I’ve expressed misgivings numerous times about the Hooverite actions undertaken by our betters in Washington. My position has been that the government should do nothing other than provide adequate – but not excessive – liquidity. That way, we’d have a short, sharp contraction and a quick recovery as market forces digested bad debt and assets. Just like the Depression of 1920-21.
But the spirit of Hoover lives on. Worse, it’s been reincarnated in the persons of Tim Geithner and Ben Bernanke. Just like Hoover, they and their cohorts are turning a recession into Great Depression II.
And sure enough, after all the interventions of the last year, we’re seeing a deflationary contraction of credit and money rivaling that of the early 1930s. From the UK Telegraph:
Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.
Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).
“There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.”
The M3 “broad” money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.
Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an “epic” 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.
“For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,” he said.
It is unclear why the US Federal Reserve has allowed this to occur.
Read it all. The folks at ZeroHedge have been all over the contraction in credit and they’re not having any of Bernanke’s happy talk about the economy rebounding.
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