Tradition Analytics Asks The $64K Question: Has The Fed Run Out Of Options To "Grow" Credit Money?

Tyler Durden's picture

Last week, we presented an equity "valuation" analysis based on Austrian economics, which concluded that the only thing that matters for the economy and for asset prices in general, is the amount of credit money moving one way or another at the margin, ie how active global central banker printers are. Unfortunately, in this economy of record correlations, and in which alpha creation is now impossible, this may well be the only approach to capital markets that works any more. Today, Tradition Analytics takes this analysis from the micro the macro level, explaining why the US, and global, economy is now like a shark - cash has to move (inward) or else the economy will suffocate. Naturally, nothing could make Bernanke happy- according to Tradition, "To sustain the up-cycle banks will have to pump out net new credit probably in the order of about $1 trillion in the coming 8-10 months, even larger than the $700 billion pumped out in the previous 8-10 months." Alas there is a problem with this, very much along the lines of what we discussed last week, which is that the new crude baseline is now a triple digit number, not one in the $30s or even $60s: "it is going to be difficult to sustain this level of credit expansion, not only due to the sheer gravity of the inflation problem that would follow, but also simply due to the fact that it is always increasingly difficult to extend more credit at the margin, and this time into an economy that is already steeped in credit."

Complicating matters is the long-discussed contraction of the business cycle, as volatility swings get ever wilder and with a greater amplitude, courtesy of record central planning encroachment which swings the global economy from one extreme to another with reckless abandon. To Tradition "it would suggest that cycles are getting progressively shorter in the great debt era and this in turn means the potential loss of monetary control, policy overreaction and misdirection, macroeconomic value destruction over time, and the risk of very deep, acute financial and banking crisis." In other words: the Fed is now boxed in a corner (and has been for years, maybe decades, in fact since its inception in 1913), and anything it does will push the pendulum to either one or another extreme. In this light, what consumer confidence does today (whereby consumers are confident because they are confident) is beyond ridiculous. 

The bottom line from Tradition:

  • The US economy, using growth in M2 money supply as a cyclical measure, has now been in a boom phase since the start of 2010.  This 2-year boom is coming to an end.  Credit and money growth has been running at such breakneck speeds that in order for the banking system to sustain the boom it would need to pump out roughly $1 trillion dollars’ worth of loans in the coming 8-10 months.
  • If that were to happen, inflation will quickly become the most import problem for the US economy and the boom would be extended to such a degree as to make not only the inflation threat enormous but the crash risk even bigger at a later date.
  • However it is going to be difficult to sustain this level of credit expansion, not only due to the sheer gravity of the inflation problem that would follow, but also simply due to the fact that it is always increasingly difficult to extend more credit at the margin, and this time into an economy that is already steeped in credit.
  • The resulting bust could be sharp as 2012 unfolds.  By the middle of the year we expect that the slowdown in credit expansion will have forced the productive sector into another liquidative bust phase.  Employment numbers will begin deteriorating and production data will likely suffer again.
  • If we are correct in this outlook then the current US boom phase may last little past 2-2½ years.  This means that since 1991 the three US boom cycles have roughly halved in length from 10 years (1991-2001), to 5 years (2003-2008), and 2-2 ½ years (2010-2012).  The implication of this should not be underestimated.  It would suggest that cycles are getting progressively shorter in the great debt era and this in turn means the potential loss of monetary control, policy overreaction and misdirection, macroeconomic value destruction over time, and the risk of very deep, acute financial and banking crisis.

And another useful observation, looking at the credit impule, only this time from the perspective of credit money:

We must caution that, as with every business cycle, the boom immediately sets in motion the seeds of its own destruction. Credit pumped into the system needs to grow at an accelerating pace or else the production structure will start to adjust once more toward a more consumer oriented one and non-specific factor resources will be bid away from higher order processes quite quickly, causing many of those industrial projects to fail before even reaching completion. In fact it is perhaps not surprising to note that in the most recent month of data producer prices actually fell and have exhibited no upside in h2 2011.

 

We should also note that such a rapid increase in inflationary credit is historically very difficult to sustain. Below we have adjusted our preferred US money supply measure, M2, into a normalised scale of its 4-month moving average annualised change (smoothed).

 

It is clear to see that since 1959 (available data) the measure does not typically move more than 2-standard deviations from the mean and when it does these episodes are very short-lived. Remember: with inflationary credit cycles the pace of new credit needs to be increased (i.e. 1st derivative of money supply growth must be greater than zero) for the boom to be sustained. In other words when the graph above is trending lower the bust is being set in motion.

We fail to see what the problem is: the central planning tyrants have always thought they know what is best for everyone, and how to make everyone's life good, at least in their view, if in the process they just happen to make the lives of the uber-wealthy that much better. And at the end of the day, nothing has crashed yet so everything is perfectly sustainable - just ask any economist or Ph.D. bearer. They know.

Full report:

US Boom to Bust Dec2011

h/t Converttrader

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Mr Lennon Hendrix's picture

The Fiat Ponzi is imploding, bitchez

Sudden Debt's picture

I wonder if Obama gets to give it a second try in 2012.
Change it again Sam!!

The Big Ching-aso's picture

 

 

If another ME war starts like lets say Iran, by then credit limit hikes will only apply to just funding the military.   So there'll have to be two sets of credit limit ceilings.  One for military, one for civilian.      Double your pleasure, double your fun.     We don't need E-tickets in this country to get wild rides, baby.

strannick's picture

Oil, the Loonie and the Aussie buck today are saying they have a few more rapidly multiplying rabbits still up there sleeve

trav7777's picture

They have dropped the price of credit to 0.

There are no takers...what does this say about the DEMAND for credit?

Pssst, don't tell it to all the "savers" who think their entitled 5% comes magically as a result of money's existence.

francis_sawyer's picture

If the question is "Has the FED Run Out Of Options to "Grow" Credit Money?"... It's an irrelevant question (& really a waste of time & brainpower to contemplate)...

Options = unlimited (because those who have power & work in secrecy, can make up the rules to any game as they go along)

The PERTINENT question is... "Do they have any reason to do so"?... And the answer to that is probably YES... Why?... Because they haven't yet STOLEN every single goddamned penny in front of the steamroller that they even dream they could get their greedy fucking mitts on...

Grow credit money? (even this late in the game)... SURE! WHY NOT?... As long as they can play the kabuki theatre carousel of politicians getting elected in & out of office (on a global scale & with currency arbitrage), why not PRINT UP AS MUCH DEBT AS POSSIBLE (& use the proceeds to extract all the "PHYSICAL" anything needed in the world, stack it all on pallettes in a cave, & wait for a day to pull the plug)...

Jeez... If an a55hole like me can figure that out, it can't be that hard...

kito's picture

bens options are not unlimited. oil is massive thorn in his side. qe3 would send oil to the moon and quickly destroy any "growth". failing to implement qe3 post elections (its not coming before) will send deflation into a death spiral (deflation will occur with qe3, just not as fast)

francis_sawyer's picture

"deflation" & "inflation" will BOTH occur at some point... The only question is with regards to the chronological order... It's called PRICE DISCOVERY & it is a component of working markets... Markets WIN (on a long enough timescale)...

Amusingly... This...

Tradition Analytics Asks The $64K Question: Has The Fed Run Out Of Options To "Grow" Credit Money?

Parse out... TRADITION... Then, parse out "GROW CREDIT MONEY"...

Laughingly IRONIC... isn't it?...

"Tradition bitchez"!

Zero Govt's picture

Deflation and Inflation are happening in parallel...

Property since 2006, banking since 2007 and business has been deflating in the main since 2008.. 

Inflation has occurred in the public sector, the US Govt has continued its spending orgy aided and abetted by Bennys counterfeit wealth fabrication which has also gone straight to the Big (bankrupt) banksters which has seen speculative flows into the stock and commodity markets

But the credit (debt) mountain peaked in 2008, Bennys furious printer has not kept debt and asset values from imploding. Central (monopolist) planners cannot tell a businessman to take on credit/debt and expand his business when he feels the economy is too weak to pay a good return nor push debt down consumers throats

The real economy is choked on debt and has had enough of this 30-40 year long binge. Benny is left to inflate (fake) what asset values he can with his big bankrupt partners in the banks. All they control is mortgages with their hands also in stocks and commodities.

The real economy is deflating, Bumma, Bernank and Blankfein et al are left to jerk around with the rest to make it look like a recovery but as we see with mortgages there's no way out (no private buyers for their over-priced assets). That's why the Fed and US Govt (read US taxpayer) must be the ultimate bag carrier for this crap (or the bill for its discounting back to the private sector)

dsg2003gt's picture

I can hear that in a Jean Girard (ricky bobby) voice.

 

 

So does this mean to buy more gold?

Irish66's picture

take out the word "grow"

midtowng's picture

The other key word is "credit". They can always expand the money supply, just not with credit.

pauhana's picture

Swap the word "credit" for the word "debt" and this article makes a hell of a lot more sense.  (See, your assets are now liabilities.)

RobotTrader's picture

Fiat creation is "Infinite"

 

They can print as much as they need.

Whatever it takes.

The obvious problem is that they are not printing fast enough.

We need a 5% inflation rate at a minimum to erase the debt.

What are they waiting for?

Japan dilly dallied for 20 years and they still have 1% interest rates and deflation, and investors over there are still clamoring for bonds and hate stocks, and there is no growth.

Doesn't Bernanke have a freaking clue?

Cult_of_Reason's picture

In money printing maniac Bernank we trust.

All our problems can be solved by printing money, and if it does not work after multiple QEs, it means da gangsta Bernank needs a bigger printing press.

I wanna know where da gold at. I want da gold. Gimme da gold. I want da gold.
http://www.youtube.com/watch?v=bZfyrIPw3wY

GeneMarchbanks's picture

'Japan dilly dallied for 20 years and they still have 1% interest rates and deflation, and investors over there are still clamoring for bonds and hate stocks, and there is no growth.'

Mostly internal buying out of 'duty'. It is cultural. US, not so much. Luckily you have Wen Jiabao. He's an immortal or so I'm told. Endless buying of AmeriPaper, right?

fonzanoon's picture

Gene in my tiny sampling of people that I associate or conduct business with here in the states I could tell you that if TPTB came out and denounced gold ownership and endorsed owning FRN as a sign of patriotism I believe both requests would be followed by most. I am surprised they have not done this yet.

GeneMarchbanks's picture

That applies to the blind jingoists who need to be beaten by a mob wielding clue sticks. The big players have already set up 'exit' plans and feel no moral obligation to the land mass between Hockey & Nachos.

'I am surprised they have not done this yet.'

WTF is 'they'?


fonzanoon's picture

That applies to the blind jingoists who need to be beaten by a mob wielding clue sticks

You are referring to the masses? Because that's who I was referring to. Who was your Japan reference towards? I thought it was towards the masses who loyally buy their bonds.

I was just saying that the same reaction here would not be out of the realm of possibility if it was asked for by our political leaders. Thats WTF they is.  I'm not saying it is the right thing to do. I am saying it is the likely outcome. Who gives a shit about the big players. Like you said they made their plans already.

 

GeneMarchbanks's picture

The Japanese have a 'fanatic' devotion to the homeland that isn't always visible. No much animal as the "masses" only mass man, in collective terms 'they' are an abstraction. Many Japanese buy as patriotic obligation.

You give your political 'leaders' too much credit. Mostly they are self-serving clowns that are as vacuous as they look. What you need is a statesman, but too many voters don't even comprehend the word. Is it possible? Of course.

fonzanoon's picture

The Japanese may buy out of devotion and here we buy out of confusion. most of people's retirement accounts are loaded up with treasury funds. If only because they think it is the last safe haven. If asked to do so out of patriotism imho I believe they would do so as well. But like I said it was based purely on my tiny sample and I could be wrong.

It also seems to make no difference to me whether patriotism or fear is the reason people own the bonds. As long as they get the desired outcome it seems this can go on and on. A spike in rates somehow would turn things upsidedown.

Clycntct's picture

++++++++++++++++++++++++++++++++++++++++

"You give your political 'leaders' too much credit. Mostly they are self-serving clowns that are as vacuous as they look."

Errol's picture

My perception of folks here in the US: they'll wave the flag if their social group is watching, but it runs a mile wide and an inch deep.  In other words, as long as killing brown people props up their bloated "standard of living" they're all USA! USA!, but if uncle sugar doesn't deliver at least a credible illusion of prosperity, he won't have many friends...

fonzanoon's picture

I would have gone with agree. Correct is not a foregone conclusion.

Interesting that the protestors here are upset with Wall Street. Not big government.  You both seem to think they will run from big government, I think they have and will continue to run to it.

 

 

GeneMarchbanks's picture

It's hard to tell where one begins and the other ends. Grey area. Stay away from both by all means necessary.

fonzanoon's picture

completely agree with that statement.

el Gallinazo's picture

"Interesting that the protestors here are upset with Wall Street. Not big government. "

 

Maybe they know that the tail does not wag the dog.  Or as Deep Throat used to advise, "Follow the money, Woodward."

Mr Lennon Hendrix's picture

The Yen is not the reserve currency.  The valuation of the dollar affects all asset prices dramatically.  The dollar has been the pole star of the world for 100 years, and you want to flip the earth on its axis.  Good luck with that.

WonderDawg's picture

Fiat creation might be "infinite" in theory, but here's the problem: you can't force more debt into a system that is debt saturated. All potential borrowers are already soaked in debt. The subprime mortgage bubble was the last hurrah. Now everyone, down to the last guy who didn't have a job but could sign his name, has been soaked with debt. The debt markets are out of suckers. That's why the "infinite fiat" theory ultimately fails.

pods's picture

Absolutely WD.  They always say that they can "print" to the moon, but in reality, it has to be borrowed into the system.  

pods

Bicycle Repairman's picture

They can print and simply hand it out. If you "lend" to someone who is never going to pay, that is what is happening. 

The author mentioned "the sheer gravity of the inflation problem that would follow".  Inflation is what they want.  Don't expect that they will ever admit to the desire for inflation or its existance.  That they will never do.

Potemkin Village Idiot's picture

In reality, it has to be borrowed into the system.

Hell, that's the EASY part... Because nowadays you have entire soverign nations doing exactly that (on your behalf, of course)... That's not big enough for you?... Well - just create entire economic ZONE behemoths (Euro), and get them in on the gig...

Need some 'organic' debt growth? No problem... Elect a black president and get a whole demographic of your population who somehow thinks Michele Obama is Jackie Kennedy & now they need to drive Mercedes around town to keep up the image...

Put all that together in a pile, then lever it up 30x... "The moon" is just a pit stop...

spinone's picture

That is the fundamental paradox with the fractional reserve system.  To pay off debt plus accumulated interest, more money must be continually loaned into existance.  But if growth should stall and the system become debt saturated (lack of borrowers with collateral), the money won't be borrowed.

The system shifts into reverse, debts are defaulted on and asset values fall, depriving borrowers of collateral. Deflation.  The FED will avoid deflation at all costs.  Ben has been very predictable in his responses so far, telegraphing them well in advance.  Ben has already said what he will do to fight deflation, called the Bernanke Doctrine.  He has acted on several of the 7 points, but not all. Expect him to carry it out:  http://en.wikipedia.org/wiki/Bernanke_doctrine

gatorengineer's picture

The problem with your analysis is that you assume you need collateral to borrow with.  You could put up greek bonds at Face value as an example with the Fed today..........

spinone's picture

Correct, but that is an example of Bernanke following his doctrine of inflation.

Straw Dog's picture

Although the consumer and business may be saturated with debt and therefore they will not borrow "new money" into the system, is it not the case that the Treasury can offer bonds and the Fed will create new money to buy them. Does that not bring "new money" into the system. What limits the Treasury/FED can carrying this on for a very long time?

Return2Sanity's picture

Three things that can bring it to an end:
1. Inflation takes hold, and the Fed no longer has a justification to pretend it's not monetizing the debt.
2. People lose faith in US bonds and the currency that backs them.
3. The public gets sick of watching the financial elite get wealthier while they stagnate, and they elect somebody who will end the Fed.

Bicycle Repairman's picture

Got to disagree.

"1. Inflation takes hold, and the Fed no longer has a justification to pretend it's not monetizing the debt."

They'll never admit to inflation even if it is in your face.  Or they will take their sweet time fixing inflation.  See the 1970s for more info.

"2. People lose faith in US bonds and the currency that backs them."

And then the people will do what, exactly?

"3. The public gets sick of watching the financial elite get wealthier while they stagnate, and they elect somebody who will end the Fed."

Presidents who mess with the FED typically do not serve out their terms.

DalaiLamaInAShark's picture

Robot, you are correct. We're in a classic liquidity trap. We will not see substantial rises in core inflation until we see enough GDP growth to get us past the elbow in the liquidity preference curve.

Fuel costs may spike here and there, but the drag they put on the economy (and growth) will eventually drive down demand for fuel.

kito's picture

robo, ever hear of oil? how much will it be worth per bbl when infinite printing occurs?

 

btw robo, how is that "stronger than ever" consumer doing? sears closing 100 stores. cant wait to laugh at your declaration when the real numbers come in for the holiday. stick to "hindsight predictions". youre much better at it.

Bicycle Repairman's picture

Inflation is going to increase the cost of oil and other things.  People won't be able to afford as much.  How did you think the standard of living was going to go down?

tom's picture

Well at least Robo acknowledges the problem of overindebtedness, and at least we know what he's wishfully thinking of as he bores us with his childish stocks-to-the-moon fantasies for the thirty-thousandth time.

More inflation to cure the debt. Yeah that worked so well, ummm, when and where exactly? Reminds me of the old lady who swallowed the fly.

I could also mention that while fiat money creation is theoretically infinite, expansion of broad money is not. It turns out not to be as easy to create price inflation as most inflationists imagine.

PaperWillBurn's picture

Q.$64,000

A. What is...1 oz of Gold.

JPM Hater001's picture

+1 more...I didnt think one really captured it.

GeneMarchbanks's picture

Notional GDP targeting. So, no they aren't out of 'bullets'.

We're still in the overture...

espirit's picture

Still waiting on that multi-million dollah loan at 0% APR with no collateral.

JPM Hater001's picture

You're not thinking big enough.

High Plains Drifter's picture

all they have to do is give every man woman and child in the united states, one million dollars each and watch as we party like its 1999.