"Money Multipliers Have Collapsed Everywhere...Confidence Is Missing. I Don't See Any Way To Stabilise M3 In Such Circumstances"

George Washington's picture

Washington's Blog.

Former officials are often more honest than current ones, since they aren't under pressure to spread happy talk.

Former European Central Bank chief economist Otmar Issing recently said what current officials aren't addressing:

can be sure that we have a self-sustaining recovery. The challenges
facing the ECB are tremendous. "Money multipliers have collapsed
everywhere. What M3 is telling us is that confidence is missing. I
don't see any way to stabilise M3 in such circumstances.

As Ambrose Evans-Pritchard notes:


from the European Central Bank shows that the M3 broad money supply has
contracted over the last six months, confounding expectations that
ultra-low interest rates would soon boost monetary growth. Loans to the
private sector fell 0.3pc from a year earlier, the first such decline
since the data started in 1983.

The M3 figures include a wide range of bank accounts...

picture is even starker in America where M3 has shrunk at an annual
rate of 6.5pc over the last three months, a pace of contraction not
seen since the 1930s. US bank loans have plummeted since May.

(While the Fed stopped reporting M3 in 2006, people are still tracking it).

How can M3 have collapsed when governments world-wide are printing money faster than IHOP can cook pancakes?

Well, professor Tim Congdon from International Monetary Research says:

key reason for credit contraction is pressure on banks to raise their
capital ratios... "The current drive to make banks less leveraged and
safer is having the perverse consequence of destroying money balances,"
he said. "It strengthens the deflationary forces in the world economy.
That increases the risks of a double-dip recession in 2010."

But isn't it good that governments are requiring banks to raise their capital rations?

but unless they force the banks to write off their bad debts, they will
remain giant black holes, and will never be adequately capitalized. If
they are never adequately capitalized, they will never release money
out into the economy through loans and other economic activity which
increases M3.

As just one example, remember that the nominative amount of outsanding derivatives dwarfs
the size of the global economy. As another example, remember that
several of the too big to fails have close to a trillion dollars each in toxic assets in off-book SIVs.

IMF chief Dominique Strauss-Kahn says
that the history of financial crises shows that "speedy recovery"
depends on "cleansing banks' balance sheets of toxic assets". "The
message of all financial crises is that policy-makers' priority must be
to stop the quantity of money falling and, ideally, to get it rising
again," he said.

As many people have repeatedly written (including me),
the world's governments must restore sound economic fundamentals -
which includes forcing banks to write down their bad assets - instead
of cranking up the printing presses and trying to paper over all of the

Moreover, as Mish, Michael Rivero, and many others have pointed out,
governments can create all the credit they want, but if people do not
have jobs, they will not borrow that money.

When will the politicians listen? Will they wait until
after the next huge market crash? When there are tent cities
everywhere? After their governments default and they essentially lose
sovereignty under "austerity measures" imposed by the IMF, World Bank
or other agency?