“Is the big surprise for 2024 going to be a cyclical deflationary bust?”
Readers can likely venture a guess as to who might harbor such concerns. Spoiler alert: The quote is from SocGen’s Albert Edwards, who’s predicted every deflationary bust in modern history. Including the ones that didn’t happen.
To make his point, Edwards conjured Milton Friedman and Anna Schwartz (you can summon Milton by moving the planchette on your Ouija board over “M” and then “2”).
The money supply is “contracting at the fastest rate since the Great Depression,” Edwards wrote, before quickly noting that most observers view that “as a mere statistical quirk.”
If you frequent these pages, you’ll recognize the argument: On the heels of an epic surge, M2 growth collapsed, ostensibly presaging deflation.
Plainly, CPI isn’t going to be -5% in a year, and if you don’t see an obvious relationship between the two lines on that chart, that’s because there isn’t one. There’s a reason monetarism fell out of favor: Namely, it simply doesn’t work as a practical way of conducting day-to-day policy. Those interested in a longer discussion are encouraged to peruse “If Only We’d Kept A Pet Monetarist,” from June.
Edwards focused not so much on M2, but on aggregate bank lending. That’s consistent with the “discussion” (note the scare quotes) on so-called “Finance Twitter,” where sanity goes to die and everybody’s “ex-Goldman” or “former Bridgewater” (according to their profile bios and their own imaginations).
“When bank lending also starts shrinking for only the second time since 1949 (the only other time being the GFC in 2008), surely it’s time for the money supply ‘deniers’ at The Fed (and the ECB) to sit up and take note,” Albert declared.
He mentioned the latest edition of the Fed’s Senior Loan Officer Opinion survey, released earlier this week. If you missed that thriller, the short version is that the updated survey showed the prevalence of tighter lending standards receded, even as the share of lenders tightening standards remained very elevated (and demand for credit very subdued).
“The SLOOS data has filled some with optimism that we’re past the worst of the credit crunch, but despite the slight improvement, banks’ attitude to lending to small companies is still wholly consistent with an imminent recession,” Edwards said.
The upshot of Albert’s latest is that the Fed’s insufficiently attentive to the anomalous contraction in bank lending. He cited Ben Bernanke’s famous “apology” to Friedman at the latter’s 90th birthday in 2002.
Bernanke “seemed at least to have understood how the Fed allowing money supply to contract was a major contributor [to The Great Depression],” Edwards wrote, before warning that despite Bernanke’s promise to Friedman, policymakers are in the process of repeating their mistakes.
“I feel sure that if Friedman were alive today, he would be again berating the Fed for their ineptitude,” Albert said. “If the monetarists are right and this data is the prelude to a deflationary bust (due to Fed overtightening), then the vast majority of investors appear totally and utterly unprepared.”
I for one do think next year will bring a recession but to be panicking about M2 contraction of less than 5% on the heels of near 30% growth is an overreaction. Sure, this may be the fastest rate of contraction prior to the Great Depression, but the Federal Reserve response was very different to that pandemic. The reading suggests that the modern Fed learned from the mistakes of that era and ensured that all banks were able to sufficiently handle outflows and support lending. There was also no helicopter money being distributed directly to citizens to offset the panic of bank run outflows. The two eras rhyme but they are not mirror images. Maybe wait until we see that contraction pass say 15% before hitting the panic button?
https://www.fdic.gov/analysis/cfr/working-papers/2020/cfr-wp2020-02.pdf
Dear God that “apology” is one stem-winder of a speech. That must have taken 3 hours to deliver. Milton must have started to wonder whether he would live to see the end of it. I’m definitely cancelling my plans to have Bernanke speak at my own birthday party.
Looking at the M2 chart, I see the current decline in M2 as partly reversing the far larger growth in 2020.
Looking at M2/GDP, it surged in 2020 and has now merely pulled back to the rising trendline. “How Much ‘Extra’ Cash Is Left Out There” post.
Put another way, velocity of M2 plunged in 2020 and has now merely recovered to the declining trendline.
https://fred.stlouisfed.org/graph/?g=1aKXZ
In general, it seems abnormal (very notable) when things break far away from trendlines; for those things to return to trendlines seems like normalizing (less notable).
This seems sensible to me….
“Is the big surprise for 2024 going to be a cyclical deflationary bust?”
Yes, but not before we get a final melt up. The credit downgrade and impending government shut down should take us to the trough of the current pice action probably 3900-4000 rage on the S&P in the next 1-4 weeks. Then a late Santa Claus rally that will likely be the Mother-of-All Santa Claus Rallies. “People” will be shocked at how great the market is doing and the rate with which we get back to 4800. Then we’ll have a Wily E Coyote moment, hanging in air off the ledge with nothing below. The only clarification I’d offer is that it’s a likely multi-year deflationary cycle for all financial assets (real and paper).
This is great, thank you. Whatever I know, it’s not enough. Whatever I’m doing it’s not enough. If I want to play, I don’t get to ignore things I’ve witnessed over the years. At some point one either learns to watch indicators with a sense of irony or not…