By Jeff Harding
Here is David Rosenberg, chief economist and strategist for Gluskin Sheff on bank liquidity. Rosenberg was formerly the chief economist for Merrill Lynch. He called the Crash and is a perceptive guy. I am reprinting this to show you that I am not the only one talking about deflation.
This is an excerpt on his morning commentary:
Well, if there is a lack of green shoots in any particular data series, it is in the weekly bank lending data out of the Federal Reserve. For the third week in a row, the supply of bank wide real estate loans declined in the June 24th week, this time by $6.2 billion, bringing the cumulative contraction to over $50 billion. Outstanding consumer credit fell by $600,000,000 and has now shrunk for four weeks in a row — a combined decline of nearly $13 billion. We also see that business credit — commercial & industrial loans — dropped $2.5 billion during the week and have also contracted for four weeks running ($37 billion in total). In sum, bank wide credit extended to the private sector was down $9.4 billion in the June 24th week and by over $90 billion during the last four weeks, which is epic. How anyone can believe we are going to see any kind of recovery as the commercial banks focus on reducing their non-liquid assets remains one of life’s mysteries.
In the meantime, what the banks did build up on their balance sheet during the week was CASH, which rose $57.3 billion to $937 billion or about four times what could be considered a normal amount. At the same time, it looks as though the Fed is now in the process of snugging monetary policy. We don’t hear from the inflation-ists that the central bank has actually been allowing its bloated balance sheet to lose some weight in recent weeks and that the growth rate in the once-red-hot monetary aggregates is shrinking and the monetary base is also shrinking.
Over the last 13-weeks, the monetary base has contracted at a 23% annual rate (!), M2 growth has softened to a 1.4% annual rate and MZM has slowed to a mere 4.6% annual rate. The chart below vividly illustrate the growing shift towards liquidity preference at all levels of the economy. Banks, non-financial corporations and households, in a complete show of caution, are building up cash and cash equivalents on their balance sheet at a frenetic pace. The ultimate question is where all this cash is going to be deployed, and we believe will ultimately be diverted towards debt repayment.