I came across this explanation for the astounding growth in moeny market assets in October, which is all the more surprising since it took place at the same time money was flowing into the stock market and the savings rate (or a good proxy for it) went below zero for the first time since the 30's. In essence it says that this growth is caused by uncontrolled credit creation outside the banking system, which is not subjected to reserve limitations. I found this at a site for nutjob goldnuts, and anything they say is suspect to say the least. What other explanations are there? Where is the money coming from? Foreign inflows?
The complete article may be found at
http://www.gold-eagle.com/editorials_98/noland113098.html
[...] the doctrine that money and credit are
created almost exclusively through the "multiplier effect" of bank deposits
recirculating through the banking system with reserve requirements and
Federal Reserve governance controlling bank credit expansion. However,
and critically, this school views non-bank participants in this process as
merely financial intermediaries, transferring bank created money from
saver to borrower. With this in mind, such analysis focuses
overwhelmingly on bank reserves and the narrow definition of money, M1.
And with M1 actually contracting marginally over the past six months
and bank reserves with a year-over-year decline, it is completely lost
among these adherents as to how it is possible that the broader money
aggregates explode in an unprecedented and historic expansion.
Greenspan's Vigorous Partners - Fannie and Freddie
Let us provide an explanation. For our discussion we will focus on Fannie
Mae and Freddie Mac, companies whose balance sheets have ballooned to
almost $750 billion from about $170 billion at the end of 1990. Fannie and
Freddie rely extensively on the money markets for financing truly
staggering balance sheet growth, having accumulated short-term
liabilities approaching $400 billion. Indeed, as we wrote last month,
Freddie actually financed its entire record third quarter asset growth with
$37 billion of additional short-term debt. Basically, Freddie and Fannie
tap the money markets for funds used to acquire long-maturity financial
assets, mortgages. They borrow, creating money market liabilities, and use
proceeds ("money") to fund the purchase of mortgages originated
throughout the financial system.
Importantly, when Fannie and Freddie purchase mortgages this "money"
stays within the financial system where it largely recirculates back to
money market funds. This works much like the banking system "multiplier
effect" accept for one very significant exception: Money market funds are
not restrained by reserve requirements, hence providing a completely
unbridled credit creation mechanism. In regard to money funds and their
propensity of fostering uncontrolled credit growth, we note the traditional
caution of the Bundesbank, clearly recognizing the considerable risk
associated with credit creation extraneous to the banking system. Indeed,
with today's highly sophisticated financial infrastructure functioning
largely unsupervised and outside the banking industry, money
instantaneously "spins" through the system providing unlimited credit
creation.
-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at ee.cornell.edu Ithaca, NY 14853 http://peta.ee.cornell.edu/~enrique