The Great Depression Online

Great Depression Online Archive Issue:

Past the Point of No Return

Great Depression Online
Long Beach, CA
June 01, 2010

Inside This Issue You Will Discover…

*** A Plunging Money Supply
*** Gritting Teeth
*** Past the Point of No Return
*** And More

A Plunging Money Supply

From Moneynews last Thursday…

“The United States’ M3 money supply reportedly is plunging at an accelerating pace similar to that in 1929 and 1933, despite near-zero interest rates.

“The M3 data — which include a broad range of bank accounts and are tracked by British and European experts for danger signs about the U.S. economy — began shrinking a year ago, London’s Daily Telegraph reported.  That race has since picked up speed.

“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 9.6 percent, the report said.”

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A contracting money supply means banks are not lending out money.  Maybe they’re not finding many creditworthy borrowers.  Or, perhaps, potential borrowers peering out over the economic horizon see stagnation…not recovery.  They’d rather pay down their existing debts and build up their savings than take on new risk.

Regrettably, over the last 60-years the economy’s grown dependant on an ever increasing supply of new credit and an expanding supply of money.  So when the money supply plunges, it’s a near certainty the economy will soon follow.

Gritting Teeth

What the financial system takes away, the government gives back.  That has been the brain trust’s playbook since the current depression began.  Yet, despite the governments extraordinary spending, all they’ve gotten is an extraordinary stock market bounce.  The real economy’s sputtered and putted along like an old Buick Skylark.

Still, that won’t stop them from pushing down pedal to the metal on the fiscal gas…

For example, just last week former Treasury Secretary and top economic advisor for President Obama, Larry Summers, asked Congress to “grit its teeth” and approve a new financial boost of $200 billion.

Here at the GDO we grit our teeth a lot.  But it’s usually when taking action contrary to what we’d rather do.  Like when waking up each morning at 5:30 AM to put in a twelve hour shift – or more – we may grit our teeth for a moment before getting out of bed.

In this regard, Congress should “grit its teeth” and not approve a new stimulus bill.  For not doing so would be the tough thing to do.

Besides, in addition to the damage it would do to the nation’s already disgraceful deficit, it would be an utter waste.  As noted above, the economy’s money supply fell from $14.2 trillion to $13.9 trillion between February and April.  At that rate, the $200 billion of new stimulus would be expunged in about 9 weeks. 

Past the Point of No Return

But the government loves to waste money.  That’s what they do…they are good at it.  Just take the federal government’s 2010 budget.  It’s ironically titled, A New Era of Responsibility.  If you’ve looked at it, you know…there’s nothing responsible about it.

The total budget’s $3.55 trillion.  Yet government revenues only cover about $2.38 trillion.  The rest, about $1.17 trillion, will be made up with debt.  The problem with debt is that there’s already too much of it.  Despite this simple fact, Summers wants Congress to “grit its teeth” and bite off more.

Gross U.S. public debt, says the IMF, will reach 97 percent of GDP next year and 110 percent by 2015.  The ailment currently plaguing Greece is a debt to GDP ratio of 113 percent.  In the new era of responsibility, the U.S. is on target to hit this marker in just five short years.

And what for?  Years ago you could grow your way out of a recession with new debt.  Nowadays new debt just digs a deeper hole. 

For example, back in the mid-1960’s a dollar of new debt produced $0.90 of new GDP growth.  By the year 2000 a dollar of new debt produced just $0.30 of new GDP growth.  Alas, in 2009 total debt saturation was achieved…where total income no longer supports total debt.

What this means is that in late 2009, each dollar of new debt subtracted $0.45 from GDP.  If you don’t believe us, you can read all about it here at the Business Insider.

Yes, it is in fact a new era.  But here is not somewhere you’d want to be.  For the die is cast.  We’re past the point of no return.


M.N. Gordon
Great Depression Online

P.S.  Just because the economy sticks doesn’t mean you still can’t get rich.  Now you can profit from Zacks investment research for free.  But the best stocks.  Sell the worst.  Target today’s hottest industries.  Stock screens and more.

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