The Global Money Machine

The Wall Street Journal ^ | December 14, 2007 | DAVID ROCHE

[Toddsterpatriot]

Snip.. It is a no-brainer to say that the credit crunch is making liquidity scarce. It is less clear why central banks are powerless to do anything to stop it contracting, and why this shrinkage will sabotage economic growth as economies fall prey to the credit drought in places as far-flung as the Baltic states to China, as well in the OECD countries.

But to back up for a minute, what is liquidity? Two years ago, when confronted with financial-sector balance sheets and asset prices that were growing at a multiple of GDP and money supply that wasn't, we at Independent Strategy found our answer......

Further research indicated that what was driving asset prices was the supply of copious and cheap credit with which to buy them. This type of asset money or credit was not counted in the traditional definition of liquidity, which is simply broad money, made up of central-bank money and bank lending.

The reason for the exponential growth in credit, but not in broad money, was simply that banks didn't keep their loans on their books any more -- and only loans on bank balance sheets get counted as money...

No longer could central banks determine how much debt was created. They used to do that by limiting the amount of central-bank money they supplied, which formed the base of all loans, and then obliging commercial banks to make reserves for every loan. This made lending capacity finite. Now that the loans didn't stay on banks' balance sheets, this control mechanism was ineffective. Lending capacity became almost infinite -- for a while. Indeed, central banks didn't even control the price of money very well any more; again; risk appetite set how risk was priced and central-bank rates held very little sway over the outcome.

[Toddsterpatriot]

No longer could central banks determine how much debt was created. They used to do that by limiting the amount of central-bank money they supplied, which formed the base of all loans

Hmmmmm....M1 only grew about 5% over the LAST 4 YEARS!!!

[Toddsterpatriot]

Interesting Ping!

[UCANSEE2]

“which is simply broad money,”

That’s what I need. Broad money. Enough to get several broads. And cars, for the broads.

[JasonC]

Actually, they can readily ensure that tons is created by just creating it themselves directly. What they can't do is directly stop banks from making tons of it, if said banks have a hankering to do so. They can influence this indirectly, though, and very strongly. (If the Fed set short rates at 20%, then...)

[JasonC]

And MZM grew 25.5% , or 5.85% per year on average, and by $1.64 trillion overall.

[Toddsterpatriot]

They can influence this indirectly, though, and very strongly. (If the Fed set short rates at 20%, then...)

Or, they could set reserve requirements at 20%...

[Mase]

Hmmmmm....M1 only grew about 5% over the LAST 4 YEARS!!!

M3! M3! M3!

[Moonman62]

Well, the money came from investors, right? I don’t see the big deal. Also, HSBC and Citi have brought SIV’s worth several billion dollars onto their balance sheets. I wonder how that will affect the credit markets.

[Moonman62]

Here's an interesting chart of the money supply over at wiki. It seems M1 has been declining in influence for over 40 years.

http://en.wikipedia.org/wiki/Image:Components_of_the_United_States_money_supply.svg

[abigkahuna]

http://www.treasurydirect.gov/news/pressroom/pressroom_reducedpurchaselimit.htm

Annual Purchase Limit For Savings Bonds Set at $5,000

FOR IMMEDIATE RELEASE

December 3, 2007

The annual limitation on purchases of United States Savings Bonds will be set at $5,000 per Social Security Number, effective January 1, 2008. The limit applies separately to Series EE and Series I savings bonds, and separately to bonds issued in paper or electronic form

snip...

The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.

Is the government closing the doors to head off bank runs?

Citibank and other money center banks have imposed limits on customers abilities to use free IIS (inter-institutional) wire transfers of more than $2,500 per month for overnight wires, and no more than $10,000 per month for 3-day wires.

American Express has an "Order limit: There is a maximum order size of $1000.00 that can be purchased within a 14-day period. "

https://www210.americanexpress.com/BOLWeb/bolfeOrder.do?request_type=orderProduct&promotion=AMEX&program=TC00000201&selleracctnbr=2539481999I Hmmm very interesting indeed...

[Moonman62]

Is that a real account number in that URL?

[abigkahuna]

No :)

[taxed2death]

M3 doesn’t matter, or so I’ve been told.

/s

[modican]

The doors started closing after 9/11 already, Its also difficult now to setup an international phone/wire Xfer account. Also “off shore” accounts are eliminated. Even Switzerland obeys, The US has a huge influence worldwide in that regard, most people don’t believe it.

[expat_panama]

difficult now to setup an international phone/wire Xfer account.

It's more difficult in a few ways, and so much easier in most ways.  There may be a few more regs from the gov't in the way but it's the private sector that actually does the work.  Back in '75 I tried to xfer $14k from New York to the US Canal Zone, and the CitiBank lost the money and it took them a month.  These days I can go online and move that kind of money from the US to Lesotho if I want --3 or 4 days tops.

OK, these days the fees are higher ($40), but I used to have to pay that much for all the telephone calls and telex's to make the idiot bankers pay attention.

[expat_panama]

Thanks Todd, this is quite a thesis.

A while back we were looking at the $20 billion China pours into bank US deposits every month thats supporting the US/China current account deficit; it makes sense that while some foreign money goes into T-bills, the bulk would go into high paying (though also high risk) mortgages.

[Vet_6780]

The Fed can't save its member banks by inflating this debt away it is gargantuan what will that do to the dollar ?

Write the bad debt off now !

[snowsislander]

American Express has an "Order limit: There is a maximum order size of $1000.00 that can be purchased within a 14-day period. "

American Express won't sell more than $1,000 worth of euros or yen in the U.S.?

That's a pretty sad statement. According to their website, it's to "prevent fraud."

I don't think that selling yen at the high markup that they used to charge was a great business, but refusing to sell reasonable amounts of yen strikes me as downright silly.

[expat_panama]

"...it is gargantuan what will that do to the dollar ?   Write the bad debt off..."

Sounds like this latest "crisis" from our lib press has got you all upset.  Time for a little perspective. 

It's true that foreclosures and credit delinquencies are up.  The reason is not that we're bad off.  The reason is that we've been so well off that the only change possible was for us to be like we were a couple years ago.

Bank loans in general are as good as they were a couple years ago.   Real estate loans are not quite as good because of rising interest rates, but those "gargantuan" loan failures are no worse than they were during the Clinton economic paradise that the lib press was so crazy about.

I'm telling you; the press is lying and we're OK.

[Mase]

M3 doesn’t matter, or so I’ve been told.

Considering that for the past twenty years the Fed has used interest rates to spearhead monetary policy rather than the money supply, I'd have to agree with you..... /no sarcasm.