Is The Collapse In FX Reserves Even More Dangerous Than The Plunge In Money Supply?

Tyler Durden's picture

By now everyone has read Ambrose Evans-Pritchard's article discussing the historic plunge in the M3, which speculates that due to the failure of attempts so far to reflate the economy, Obama is likely considering a renewed stimulus. To validate his point, Evans-Pritchard quotes Tim Congdon of 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. Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantitative easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty." SocGen's Albert Edwards chimes in with an observation from a slightly different angle, namely that the collapse of global FX reserves, whose explosion until 2007 "fuelled both global GDP growth and the credit bubble," which are simply indicative of global imbalances and are a very useful measure of total liquidity, are now plunging. This merely reinforces the deflationary pressures of the plunge in money supply, and forces the Fed into a corner from which there is no escape except by activating another multi-trillion QE program. Yet away from the US, Edwards argues that the huge imbalances within the Eurozone will serve as the seeds of its own destruction.

To quote Edwards:

One of the key drivers - some say THE key driver - of the great credit bubble was global imbalances. Large external imbalances fuel global economic growth when the surplus country intervenes to stop currency appreciation. Growth in global foreign exchange is one common measure of global liquidity. Many believe the explosion in FX reserves seen until the end of 2007 fuelled both global GDP growth and the credit bubble. The recovery in liquidity over the last year is unravelling and this may explain why risk assets are now suffering so badly.

The SocGen analyst chimes in on AE-P's earlier piece...

Monetarists have been jumping up and down about the continued weakness in global money supply measures. The well known market commentator, Ambrose Evans-Pritchard, for example notes in the UK?s Daily Telegraph today that “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” - ?link. Looking around the globe, the US is not an isolated experience.

Now I?m not a monetarist myself, but you don?'t need to be to know that money does indeed matter. And in a post bubble world where the private sector is still de-leveraging and now the public sector is trying to as well, a contraction in the money supply of this order of magnitude spells big, big deflationary trouble. Incidently Bernanke apologised on behalf of the Fed at Milton Friedman?s 90th birthday celebration for causing the Great Depression by allowing monetary growth to implode. To quote ?"I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.” ?- link. Monetarists say they are doing it again!

M3 is just the beginning. For a true picture of global liquidity, one has to look at global imbalances. And they don't paint a pretty picture.

Another key measure of liquidity we watch closely is also in rapid retreat ? namely the growth in global foreign exchange reserves (see chart below). This traditionally has a close correlation to both emerging equity market performance and commodity prices. Its retreat might help explain recent weakness in these asset classes and has broader implications.

If I have learnt one key lesson, it is that extreme imbalances have a funny habit of correcting at some point, bringing the existing consensus crashing down. For example, I remember in the mid-1990s being repeatedly savaged by clients for pointing out that Asia?s extreme current account deficits in the mid 1990s were unsustainable ?Noddynomics?. And using this analysis it was clear to me even back in early 1998 that much of Europe would suffer bubbles with strong parallels to the mid 1990s Asian crisis ? (see The Independent newspaper - link).

How have global imbalances played out in the world to date?

Many believe that the mega-external imbalances (predominately between China and the US) were in very large part responsible for inflating the global economic and market bubble. One measure of the liquidity these imbalances produce is represented by the change in foreign exchange reserves as emerging economies (generally) and China (in particular), print money to stop their exchange rates rising against the US dollar (see chart below).

After recovering last year, this key measure of global liquidity is back in rapid retreat and is closely associated with the current downturn in commodity prices and other risk assets. This might explain why the current ?correction? may be about to turn into something far bigger. One key driver in the reduction in global liquidity is the disappearance of the huge Chinese trade imbalance (see chart below).

While most commentators (including this one) focused on the vendor financing scheme that dominated economic relations between the US and China, few really focused on the huge imbalances that existed within the eurozone, mainly because they netted out to close to zero. But the current crisis in the eurozone has thrown these imbalances into sharp focus.

Make no mistake, the fiscal crisis we are seeing in the periphery is a direct result of the correction in the massive private sector deficits in these counties. The fiscal bust is directly proportional to the depth of the private sector retrenchment, which in turn is a function of the one-size-fits-all inappropriate monetary policy inflicted on them by the ECB. And these huge private sector deficits in the periphery were mirror images of similarly sized surpluses ? mainly in Germany. Germany is to the periphery what China is to the US.


To be sure, the transference of private sector excesses built up during the bubble directly onto the public sector is not unique to the eurozone periphery ? it is equally observable elsewhere (see below chart for the US for example). But unlike the periphery, the US and UK had control of their own monetary policy ? i.e. it was excess of their own moronic  choosing.

But one thing is clear in every nation. National income accounting identities require that the public and private sector balances must sum to equal the current account balance (again see chart above). We have articulated previously the dangers of fiscal retrenchment at a time when the private sector is still de-leveraging.

Edwards closes off by quoting Rob Parenteau:

?Rapidly cutting fiscal deficits without considering the impact of such moves on private sector financial balances is a shortsighted, if not dangerous policy direction. Sector financial balances…cannot be treated in isolation. It is an elementary fact of accounting that the private sector as a whole can only spend less than it earns if some other sector spends more than it earns. That sector has tended to be the government… Pursuing fiscal retrenchment in order to reduce government debt default risk will merely raise the odds of private sector debt defaults…The only way to avoid this outcome is if the nations undertaking fiscal retrenchment can swing their trade deficits around in a fully offsetting fashion. Otherwise, domestic income deflation is the likely result ? A return to debt deflation dynamics like those engaged after the Lehman debacle is not out of the question.?

The bottom line is that in attempting to fix one problem in a suddenly broken system, another one develops, as everything is interrelated and interconnected in the global economic system, linked up through channels of liquidity, or lack thereof. M3, global imbalances, declining wages, all these are indications that the Fed is certain to lose the war. But not the the next battle, which will be fierce: expect a massive, unprecedented, and record reflation attempt yet by the Fed and the global central banks, that will make all stimulus to date pale in contrast. At that point, once the Fed's actions become obvious for all to see, watch for the gold "bubble" to go exponentially parabolic.

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Mako's picture

The "total credit market debt" has gone negative, first time since the great depression.

Next report in 2 weeks.  Currenty credit is growing at a negative rate for 2009 and 2010.

Current total credit/debt Q4 2009 $52.42T down from $52.89T Q1 2009.  The fat lady is warming up. 

"The bottom line is that in attempting to fix one problem in a suddenly broken system"

There is no fix, the fix is collapse and liquidation just like every other time.

Duuude's picture


Please expand on your thoughts. Deflation? Effect on Gold?


Mako's picture

Wild swings on all alleged asset classes... to the upside and downside. 

Eventually none of these markets will exist, production will be shutdown in mass... collapse and liquidation.

Cursive's picture


Are you suggesting we won't even have a currency?  Can you be slightly more specific?

Mako's picture

You use credit as money... the credit system will go poof with it the stuff you use as money goes poof.   Production and asset valuation is based a functioning credit system, no credit system = production and asset valuation nose dive.

No ATMs, no credit cards, no lines of credit, etc.

All these markets, exchanges, boards, etc will implode into a mess this time, won't be as pleasant as the last time.


Duuude's picture

Thanx Maco.

I'm looking shorter term, if you have a feel for tha progression I'd appreciate anything you may want to share about tha coming Clusterf*ck.

I expect QE Maximus, then more Deflation than at present...looking at what we have now...

Mako's picture

Volatility short and medium term, as the system continues it's collapse.  People are running for safe, each round a chair is removed, so huge swings like we have been seeing will continue.  Eventually, there will be no musical chairs left and all you will have left is liquidation.

You haven't seen anything yet, this is still the good times.

WaterWings's picture

Long term: bombs and tanks.

After that it's Thunderdome!!!

Mako's picture

Most likely... unless you get some people to willingly jump into the pit.

Sudden Debt's picture

Gold down, deflation up +-20%

But I don't think the Fed will allow that and Obumba will launche Q2 anytime soon.

Plan B is to divert the attention by a nice war or so and use that also as a excuse to do a QE.

Whatever, a QE is already arround the corner and ready to hit us in the face.

The US need inflation, and it will get inflation. Whatever it takes.

Sudden Debt's picture

Also, don't forget that with deflation, the US is over and out.

The $ would strenghten to much to even have a export anymore, the government debt would really get to exspensive to maintain, the working class would be wiped out...

Can't let that happen.

ZerOhead's picture

The US has just tried the biggest fiscal experiment in history and it has failed.

"The fix is collapse and liquidation just like every other time."

That kind of thinking... while technically correct is just so... well... 20th century. In the 21st century we believe in mudshots, junkshots, and coming soon to a central bank near you... Fxshots, swapshots and massive M1shots for the hotshot bigshots.

The credit destruction is real... but when asset values start heading south to the Gulf of Mexico who ya gonna call on but Uncle BB and his trusty (not Rusty...) FedCo 3000 Turbo-printer!

The dream will not be allowed to die. They will never surrender!


Hephasteus's picture

M3 hasn't plummeted. It simply got plugged into a million different equations that won't resolve. You can't match an exponential M3 growth to linear but just barely exponential M2 and a straight flat as kansas M0.

Turd Ferguson's picture

QE to infinity


Ezekiel 33:6

jesusfreakinco's picture

The bottom line is that in attempting to fix one problem in a suddenly broken system, another one develops, as everything is interrelated and interconnected in the global economic system, linked up through channels of liquidity, or lack thereof.

JFC - Bingo!!!

At that point, once the Fed's actions become obvious for all to see, watch for the gold "bubble" to go exponentially parabolic.

JFC - Double Bingo!!! Cause and effect.

Apostate's picture

Yay! I like money!

I love my president!

plocequ1's picture

Very simple solution. QE and stimulus. Bring it on Ben. My Mac book pro
and ipad arrived. I really don't give a fuck what happens. My Toyota Corolla is all prepared with sheets and blankets and I ordered my Seed bank and generator from Alex Jones. I'm ready Ben.

Yardfarmer's picture These charts from the link at the end of the A E-P article are most instructive

almost_have_a_name's picture

Are we better off if the system colapses or recovers ?


mikla's picture

The system will not recover.  We can talk about the many forms of system collapse.

almost_have_a_name's picture

I'm sick of the waiting game, and I don't want the other

side to pick the date (in the dead of winter).

How do we speed it up ?


bigkahuna's picture

We can speed it up by first focusing on getting out of debt while simultaneously building up a non-perishable supply of food as well as a small stash of silver--probably junk silver old us coinage. Food is more important than silver though. Then make sure if you have anything left over to put it in a local and small bank or credit union. Recall that in an environment where your currency is in jeopardy, you should have a stock of food, water purification system, and an alternate energy source available. If you are ok with firearms (or not), have some kind of protection for your family-like a good shot gun and some ammunition. By the time you have all of this together, you will have sufficiently shunned the idea of giving big banks and the fed your money and if everyone did this together, it would ensure a crash pretty quick--because the federal reserve banks would become quite angry and make the crash happen.

Blindweb's picture

Also look into resilient communities; essentially increasing the self sufficiency of your community.

WaterWings's picture

Get everyone you know to join the Tea Party. Not for elections or anything (no point in that anymore when you have the Coast Guard telling the Press "no filming or we'll arrest you" on the beach cuz a foreign corporation sez so) but that will help get the frenzy going.

But you have to have thick skin: "Racist! Teabagger! Bush lover! Tenther! Birther! Goldbug! Idiot! Homophobe! Xenophobe! Anti-government-right-winger-Christian-thingy!"

But that's the point! Stand out there with a sign: "Down with this sort of thing!" and it can really piss people off. This sucker is out of control and MSM is pouring the gasoline. LOL!!!

Me, what am I doing? Staying far away from all that. No point anymore. Beans, bullets, bandaids.

RockyRacoon's picture

Beans, bullets, bandaids.

...and bullion!


depression's picture

I just do not like this term "double dip recession".

The pattern is not a W, it's a stair step down, an L followed by another lower L.

This is a slow rolling all consuming deflationary credit collapse and economic depression. All the hopium and cheerleading will not change this reality.

Matto's picture

Im with you. Baby boomers are exiting the workforce and taking their savings and spendings with them. Fuck all can be done about it. QEII wont reflate the credit collapse that is coming down the pipeline but it may manage to debase the decreasing money supply through a crisis of confidence just the same.

Greyzone's picture

The term you are seeking is "catabolic collapse" (Warning: PDF!). John Michael Greer proposed this theory in 2005 building on the work of Professor Joseph Tainter, whose initial theory attempted to frame all societal collapses in terms of diminishing marginal returns against increasing complexity. Tainter's theory was arguably a first solid understanding of how societies collapse but it did not quite mesh with temporal observations. Greer's work is an effort to take Tainter's theory and further adapt it to the observed behavior of past civilizations that collapsed, in order to yield a theory with some predictive powers (basic science - observe, hypothesize, test with an objective of falsifying your own theory).

There have been many attempts to explain the increase in debt and money supply over the last 40 years, but the one that comes closest to addressing this was first mentioned (to my knowledge) by Nate Hagens, and proposes that the increases in debt and money supply are an effort, using fiat money, to continue the rates of growth that occurred when human population was lower and resources were far more abundant than now.

We have not yet quite reached the point of real resource constraints biting us but we are beginning to see this as it takes more and more real energy to draw on increasingly lower quality ores, petroleum, natural gas, etc. As we approach the point where energy cost of extracting resources like oil to be used as energy sources becomes 1:1, the cost implications for everything else in society rise in response. Now the last I checked, we were somewhere between 5:1 and 10:1 in terms of energy returned versus energy cost (EROEI - Energy Returned On Energy Invested) for coal, oil, and natural gas extracted. That doesn't sound too bad except when you realize that just 70 years ago the ratio was nearly 100:1. And the change is due directly to having to drill/dig deeper into harsher environments (Deep Horizon anyone?) which themselves have higher operational costs and significantly higher dangers.

Eventually, any energy "source" which falls to 1:1 or below no longer is worth extracting for energy. That's basic physics and economics can blow its non-scientific ass all it wants but physics will win that argument every time. The longer term problem facing our civilization is a need to transition off fossil fuels (not right this second) and to replace those energy sources with energy sources that have EROEIs that are higher, if possible. Down that road is going to lie a mix of nuclear fission, nuclear fusion (maybe), solar, wind, tidal, etc. And those energy sources require higher levels of technical complexity than fossil fuels required.

So the transition has to be upwards to a higher level of social and technical complexity or we get the alternative - collapse. And right now, the vampire squid and entities like it seem more interested in ensuring we do collapse than really addressing the problems and contributing to longer term solutions. Of course the fact that we give corporations "personhood" before the law, yet corporations are legally mandated to act in ways that would mark a living breathing human being as a sociopath probably contributes to our entire social schizophrenia.

This goes back to a position I've taken for years on the internet about our future. I firmly still believe that every technical problem we currently see in front of is can be solved. The real problem is whether we will have the political and individual willpower to force change before collapse occurs. Because if we wait until after collapse occurs, we may just fall far enough down the technology tree that we can't get back to where we want to go. Sir Frederic Hoyle once remarked that technological civilization is a one-shot affair. If we blow the initial endowment of easily accessible ores and fossil fuels, those won't be replenished for millions of years. We either get this right or our entire civilization takes a step down. And right now, in every government around the world, we are twiddling our thumbs trying to preserve the status quo. Right now, more than ever in my opinion, we need less government meddling in markets precisely so the markets can send honest price signals about everything. Subsidizing anything needs to stop, including subsidizing fossil fuels. If the market price of fossil fuels were fully realized, we'd all begin to change our lifestyles pretty quick and begin to look at alternatives at the same time. But as long as we try to preserve the status quo, the market is prevented from sending the real price signals that something is amiss and needs to change.

DosZap's picture



"And right now, the vampire squid and entities like it seem more interested in ensuring we do collapse than really addressing the problems and contributing to longer term solutions".

This has been the plan all along, if you cannot see it, go to the nearest Optometrist, asap.

We are on PURPOSE being bent over,loaded up.

Anyone who thinks this is an accident..........well, I am sorry.

Greyzone's picture

I admit to wavering between "Are they that inherently stupid?" and "Are they that inherently evil?" I suspect the truth is a mix of both of those putrid choices.

RockyRacoon's picture

Folks like you don't run for public office as a rule.

Therein lies a sad fact.

Folks like you are generally making a living, taking care of business and family, minding his own business, staying out of the limelight.  There is a social disconnect here and it's not your fault.

jailnotbail's picture

The longer term problem facing our civilization is a need to transition off fossil fuels (not right this second) and to replace those energy sources with energy sources that have EROEIs that are higher, if possible.

Well, if not right this second then it should be the very next thing.  Actually even right this second is too late


How The Global Oil Watchdog Failed Its Mission

How the IEA was silenced about the future of global oil production.

Coldcall's picture

How long will citizens of the US, UK, EU allow their governments to piss their money down the drain, creating fake gdp growth, in order to maintain this illusion?

How depressing.


SheepDog-One's picture

Coldcall, best I can figure it goes on until cable TV and wifi/cellular towers are shut down, then its immediately the French revolution. Until then, rally on futures, rally on...

almost_have_a_name's picture

The propagand machine has everyone distracted. I can't

convince my retired neighbor (WWII Navy vet) that television

is his new enemy.





silvertrain's picture

 Keep trying, some people are worth not ever giving up on...

 FTA dish and reciever setup to bring in al-jazeera and other  media no biased media LEAGALLY run on a small solar powered panel..

Matto's picture

Fiscal infeno!

Psquared's picture

I work very closely with credit. If M3 is plunging it will show in credit availability, particularly if banks are trying to build their reserves and reduce credit risk. So far, from my vantage point, the same people are able to borrow money as 3 years ago, but some of the people who could borrow 3 years ago now cannot.

Ultimately, if the situation is getting worse, these events have to affect the availability of credit but so far they are not. I have not really noticed an increase in rejections which means underwriting standards have not even tightened up.

What might happen is the credit will just stop - i.e., banks will stop lending completely, but I don't think it will be sudden - although that is possible. It seems more likely to me that it will start getting tougher and "some" lenders will begin to tighten standards. I have not seen that this year at all. (From 3 years ago yes, but since January of this year, no.)

A Man without Qualities's picture

Banks must keep lending like a fish needs to keep moving, and they know this.  The problem is, there are not enough people who can actually pay back.  They are currently in a quandary - they are supposed to improve lending standards and increase lending, but this cannot happen.  So, they are waiting for uncle Ben to put a reassuring hand on their shoulder and say, "it's all ok, don't worry, we've got your back."

Hyperinflationary collapse, here we come.... but not for a few years yet.

SheepDog-One's picture

'Not for a few years yet'...really how do people figure that? N Korea might lob a few nukes over the fence today, then whats that do to everyones 'Sure its all obviously collapsed today but we'll see nothing happen for 3 more years' conclusion?

A Man without Qualities's picture

How would N Korea lobbing nukes be hyperinflationary?

My point is, the central bankers will do everything to prevent a deflationary collapse and because these forces are so strong, they will have to do a hell of a lot.  The problem is, it is like pulling a brick out of a wall with a piece of elastic - you pull and pull and nothing happens then, eventually, it flies out and smacks you in the face...

Psquared's picture

That is my guess too. We are still a few years away and there are still tricks up the sleeve. If a Black Swan comes along it may be sooner, but if things bump along like they are now my guess is 2013-2015.

DosZap's picture


Your correct, except that the restictions on getting credit IS being tightened (back to old stds), on home purchase.

IMHO, until the Banks STOP getting 3% return on their NOT lending, nothing changes.

Plus, and here's the (IMHO) reason we are not seeing growth, and rehiring.............

No one knows what this admin is going to do, and how it will affect them, if they can even stay in business.

Right now, ONE person employed, is having to do the work/duties, of what used to be the duties of three employees...............

Everyone I know working, is having to kill themselves with 25-30 hours worked extra per week, just to keep their positions.

Don't like it tough shit.....quit.

No one,esp business,is gong to take on debt without a workable plan, if you do not know the rules, how can you plan?.

You can't.

Kali's picture

Yes.  In addition, if you are miraculously able to operate a viable biz plan in this environment, you make money, which is immediately taxed and "expensed" away.  This is what has happened to me.  So, how do I plan for the future in this environment?  I don't recycle my "assets" into the system, I take them out. (beans, bullets, bullion).  I will not expand my biz until TSHTF and will be able to better operate in the "new" environment.  In other words, I will get to keep what I earn instead of giving all away to people who produce no real value to society (in fact, cause harm).  My biz plan rejects debt financing, period.

Paul Bogdanich's picture

The guy incorrectly attributes the first alarm to Ambrose Evans-Pritchard when the guy over at shadow stats was the first to see the trend and has been warning about it ever since.  

Slewburger's picture

Anybody having trouble moving MM accounts?

Specifically former GMAC?

RockyRacoon's picture

Define what you mean by "trouble".  Can't answer without more info.

Slewburger's picture

Referred to a technical specialist who will call within 24 hrs? (gulp)

Hephasteus's picture

The money market is the heart of the M3 ponzi. It should have broken the buck and been returning 90 cents on the dollar for over a year. But they don't want people knowing it's a ponzi so at some point the "banks don't have my money" thing is going to show up in the money market and in 401k.