“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.”