It appears that the hero saving us from swift economic contraction, caused by the dynamics of the credit bubble implosion, is Japan. The BOJ is expanding it money supply, and the MOF is doing its bit by buying boxcar loads of $s with new fiat yen. Fed Governor Ben S. Bernanke said this in a presentation yesterday: “Japan once again provides the most recent case study. In the past two years, current account balances held by commercial banks at the Bank of Japan have increased about five-fold, and the monetary base has risen to almost 30 percent of nominal GDP. “ Yes it is Japan and not the US that has the largest national monetary base in the world. This week they issued year end figures for their monetary base, which expanded 16.4% in 2003 after expanding 25.7% in 2002. In fact for the five year period up to 2003, their monetary base exploded by 78% - while they reported very low inflation. Lots of excess yen here, which finds its way around the world through various derivatives back to US financial markets.
The problem the Fed has is that by itself, it is no longer is able to promote US credit growth along the hyperbolic curve needed to offset the mounting interest and principal repayments, plus credit losses from the debtors – and others just plain fleeing the US financial system. The Fed appears to be relying on a previously untested theory that the inflation of the world money supply (outside of the US) will support US markets and the US economy.
Interestingly, Yen has gone nowhere - indeed it has gone up a bit - in the recent $ bounce.
Some interesting news from the Fed tonight. The manic intervention to support the US$ last week showed up in this week’s figures. Remember it was just a short week or so ago, January 2 and 3, when the dynamic duo of dollar debasement, Greenspan and Bernanke, rocked the forex market with their speeches and comments. Marketable securities held in custody for foreign central banks by the Fed increased by $20 billion. Looking back over a longer period of the last 17 weeks, custody holdings increased by ~ $135 billion - or ~ an annualized rate around $414 billion. 21st century wildcat central banking at its best. By the way, custody holdings might not, and probably don’t include all $ intervention activity. The massive $ purchases, mostly against yen sales, have only succeeded in slowing the fall of the overall trade weighted value of the US$.
Official US money supply:
http://www.federalreserve.gov/releases/h6/Current/
http://www.federalreserve.gov/releases/H41/Current/
http://research.stlouisfed.org/fred2/series/M2
Money supply measures leveled out, after their accelerated drop last week. M-2 money supply dropped by $5.5 billion but M-3 reversed and rose $29.8 billion. Over the period from 20 week period ending January 5, 2004, M-2 has dropped $124 billion (5.2% annual rate); M-3 dropped $148 billion (4.3% annual rate). Inflation adjusted money supply is an official component of the leading indicators because of its correlation to economic activity. Even using the heavily manipulated and deflating CPI, the inflation-adjusted money supply continues to show a disturbing drop. The Fed members again recently said they were not worried about the drooping money supply, and so far they have not taken any unusual official actions in reaction to the money drop.