Mar 122012
 March 12, 2012  Posted by at 1:05 pm Finance

Ambrose Evans-Pritchard’s latest article for the Telegraph provides some great data on a theme that TAE readers are quite familiar with – the absence and/or ineffectiveness of the global liquidity faucets that are relied upon to spur growth, inflation, market stability, etc. While it is convenient and understandable that many analysts will argue that central bankers will simply print increasingly large sums of money until monetary velocity accelerates and destroys the value of the underlying currencies, the reality on the ground tells a much different and more nuanced story.

Whether we are talking about QE3 (“sterilized” or otherwise), LTRO1-3, PBoC easing or any other monetary operation, there are a plethora of factors that serve as obstacles to both their occurrence and effectiveness. These factors are economic, financial, social and political in nature. Here is the Evans-Pritchard article that goes back over much of that familiar ground (I have bolded the section which ties in with recent discussion about QE3), and also adds some insightful data points into the mix:

Global liquidity peak spells trouble for late 2012


Data collected by Simon Ward at Henderson Global Investors shows that M1 money supply growth in the big G7 economies and leading E7 emerging powers buckled over the winter.


The gauge – known as six-month real narrow money – peaked at 5.1pc in November. It dropped to 3.6pc in January, and to 2.1pc in February.


This is comparable to falls seen in mid-2008 in the months leading up to the Great Recession, and which caught central banks so badly off guard.


“The speed of the drop-off is worrying. This acts with a six months lag time so we can expect global growth to peak in May. There may be a sharp slowdown in the second half,” said Mr Ward.


If so, this may come as a nasty surprise to equity markets betting that America has reached “escape velocity” at long last, that Europe will scrape by with nothing worse than a light recession, and that China is safely rebounding after touching bottom over of the winter.


Stocks usually turn about two months before the real economy peaks, but not always.


Stephen Jen from SLJ Macro Partners said the world economy is weaker than it looks, with monetary stimulus losing traction in the West just as China, India, Brazil, et al, hit the buffers, constrained by inflation and their own credit woes.


“The risk here is that the credit cycles in emerging markets mature and start to deflate just as developed markets struggle with their own deleveraging process. We think 2012 will be a tough year for risk assets,” he said.


Monetary data for China is remarkable. Real M1 contracted in January, weaker than post-Lehman. The rate rebounded in February but only to zero.


It is too early to judge whether China really can deflate its property bubble with carefully-calibrated credit curbs, achieving a feat that has eluded very clever officials across the world over the last century.


But bear in mind that China has racked up loan growth of 87pc of GDP over the last five years – according to Fitch study that should be compulsory reading – compared to less than 50pc in Japan leading up to the Nikkei bubble, or in Korea before the 1998 crisis, or in the US before the subprime debacle.


We know from China Iron and Steel Association that steel output has dropped from 2m tonnes a day last year to 1.7m this year – with chilly implications for Vale and Brazil’s real, or BHP Billiton and the Aussie dollar.


We know too that R&F Properties in Guangzhou reported a 40pc fall in house sales over the first two months of the year, with a 22pc drop in price. Like others, I am watching the Confucian ‘soft landing’ with curiosity.


Monetarism is not an exact science. The latest global signal may prove a false alarm. But monetarists have had a good run during the Great Recession, and were quick to spot the turn-around in the US economy in mid-2011.


What they see now is that US money is losing its fizz. Both M1 and M2 have flattened so far this year, and even contracted slightly in recent weeks.

Meanwhile velocity has plunged, with the M2 gauge dropping below 1.6 last week for the first time since records began in 1959 (as shown in the chart from the Federal Reserve Bank of St Louis below).



Nick Bullman from the consultancy CheckRisks said that should give pause for thought. “It’s terrifying that markets are rising given what’s going on in the real world,” he said.


Rightly or wrongly, the US Federal Reserve does not intend to do anything about this. Time is running out for Ben Bernanke before the US election season closes the political window on fresh stimulus, yet he gave no hint of largesse in his latest testimony to Congress. He fretted about inflation instead, causing gold to crash over $100 (£64) an ounce within hours.


Regional Fed hawks are in any case near revolt. Dallas Fed chief Richard Fisher dismissed talk of more QE was “wishful thinking”. “It is not our job to prop up Wall Street,” he said


So the Fed is hunkering down even though Mr Bernanke himself warns that the US faces a “massive fiscal cliff” later this year as automatic tax increases come into force.


Across the Atlantic, a German temper tantrum has made almost it impossible for Mario Draghi to deliver any more magic at the European Central Bank. His €1 trillion (£837bn) blast of liquidity for banks under the ‘LTRO’ scheme – actually just €530bn in fresh money – has averted a collapse of the Latin banking systems and bought another lease of life for monetary union.


However, banks parked €827bn back at the ECB for safe-keeping last week. They are still slashing their balance sheets to meet the EU’s ill-timed demand for 9pc core Tier I capital ratios by June. What the Draghi Bazooka has done is to slow the pace of deleveraging, not stop it. This comes at a cost of big distortions to the credit system and structural subordination of private creditors.


The ECB’s January data showed that real M1 deposits were still collapsing at frightening rates across Europe’s arc of depression, with six-month falls of 12.9pc in Greece, 9.2pc in Ireland, 9pc in Portugal, 8pc in Italy. And remember, this is a leading indicator. Italy is already in a slump. Its industrial output has fallen 5pc over the last year. It faces a further fiscal squeeze of 3.5pc of GDP this year in the middle of a deep recession. Buona fortuna.


France’s Nicolas Sarkozy was quick to declare Europe’s debt crisis “solved” after the Greek deal. Such claims are jejune. He ignores the cancer eating EMU: the 1930s Gold Standard mechanism that imposes all the burden of adjustment on the weaker economies, trapping Italy, Spain, Portugal and Ireland in debt deflation, and trapping his own country in structural decline.


Europe’s policy-makers are implicitly relying on a fresh cycle of global growth to do their work for them, and lift Club Med off the reefs. If recovery flags again, the strains will become intolerable. With Spain’s youth unemployment already hitting 51.2pc, how much more will it take before the political fuse detonates?


For all the talk, the EU has not yet embraced fiscal union, debt-pooling, or budget transfers, or put in place a viable political structure to overcome the deformities of monetary union, or even diagnosed the problem properly. The Greek saga has been a long-drawn exercise in evasion.


A full global recovery this year may disguise this for a little longer. Any relapse will bring matters to a head yet again within months.

Home Forums The Global Liquidity Peak

  • This topic is empty.
Viewing 21 posts - 1 through 21 (of 21 total)
  • Author
  • #8591

    Ambrose Evans-Pritchard’s latest article for the Telegraph provides some great data on a theme that TAE readers are quite familiar with – the absence
    [See the full post at: The Global Liquidity Peak]


    “A full global recovery this year may disguise this for a little longer. Any relapse will bring matters to a head yet again within months.”

    So there’s a full global recovery expected?


    Candace wrote: So there’s a full global recovery expected?

    I don’t get that last part either, but, no, there’s no full global recovery expected by anyone who has the least bit of awareness and common sense.


    There has to be a global recovery.
    Its an other word for exponential growth.

    Reality is that if one part of the globe has growth then it has to be at the expense of another part of the globe. Since we have reached peak everything we have also reached a zero sum game.

    I’m sure that a simple example for newbies will suffice.

    German wants to grow its production, (GDP), BUT it can no longer lends money to the greeks to buy their products.

    Greece has an austerity, must cut its purchases, so its GDP goes down and since Germany cannot sell its production because they do not have any money then Germany’s GDP goes down.

    Cut off the loans and you cut off the growth.

    See … If you cannot have growth then you got to invent a new system.


    So the Fed just can’t print money forever? D’oh!

    What are the other practical, political and legal limits on Fed money printing? Obviously the Fed has learned that QE brings uncomfortably high food and energy prices and political heat. What will they try next? A lot of people are speculating that the Fed will go into the market and buy distressed mortgages at above market prices. What if the Fed loaded up on mortgages and ignored defaults, i.e. failed to foreclose on defaulting homeowners. That would be a creative way to drop money from helicopters.


    ashvin post=1201 wrote: [quote=Candace]So there’s a full global recovery expected?

    I don’t get that last part either, but, no, there’s no full global recovery expected by anyone who has the least bit of awareness and common sense.

    I don’t think AEP expects a recovery. He is a financial writer for the MSM though, so he has to throw in the party line Hopium.



    ashvin said “there’s no full global recovery expected by anyone who has the least bit of awareness and common sense.”

    That’s the problem with people I know. Although they are intelligent and college-educated, they are clueless about anything global. A few did mention an economic downturn, but I am told it is just a blip. Nothing to worry about, as the economy always recovers.


    I keep running into “it’s just part of the business cycle” response. I just don’t have enough expertise to convince people that this isn’t just a standard boom/bust cycle.

    People I know are still planning on taking on massive debt. I can’t seem to find the right way to tell them that it is a really bad idea. Very dis-heartening.

    el gallinazo

    Things haven’t changed much in the last couple of millennia.. Just look at what the average Roman was up to in Pompeii when he was caught by the pyroclastic cloud rolling down Vesuvius. Recent evidence indicates that most of them were watching Dancing with Dionysus. They didn’t have potatoes (they was invented in Peru) but they certainly had couches.


    Candace, at the risk of sounding unkind, perhaps it’s not your job to tell people not to take on debt or convince them of anything. People who plan to say, buy houses during a housing bubble are not really in a listening mood. You might try passing on sites like TAE and some others that are sounding a warning and suggest that they look at contrary evidence. Look back at your own journey and see how long it took you to educate yourself and realize that most people are not going see what’s happening before it crashes down around them.


    Heh, heh, so much better put El gall…


    True enough. But massive student loan debt is just so sad. It seems middle class people can’t imagine that their kids should go without a “certificate of middle-classness”. No going to the ju-co for the first two years either, gotta keep up with the other kids starting out at four-year schools.

    My mom was born in 25. I was raised waiting for the next “great depression”. I had an unfair advantage in gaining my doomer perspective. 😉


    “…..and yet in our world everybody thinks of changing humanity, but nobody thinks of changing himself.”

    ~Leo Tolstoy’s Pamphlets~

    el gallinazo


    Agree. Spiritual evolution is a very individual thing. Trying to force feed others about this is like trying to teach a dog to eat with its hind end. The good news is that if one can improve oneself, it will effect others positively through “osmosis.” But it is hard to see people close to oneself drinking the economic Kool-Aide. The kids are trapped now. They are buying the BS about education as the road to the American Dream because they don’t want to compete with 30 others for a scholarship to Mickey D U. The current expansion of credit in the US is based entirely on student debt. And it is no accident that it was made a life long sentence 7 years ago, courtesy of the Cartel. It’s become the much touted Einstein definition of insanity. If that BA didn’t work, then I oughta double down for another $100k and get an MA or MBA.

    As to the quote by Lev Tolstoy:

    His literal interpretation of the ethical teachings of Jesus, centering on the Sermon on the Mount, caused him in later life to become a fervent Christian anarchist and anarcho-pacifist. His ideas on nonviolent resistance, expressed in such works as The Kingdom of God Is Within You, were to have a profound impact on such pivotal twentieth-century figures as Mohandas Gandhi[4] and Martin Luther King, Jr.[5]

    I have a bit of PTSD with Tolstoy. During the final exam of my final course in Russian in university, I had to translate a couple of pages of Anna Karenina (when she sneaks into her estranged husband’s house to visit her young son) into English. That was 45 years ago. I can’t remember 10 words in Russian, but that scene is embedded in my brain 🙂

    Golden Oxen

    These poor kids starting their adult life with burdensome student loan debts is a sad situation indeed; especially when all the adults in their life, whom they look to for help and guidance, tell them it is the only way to go. Starting life in the grip of the banksters, how horrible.

    el gallinazo

    Well, in a couple of years when the 55+ cohort get their clocks thoroughly cleaned, the younguns will be better off. Geezers going to start to pick cotton? I can barely reach my laces 🙂


    @ ElG “I can barely reach my laces” Maybe we should talk about this over on the Lifeboat pages! Could be a common problem among the old doomers.


    We may be closer to the brink than many realize:

    “Ben Bernanke has once again said “No QE for now, but we are not out of the woods”. Observers need to wise up to the fact that this is a man who knows he must hold his fire, for far worse is coming.

    Despite this, JP Morgan and Bank of America seem to have passed the Federal Reserve’s stress tests. JPM I can get behind, but BoA? Stress tests, I increasingly believe, are so-called because they are primarily designed to reduce global investor stress.

    It would be good to feel that the European Troika knows what is down the road. I’m sure Lagarde does, but the rest leave me more convinced than ever that rising to top positions has very little to do with creative talent. There was much talk today in Brussels of slapping Spain’s Rajoy down, with the IMF declaring that Portugal is ‘on track’. There was in turn further gobblegaggle on the subject of Greece now undershooting its 2020 deficit target. Mind you, it was Wolfie Strangelove who said this, so we must judge the observation for what it is: unmitigated bollocks.

    Jens Weidmann of the German Bundesbank continues to be a thorn in Mario Draghi’s side. Just when the Italian Stallion thinks he’s got away with another scam, Herr Weidmann bashes him with more statistics to demonstrate what a dangerous game the ECB is playing. Today – in a bid to ram home the message as loudly as possible – Jens reported that Bundesbank profits had fallen from €2.2bn in 2010 to just €643m in 2011 “after substantially increasing reserves set aside to cover risks associated with the ECB’s crisis-fighting measures”. Take that, you Dummkopf Schweinhund.

    Meanwhile, the EU’s FinMin agreed to suspend transfers to Hungary of its share of funds for poorer countries on the grounds that it had dared to contradict a Sprout edict. The UK, Austria and Poland thought this was a bit heavy, so the compromise is that the funds could be reinstated in June if FinMin ‘determines that the government is working to bring its budget policies in line with EU rules’. Orders vill be obeyed at all timess.

    Still no news on the hard-to-explain-away 107 bn euro pot of further Greek liabilities. Or indeed on the fact that the EU is sticking very strictly indeed to a policy of bailing Athens out with worthless paper. Or indeed on the subject of all those deal-dependent things that the Athens government hasn’t done as yet. As long as the ‘bailout’ is being funded with toilet-tissue, I’m sure the Eurocrats will be happy to go along with it. But my water tells me Venizelos is in for an imminent kidney-punch.

    China is slowing down while trying to grapple with the wriggling dragon formerly known as the property market. It’s also dumping Dollar debt as fast as it can, as the Currency Wars that Jim O’Neill says don’t exist continue to escalate. Nobody seems to have given a lot of MSM thought to how the US will borrow if that policy continues. Beijing must not, of course, sew up the mouth that devours its output. But I continue to wonder what America will do when China achieves a degree of self-sufficiency, and then decides to focus 100% on supplying its own population with what it needs to become eternally placid.

    The West in general – and former Goldman Sachs employees in particular – continue to pin their hopes on inflationary subterfuge that will eventually dilute the obscene debt. The chances of them doing this without Chinese retaliation are zero. But rather more to the point, if (in the act of trying to dilute debt) you let loose funny money to the value of ten times global GDP, who will benefit?

    The short answer is ‘Nobody’. But we are dealing with Masters of the Universe here: we must not intervene, for they know what they are at, whereas we are mere mortals unable to understand their mysterious ways.

    Perhaps a bit heavy on the irony pedal there. However, the reality is that contagion will escape, banks will not be prepared for a wall of monetising requirements, and by the end of 2013 at the very latest the entire Hollywood-set facade-folly will have crashed to the ground. For all I know, it may do so the week after next. Nobody knows. Let’s face it: if anyone did, they wouldn’t be arsing about writing blogs like this one.” – John Ward

    blog entry:

    el gallinazo

    The Troika policy could best be summed up by one of the favorite tee shirts on my former Caribbean island home.

    “The floggings will continue until morale improves.”

    As to:

    “But rather more to the point, if (in the act of trying to dilute debt) you let loose funny money to the value of ten times global GDP, who will benefit?”

    Well as I mentioned earlier, this would amount to a de facto global Jubilee. Money for nothing and your chicks for free. Well, maybe not that good, but Joe & Jane Bagodonuts could pay off their mortgage just by diverting a wheel barrow of fiat from their home heating system to the bank holding the title (assuming there is one and it could be found), and Joe Jr. can temporarily halt his earnest discussions on Facebook regarding the last Spiderman comic book episode and pay off his MBA with a second trip with the family wheel barrow.

    I doubt this is either Jamie or his shadowy bosses most pleasant dream. But to answer your question more directly – J6P more than any other foreseeable outcome, particularly a deflationary depression.


    All I know is I keep hearing gloom and doom as the markets race higher. Contrary to the constant claim of the banks being all but dead, they were way up yesterday. When does this gloom and doom scenario actually start to become reality?



    Just an opinion, but, THEY can fiddle the books and monetize and print ad infinitum and are obsessed enough to do so. When energy limits kick in, aint no voodoo gonna keep it afloat. Thats well before the end of the decade. Geological time scales do tend to drag on for us mortals.

Viewing 21 posts - 1 through 21 (of 21 total)
  • You must be logged in to reply to this topic.