By David Henderson
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc.
This is from Ambrose Evans-Pritchard in the Telegraph, a British publication. It goes on:
“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.
Congdon is a well-known British monetarist economist.
The deck line–that’s the line just under the title that tells the gist of the story–says:
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 strange word in there is “despite.” This was the mistake made in the Great Depression when the Fed looked at low interest rates and said, “See? Monetary policy must be loose.” Of course, as Milton Friedman pointed out many times, always crediting Irving Fisher, all we observe are nominal rates. Nominal interest = real interest + expected inflation. A tight monetary policy leads to low or negative expected inflation, making nominal rates, for a given real rate, low.
I caution, though, that because the Fed quit reporting M3 a few years ago, the data on M3 are from John Williams. I’ve never found him persuasive in his claims that the CPI dramatically understates inflation.
HT to Jeff Hummel and Mark Brady.