Posted by: quiscus | August 7, 2011

August 7, 2011

 “The Problem Is Not Debt But a Shrinking Money Supply

The markets are not reacting to a “debt crisis.”  They do not look at charts ten years out.  They look at present indicators of jobs and sales, which have turned persistently negative.  Jobs and sales are both dependent on “demand,” which means getting money into the pockets of consumers; and the money supply today has shrunk. 

 

We don’t see this shrinkage because it is primarily in the “shadow banking system,” the thing that collapsed in 2008.   The shadow banking system used to be reflected in M3, but the Fed no longer reports it.  In July 2010, however, the  New York Fed posted on its website a staff report titled “Shadow Banking.”  It said that the shadow banking system had shrunk by $5 trillion since its peak in March 2008, when it was valued at about $20 trillion – actually larger than the traditional banking system.  In July 2010, the shadow system was down to about $15 trillion, compared to $13 trillion for the traditional banking system. 

 

Only about $2 trillion of this shrinkage has been replaced with the Fed’s quantitative easing programs, leaving a $3 trillion hole to be filled; and only the government is in a position to fill it.  We have been sold the idea that there is a “debt crisis” when there is really a liquidity crisis.  Paying down the federal debt when money is already scarce just makes matters worse.  Historically, when the deficit has been reduced, the money supply has been reduced along with it, throwing the economy into recession.

http://globalresearch.ca/index.php?context=va&aid=25916

 

 

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