Credit Growth/Measurement from Doug Noland:
prudentbear.com
(In short, credit growth mutates and hence is not measurable and obviously M3 is lot narrower than the real credit growth. Just watching the assets growth is a good indicator).
M3 expansion had been slowing markedly. For the year, broad ‘money’ growth had declined to a rate of only 3.6%, about half of 2002’s 6.6% expansion and a fraction of 2001’s 12.9%. M3 was actually little changed during the second-half of 2003 and even ended the year with a $60 billion contraction over a 4-month period. There was at the time a groundswell of Money Babble about the falloff in M3 and how this indicated a contraction of Credit. Readers likely recall all the deflation hoopla.
The M3 aggregate had deceived. The reality of the situation was that Household Mortgage Debt was expanding at double-digit rates during this period, as the Historic Mortgage Finance Bubble shifted fully into overdrive. Total (non-financial) Credit was growing briskly, in the neighborhood of 7%, with Financial Sector borrowings expanding by about 10%.
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For a list of reasons (some noted in this CBB), I suggest that it is today basically impractical to identify, aggregate, or model contemporary “money” dynamics. There is no definitive “money supply.” Credit instruments change and the nature of Credit intermediation changes. Perceptions change - and do so subtly over time, as well as abruptly in real time. Importantly, during periods of rapid Credit growth and asset inflation, it will be the nature of the ebullient marketplace to accept an ever broadening scope (and risk profile) of Credit instruments and intermediation as “money-like.” “Repos” and asset-backed securities are these days some of the most coveted “money” in a way unthinkable just a decade ago.
.........To be sure, much of current speculative leveraging is financed through the shorting of debt securities. In this manner, Credit and marketplace liquidity are created (in gross excess) through the process of expanding non-monetary aggregate liabilities (i.e. “repos” and borrowed securities).
............As long as Credit expands sufficiently to sustain the boom (which it is clearly doing), analysis of “money” needn’t take up much of our time or attention. We don’t have to be concerned with the Fed covertly “printing” M3, as the jettisoned components are all financial sector liabilities. And we can remain quite confident that financial sector liability expansion continues in earnest. Inflating asset prices and asset markets - through heightened speculative leveraging - create their own source of liquidity. |
