Blog Spotlight: The Mess That Greenspan Made

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,
around 7pm.


This is Tightening?

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
some time.

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 latest M3 data is now available in reconstructed form at Now and Futures and John
Williams’ Shadow
Government Statistics

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?

A Changing

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

The Dissenter

Maybe Jeffrey
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.

Everything Seems
Different Now

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?

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What's been said:

Discussions found on the web:
  1. blam commented on Nov 16

    I don’t know where we go from here, but it seems we have no choice but to flirt with the 70’s experience. Perhaps, after Greenspan imported Japan’s problems, Bernanke feels that he can short cut the depression part and inflate past it.

    If I recall, Japan’s equity and bond markets bloated just like the NYSE and S&P as a result of the BoJ’s frantic attempt to keep the property bubble inflated with counterfeit. Instead of just one bubble bursting, real estate, Japan had three which depressed their economy for a generation.

    Maybe this is what Mr Lacker fears. I know I do!

  2. m3 commented on Nov 16

    it is scary to think that the throttle on money supply is now being held by financial institutions, hedge funds, and the like.

    if there were ever a group of financial gluttons on earth, these guys take the cake.

    they all know that every credit bubble has ended disastrously. but they always find a new financial “innovation” to keep the punch bowl full.

    maybe they can keep it going this time… i dunno. but i’ll never again doubt the power of unfettered liquidity, or the US consumer’s willingness to knowingly spend himself to the grave. 80% of the time, that’s a profitable bet to make.

  3. whipsaw commented on Nov 16

    I suppose the question is “At what point does anyone spot the turds floating in the punchbowl?” Apparently, not since May anyway.

    You libertarian market freaks can forget about your mainly fictional dream, we are in a managed economy/market that is bound to go up, up, up on paper because otherwise it collapses and we have revolution and the oligarchy can’t abide by that.

    I am riding QQQQ and now SPY calls up, but with tight stops. Dangerous market.

  4. whipsaw commented on Nov 16

    I suppose the question is “At what point does anyone spot the turds floating in the punchbowl?” Apparently, not since May anyway.

    You libertarian market freaks can forget about your mainly fictional dream, we are in a managed economy/market that is bound to go up, up, up on paper because otherwise it collapses and we have revolution and the oligarchy can’t abide by that.

    I am riding QQQQ and now SPY calls up, but with tight stops. Dangerous market.

  5. chad commented on Nov 17

    i am one of those libertarian freaks whipsaw – and i agree wholeheartedly with you that this is a managed economy. the forces at the top feed us the water and we gots to fight for it……….i’m getting off topic

    from what i’ve read here – it sounds like y’all are begging for a volker style parabolic rise in the overnight rates. i mean we’re driving down the road (in an economic sense) slowly decelerating (weaker GDP) while our engine is running hot (inflation) and you guys want to throw the transmission in reverse, throwing everyone in the back seat (us pleabs) through the windshield!

    i agree with barry’s skepticism about the reported inflation #s , and I am worried that the fed will bow to market sentiment too soon and begin easing too early – if its even warranted, but for the most part, commodities prices aren’t on the same trend they were last year – yes gold and oil are still elevated, but they’ve stopped climbing (for now). one worrisome spot is wages are beginning to creep, but they aren’t climbing at the rate commodities did.

    what’s with the deathwish? kill inflation and kill an economy? this aint the 70’s…………yet. heaven forbid the fomc just sit on its hands to see if what its done is working. does the fed always have to be doing something?

  6. James commented on Nov 17

    I’m starting to wonder if we are trying to pull the Japan and inflate oulr way right out of the housing problem. It makes sense because Bernake thinks the world is fine as long as credit is expanding at a healthy clip. The global financial system is high risk. There are no rules and no borders.

  7. charts commented on Nov 17

    Iacono is a meathead. The overarching theme of his blog has always been flawed, and, Barry, I frankly can’t believe you read his garbarge blog.

    Now, please take a look at M3 growth over the past 8 years and tell and tell me why it’s relevant? It has no reliable connection to the value of the dollar or gold, it has no correlation to the stock market. There is reason to highlight M3 unless you’re a conspiracy theorist, and then to what end is it useful? The mess that Iacono made. I thought it was a lump of dogshit, but it turned out to be his blog.

  8. Roger commented on Nov 17

    I’m rather dispointed with this Blog right now, Barry R talks bearishly all year long and predicted the market would go down by half, apparently nothing has been happening here. Ironically if you ask which direction Barry has traded for most of the year, of course, he will for sure tell you, LONG. This is funny.

    Now this blog is focusing on the topic which the FEDERAL RESERVE is supposed to deal, BLS, PPI, CPI…etc, it makes me feel Barry R’s Blog is not a serious one anymore, you see, the truth is Barry does NOT have all data to do FED’s job, and even worse he is dislocating his trades from his view.

    This sounds like a joke, the material in this BLOG is the topic in the LUNCH table, but never bring it back to your trading room. My 2 Cents.

  9. L’Emmerdeur commented on Nov 17

    Dear charts,

    French kings thought like you, and the last one of their kind lost his throne, his title and his head for it.

    (and, no , Napoleon III doesn’t count)

  10. L’Emmerdeur commented on Nov 17

    Furthermore, “charts”, those who wish to be taken seriously do not link to a myspace page. Ever. Now go back to your desk, there’s more tickets to enter into your settlement system.

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