Credit (M4) vs GDP


Click on the picture to enlarge. This is the chart that keeps me awake at night. That peak on the left is the 1929 crash. The interesting part is that the deleverage didn't start until 1934. The market crash in fact drove M4 relative to GDP UP. The real depression happened when M4 started going down.

In other words: it hasn't even started. When M4 starts really going down, then the shit will really hit the fan. Banks lose money, can't recapitalize, legislation will limit credit availability and levels, M4 goes down. Housing can't float due to credit tightening, we go below mean, banks lose a lot more money.

M4 deleveraging is a self feeding macro beast. It could be 2 years out. Pray.

Comments

Roy Russo said…
Oh Marc, put the charts and numbers away and just listen to Baby Jesus (Obama). He will calm your fears with soothing words of inspiration and hope.
August 14, 2008 at 8:21:00 AM PDT
Tom said…
Marc,

Check out this link about oil prices and queueing theory.

http://resourceinsights.blogspot.com/2008/08/does-queueing-theory-explain-oils-wild.html

Queueing theory and housing prices would be an interesting analysis as well : )
August 14, 2008 at 10:14:00 AM PDT
Anonymous said…
Obama's plan is kind of like Hoover's and Roosevelt's...raise taxes, Smoot-Hawley, etc... Hoover turned the recession of 1930 into the Depression of 1931-34. Roosevelt turned the recovery of 1935-36 into the 2nd wave of the Depression 1937-39. Taxes rose to 94% under Roosevelt! Why work?
August 15, 2008 at 9:14:00 PM PDT
adt43wt342 said…
Roy, whatever,

Tom, I will check it out.

Pierre, I am not sure there is anything politicos can do at this stage. Clearly historians say that they just made the 29 crisis worse and turned it into a full-blown recession.
August 16, 2008 at 9:00:00 AM PDT
Anonymous said…
They can screw it up....probably not a 1930s style Depression, more like an 1870s style delation/depression with a new twist on fuel/food inflation. Or something like Japan 1990s.
August 16, 2008 at 9:40:00 AM PDT
Tom said…
Most of the Demand out there is coming from too much easy money. When they expand the money supply, the impact the price increase for things like oil, food, fuel. That is what fuels the demand. People convert their money into hard assets knowing that the money supply is going to further increase and there will be more "dollars" to buy those goods.
August 16, 2008 at 11:12:00 AM PDT
Tom said…
Just like if you gave people rebate checks. More people will go to the grocery store and buy buy buy! Goods will fly off the shelf. That causes the supply to fall and prices to rise as more people try to pay to get first in line.

If you gave every Sports Franchise $30 million dollars, the salaries for players would increase because of the competition that all the extra money creates.

The FED creates inflation and artifically influences "DEMAND". So when you hear all these Wall Street shills cite strong demand, is it really demand or just the result of cheap easy money?
August 16, 2008 at 11:15:00 AM PDT
adt43wt342 said…
tom,

that "inflation is always and everywhere a monetary phenomenon" is an accepted economic principle.

I personally still don't quite grock the meaning though, the sentence probably means "sustained inflation" (yearly inflation) as the current commodities inflation is surely demand driven (see first post on oil supply vs GDP). This is a one year thing.

Second, it should follow that "deflation is always and everywhere a monetary phenomenon?"... If that is the case, M4 will drive deflation.
August 16, 2008 at 5:25:00 PM PDT
Tom said…
Marc,

I agree. But this is the problem. If credit dries up, and the FED tries to pump more loquidity to the banks and take non-liquid assets or those that are hard to price as collateral, then what will the banks do with the new found liquidity they have? Even if they have it pay for it later? Do they drive up commodity prices? I know that Goldman Sachs is famous for tying up large portions of their liquidity in commodities, specifically oil. Kind of makes me wonder about the conflict of interest in one of their analysts predicting $200 oil.
August 21, 2008 at 8:16:00 AM PDT
adt43wt342 said…
Someone from GS called me 2 days ago asking if I wanted to buy a product in commodities (I did)... but I wondered a bit about the opening... maybe liquidity IS drying up already and they are looking for their client to prop up their book?
Saw in your profile that you like 90's electronic music... me too but the production sound is getting old nowadays. I have enjoyed putting up the music and mixing with LIVE.
August 22, 2008 at 4:35:00 AM PDT
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