For the next edition of our series Blogger Spotlight: Tim Iacono and The Mess That Greenspan Made.
Tim is a software engineer in his mid-forties, living in Southern
California. He calls his blog is a "vain attempt to stave off a
mid-life crisis, and here’s hoping that it’s going to work."
This is part of our ongoing short list of excellent but somewhat overlooked
blogs that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
Much has been made of the "tightening" by central
banks around the world, particularly the multi-year "baby-step" therapy applied
to short-term interest rates here in the U.S.
treatment was just concluded a few months ago under the watchful eye of Fed
Chairman Ben Bernanke – the baby steps weren’t the new Fed Chief’s idea, but he
is saddled with what they have produced.
Having wondered what effect these rising rates have had on the creation of both
consumer debt and new money, the construction of a chart showing all three laid
together is a task that has sat near the top of the To Do list around here for
It can now be checked off.
Nearly all of this data is available at the Federal Reserve website. The only
part for which one has to look elsewhere is the last six months of M3 Money
Supply – the central bank stopped divulging this data earlier this
The trend is still up –
Household debt looks to be throttling back to a tepid sub-ten
percent annualized growth rate – that might be expected after the orgy of
borrowing since late 2002. Whether the recent pullback is a result of higher
rates or sheer exhaustion by consumers is unknown.
Surely there are
limits to what Americans can borrow and spend. Aren’t there?
Looking back a few decades at the relationship
between short-term interest rates and the growth of money supply, one change
jumps out at you. Up until the mid-1990s, the two were located in about the same
area of the chart, often times crossing over each other.
That all stopped
in the mid-1990s after the "productivity miracle", cheap energy, and other cheap
imports allowed the two to become detached from each other. As shown in the
chart above, there are now a good three to five percentage points, sometimes
much more, between the two curves.
The most recent data puts money supply
growth at near ten percent with short-term rates fixed at just over five
Could that cause problems over the longer term?
significantly though, the old relationship between higher short term rates and
lower money growth seems to no longer be working. This was a consistent pattern
up until the mid-1990s – when interest rates rose, money supply throttled back.
When money supply growth slowed, falling short-term rates caused money supply
growth to head back up (sometimes with a lengthy delay).
For the last ten
years, and as shown clearly above for the new decade, higher interest rates seem
to goad the money supply into growing faster until it declines for other
Lacker at the Richmond Fed has seen a chart like the one above and walked away
unimpressed with the effects of the rate hikes to date. Either that or he
realizes that the Fed has to do a better job at appearing to "fight inflation",
this being one of the more curious roles for a government agency – being
responsible for combating something that they cause.
Mr. Lacker has been the
sole dissenting vote at the last three Fed meetings, favoring a quarter-point
rate hike while all other voting members opted for a pause aimed at refreshing
an ailing housing market.
Like former Fed Chief Alan Greenspan, Mr.
Lacker looks at some of the housing data and sees hope.
On Monday he said
there were "tentative signs emerging that the housing market may be
stabilizing." After looking at weekly mortgage applications and recent home
sales data, he commented "We’ll just have to see. It’s very
What is decidedly not
tentative is the booming new real estate sector of auctions. That is, selling
real estate that has been turned back over to the bank and reduced in price for
quick sale in former hotspots such as Colorado.
With the bond market forecasting lower rates
ahead and with the rise in short term rates failing to have the desired effect
on credit creation and money growth, what’s a central banker to do?
old relationships no longer seem to apply.
If the intent of the last two
and a half years of rate hikes has been to tighten things up here in the U.S.
after the near death experience of the stock market melt-down that began in
2000, then something has gone horribly wrong.
The levers and knobs don’t
seem to work anymore.
This is tightening?