Behind Door Number Two: Why Ben Bernanke is Collapsing M3

02-09-2010 • EconomicPolicyJournal.com

His conclusion: This particular signal on looming economic activity rarely is seen, but once it is generated, it is solid. The weaker economy ahead will be particularly disruptive to a system that assumes positive economic growth will be seen in all of 2010. Williams also comments on my favorite indicator M2: Year-to-year change in M2 is estimated at a 1.9% gain in January — a contraction after inflation adjustment — following a 3.4% annual gain in December. Month-to-month, January M2 dropped about 0.8%, following a 0.2% gain in December...With slowing growth in M2 (the broadest money measure published by the Fed) and continued credit contraction, the Fed has to know that conditions are not healthy or appropriate for economic expansion. These conditions also are suggestive of ongoing difficulties in the U.S. banking system. Continuing to act as though such were the case, the Fed pushed the St. Louis Fed’s Adjusted Monetary Base measure to $2.059 trillion in the two weeks ended January 27th — its second highest level ever — 1.0% shy of the December 2, 2009 period peak and up at an annualized 56.1% rate of growth since the near-term trough in the August 12, 2009 period. The monetary base is currency in circulation plus bank reserves. At present, banks are leaving extreme levels of excess reserves on deposit with the Fed, instead of lending those funds into the normal stream of commerce. Judging by comments made by Bernanke and Kansas City Fed President Thomas Hoenig, I wonder if they understand how tight things are. They continue to talk as though low interest rates are Fed easing, which I have emphasised is not the case. Clearly, Williams agrees with my thinking that it is money supply that has to be watched.