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A Massive Failure?

May 27, 2010

Since I think both the Joe Sestak and Joe McGinniss stories are both pretty big snoozers, and I don’t have much to add to the gulf oil spill story since I think the feds should have blown it up about a month ago anyway, I’m not going to write anything about those things right now (okay, maybe that’s not true—I might have something on Sestak up later).  Instead, I’ll direct your attention to something else that’s quite interesting/disturbing:

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

Well, that certainly can’t be good, even if the Fed apparently doesn’t monitor the M3 figures anymore, especially in the face of (what appears to be) moderately strict financial reform.  So what’s the plan to combat this?

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. “You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip,” he said.

The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

Ah, I see.  This would seem to vindicate the assertion that, regardless of the merits of fiscal stimulus in theory, ARRA was poorly designed and was simply a huge frittering away of taxpayer dollars.  As soon as its funds begin to dwindle, the baseless economic gains that it supported would wither away with it, leaving us in the exact same shape (or worse) that we were before the stimulus was implemented.  Of course, this argument could easily refuted by any Keynesian economist.  “How much more would the money supply have contracted if we didn’t have any stimulus at all?”  “That’s why we said the stimulus should have been bigger in the first place!”  “We have to spend even more public money to ensure that the economy doesn’t go down the tubes before the private sector can recover—that’s why we need Stimulus II!”

Well, I guess it’s too early to pass judgment on the merits of fiscal stimulus since ARRA only passed a year and a quarter ago and proponents of the policy supposedly have just as many misgivings with ARRA itself as its opponents do. (Does it seem like any of those arguments above could literally be used in any situation?  Can’t they just always claim that things would have been worse sans government intervention?)  As I said yesterday, though, this should shed some light on the effectiveness of the actual American Reinvestment and Recovery Act—so far, it appears to have done exactly what its opponents said it would do at a huge cost to the taxpayer.  Is it too soon to conclude that this was a colossal waste?  I think not.

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