Wednesday, July 04, 2012

US financial system has now been reset

For the first time in 40-plus years, the ratio of monetary base to credit in America has returned to 5%.
(If you want to check the data, see here and here.)

INVESTMENT DISCLOSURE: Mostly in cash (and index-linked National Savings Certificates), but now planning to build up some reserves of physical gold via regular saving.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content.


The Arthurian said...

Unfortunately, the neat trick that your graph shows was accomplished by creating money rather than by extinguishing debt. What that means is, most of the debt burden remains, and also that if recovery ever comes it is likely to bring inflation.

BTW, monetary base is now about one-third greater than circulating money (M1SL). The money sitting idle as excess reserves is about as useful for recovery as the money the Fed has yet to print: not useful for recovery at all.

TCMDO is now greater than its 2008-09 peak. Even with the Federal component removed, debt has fallen only about 7.2% from the peak. And while the ratio of non-Federal to Federal debt is important, it is evidently not the only factor inhibiting growth.

(TCMDO-FGTCMDODNS)/FGTCMDODNS has fallen to the level it was stalled at in the 1970s and 1980s. This level may be low enough to keep the economy is "stall" mode, but not low enough to inspire strong (nor even moderate) growth.

Most important, money must be put into the hands of, and the burden of debt must reduced for, people who will spend once those changes are in place. The sooner, the better.

Don't have one said...

Also see this interesting article

Sackerson said...

Good points, Arthurian. Yes, the fiscal problem hasn't been solved, nor has the misallocation of resources in the economy. But on the face of it, systemic risk has been addressed - until derivatives blow.

DHO - will read, thanks.

spidermed said...

Do you think that this is a good news? Somehow it maybe a good news but economic standing isn't constant!

company debt

Sackerson said...

No, Spidermed, I don't think it cures the problem, which is far too much debt in relation to the "real" economy.

Dave the Dog said...

Just saw the latest M4 figures and the net lending figures - more telling than the GDP figures!