debt cannot maintain the low interest rates without currency deflation in the Global market. The resulting rising interest rates however further increase the costs of debt burdens.

I am interested in finding charities who want to help supply housing for the poor. I am a real estate developer who knows many others willing to donate the down payments for complexes for developement. This would create much work for others and well as housing for the poor. I would think this combined with section 8 could put a dent into many areas that need more housing. I am talking about large complexes of 40 or more per project. I have penciled this out and firmly believe that not only will this provide housing it will add substantial income to the charity as the owner of the apartments.
If anyone can refer charities interested in this offer it would be greatly appreciated.