The Epic American Credit and Bond Bubble Laboratory Message Board

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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: CalculatedRisk who wrote (33413)	5/28/2005 8:44:15 AM
From: russwinter	Read Replies (1) of 110194

Contrary Investor had a piece Thursday about this whole M3, credit issue, and discusses credit creation outside the US banking system. This has always been Doug Noland's point as well. There is also a chart entitled qt to qt increase in credit market debt relative to M3 that perhaps Ild could post. contraryinvestor.com We’ve concocted a chart below that tries to account for aggregate systemic credit that is being created outside of the formal US banking system. Here’s the deal. We’ve taken the quarter over quarter rate of change in total credit market debt outstanding (directly from the Fed Flow of Funds report) and subtracted the like period quarter over quarter rate of change in M3 (broad money supply). In other words, we’re trying to get a sense for just how much liquidity/credit/call it what you will, is being created outside of the formal US banking system that is being registered in the official monetary aggregates (the M's). Remember, the GSE’s can essentially create money (credit). The asset backed securities markets can play the same role. You can see the results for yourself. There has been a literal explosion in non-banking system credit/money creation over the past few years. It’s simply off the charts relative to historical experience. So the analytical problem is one as to whether a slowing in money supply growth rate is really reflective of contracting aggregate systemic credit creation. As you know, the credit cycle game has changed in a huge way over the last half decade to decade. We’d absolutely bet that a contraction in the rate of change in M3 is meaningful, but we need to remember that there are many other sources of credit creation these days than simply the US banking system. Let’s put it this way, despite the apparent message of the rate of change in money growth, we need to take a broader view of life. The credit creation spigot is far from closed. Far from it. Seperately, there is a big event occurring in the FCB purchases that isn't being picked up by very many people. Lee Alder is one who has, and for those who subscribe, be sure to get his comments entitled "The Secret Bailout?" this week. wallstreetexaminer.com Despite the slowdown in FCB purchases yoy, there has been a huge pickup in purchases of US agency bonds. FCBs have purchased about $58 billion so far in 2005. That's a major monetization effort.

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