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.

“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.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to “grit its teeth” and approve a fresh fiscal boost of $200bn to keep growth on track. “We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on,” he said.

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.

via US money supply plunges at 1930s pace as Obama eyes fresh stimulus – Telegraph.

About a year ago I wrote a post called “Keynesian Economics is like Prescribing Crack for Coke Addicts“.  Obama’s $700 billion Stimulus package had just been signed, with pretty much all of the Republicans voting against it.

At the time, I really didn’t know if it would work.  Keynes’ economic theories had never been fully tested in this type of a crisis scenario…and we were certainly in one.  So here we are a year later….did it work?

First of all, a bit of a clarification:  The American Recovery and Reinvestment Act signed by Barack Obama is “the stimulus.”  This is the money that went to fund road projects and pay firemen.  It’s been called “the stimulus package” or “The recovery act”, and every Republican (except 3) voted AGAINST it.  The Recovery Act contained the following provisions:

1. Financial assistance to states that were about to fire scores of workers, from firefighters to police officers to teachers, as well as an extension of unemployment benefits and generous COBRA health insurance subsidies.
2. Spending on new infrastructure and manufacturing: those newly smoothed roads and highways on your commute to work, along with spending on transit and green energy technology.
3. The largest middle class tax cut in American history — $288 billion in tax relief which, I might add, every Republican (save for three) voted against.

Unfortunately many Americans confuse the stimulus package with “the bailout”.  TARP.  The $700 billion Troubled Asset Relief Program signed by George W. Bush.   Hundreds of banks received money from this program…a few have repaid…many have not.

A recent CNN poll showed that 54% of Americans think the stimulus has helped bankers and investors.  Obama is losing the PR battle, because Americans think that the Stimulus and the Bailout are the same:  They’re Not.   While there is much to complain about TARP, the Recovery Act appears to be working.   Wall Street seems to think so:

Okay…but that’s just Wall Street…what about jobs?

Looks  pretty good there too.   Okay..but these numbers might be fudged.  How about GDP?  That’s the real pulse of the economy, right?

So does this mean that Keynes is vindicated?   That supply-side economics is dead?   That Adam Smith’s invisible hand has vanished?

I don’t know the answer…I’m just a piano player.  But I do know that it looks like we may have dodged a very big bullet…for now.  For more on this, visit:  Bob Cesca: Happy Anniversary, Recovery Act.

After running out of fresh faces, the Republicans tapped Louisiana Governor Bobby Jindal to give the “Republican response” to Obama’s “not quite the state of the union” address to congress this week.

In his speech, Jindal cited the government response to Katrina as an example of why govenment is bad.   It floors me that no one in the Republican party thought that bringing up the Katrina debacle might be a bad idea.  Apparently Jindal thought it was a good idea.

But apparently not good enough, because now it appears the cute little anecdote that he used in his speech…you know, the one about the Sherriff yelling over the phone in frustration because the “bureaucrats” wouldn’t let people launch their rescue boats without proof of insurance?

Well, turns out it wasn’t true.

What goes on in these Republican meetings?   Srusly

TPMMuckraker | Talking Points Memo | Jindal Admits Katrina Story Was False.

I saw Alan Greenspan admit that he doesn’t fully understand what’s going on in the markets.   If Greenie is bailing out on us, we’re in BIG trouble, so in between learning new songs, I’m trying to wrap my mind around this economy.

Here’s a good place to start…This American Life Podcast.

A special program about the housing crisis produced in a special collaboration with NPR News.  What does the housing crisis have to do with the turmoil on Wall Street?  Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

http://www.thislife.org/Radio_Episode.aspx?episode=355

You gotta love the Internets….a user-edited wiki breaking down the text and money of the American Recovery and Reinvestment Act of 2009.

Main Page – StimulusWiki.

Does anyone else find it a little odd that the the Washington Post presents this as an “Op Ed” piece appearing on page A17?   Check the byline at the bottom:

The writer is president of the United States.

Really, Washington Post?   REALLY?

Barack Obama – The Action Americans Need – washingtonpost.com.

ECO 2013  – Principles of Macroeconomics
Dr. Dave Denslow, PHD
University of Florida

That’s my street cred for purposes of this blog entry.  I took an undergrad course at UF in 1990.   One measly semester with a fantastic professor.  I never attended any actual classes…this was one of those mega-classes where they recorded the lecture on video and you could either go sit in a big lecture hall and watch the video, or watch it on cable TV at home (it was practically impossible to get a seat at the *actual* lecture, which happened at the ungodly hour of 7:30am!)

Guess which one I picked?

Yep.   So I watched Dr. Dave on my 19″ television as I munched on Lucky Charms while my roommate smoked weed.   Dr. Dave had a cohort in the economics department…Dr. Mark Rush.  Dr. Rush taught the sister class, Microeconomics.    The two of them would trade jabs about guns and butter…it was actually one of the more interesting courses I had during my college experience.

Lately I’ve been thinking a lot about Dr. Dave.  Because Dr. Dave taught me how to pronounce this guy’s name:  John Maynard Keynes.

Sure, it’s easy now for me to remember how to pronounce it…I just think of actor Michael Caine.   Then I think of a room full of Michael Caines (just like when John Malcovich went inside his own portal in “Being John Malcovich”).   Keynes is pronounced like a room full of Michael Caines.   When talking about Keynsian Economics, it’s hard for me not to think about Caine’s role as Austin Powers’ father, where he got all “Michael Cainesian” over the part.

I know it’s silly, but trust me…it works.   And you won’t come off sounding like an idiot by pronouncing it Keensian.  But I digress…because Dr. Dave taught me more than just how to pronounce Keynes…he actually taught me a little bit of macroeconomic theory too.

Dr. Dave taught that Keynes is known as the “father of modern economics” generally because he was pretty much the first guy to accurately describe some of the causes of  recessions and depressions on a country or global scale.

In a normal economy, Keynes said, there is a circular flow of money.  My hairdresser, Tony, comes to Howl at the Moon and gives me $20 to play Piano Man, which in turn becomes part of my earnings.   I turn around and use that money to pay Tony for haircuts…my spending becomes part of your earnings, and your spending becomes part of my earnings.

Classical economics teaches that if there is a downturn, the economy will eventually sort itself out.   If Tony can’t afford to pay $20 to hear Piano Man, then I’m going to drop the price until it comes back down to a level that Tony can afford to pay:  basic supply and demand.

But for various reasons this circular flow can falter.  People start hoarding money when times become tough; and times become tougher when everyone starts hoarding money.  Suddenly Tony either doesn’t want to or can’t afford to hear Piano Man at any price and therefore I can’t afford haircuts.  We’re all screwed!

This breakdown in the circular flow is called a recession, or as Keynes called it, “a failure of effective demand.”   Basically, people aren’t spending enough money, either because they don’t have any or because they got laid off (or are afraid they’re about to get laid off.)

To get the circular flow of money started again, Keynes suggested that the central bank — in the U.S., the Federal Reserve System — should expand the money supply (print more money).  The theory being simply that this would put more money in people’s hands, inspire consumer confidence, and compel them to start spending again.

A depression, Keynes believed, is an especially severe recession in which people hoard money no matter how much the central bank tries to expand the money supply.  In that case, he suggested that government should do what the people were not: start spending.   He called this “priming the pump” of the economy.

But does it work?

In the depths of the Great Depression, Roosevelt expanded government spending, but he never spent as much money as Keynes said he should have.   He also did all sorts of things that Keynes opposed, like raising taxes and trying to balance the budget.  Keynes himself said those steps would cancel out any positive effect from spending.  Indeed, most economists believe that only massive U.S. defense spending in preparation for World War II cured the Great Depression.

In 1973, the U.S. economy had been growing for three years and unemployment had dropped to well below 5 percent. Then on Oct. 6,  Egyptian and Syrian forces launched surprise attacks on Israeli-held territory. Arab members of OPEC cut off shipments of oil to the U.S. and other countries that supported Israel, forcing oil prices to sharply rise.  Nearly 2.2 million people lost their jobs and by the end of 1974, the stock market had lost more than 40 percent of its value.

The U.S. had high unemployment, and for some reason the Keynesian solution stopped working. The national government spent and spent, but unemployment only got worse.  Then came inflation, something Keynes never accounted for.  Thus came a new term:  Stagflation.

In the early 1990’s, when Diggz was a college sophomore, Dr. Dave taught Keynesian economics as a theory…a semi-failed one.   Our textbooks explained the basic Keynesian system, but then had a few chapters explaining why it didn’t work.    Dr. Dave said that Keynesian Economics was like prescribing crack for coke addicts…you’re shifting the problem around but the problem is still there.   Supply-side economics was where it was at.  Reaganomics.   Control the economy through interest rates.  Alan Greenspan.   Enter the anti-Keynesians.

If the weapons the Keynesians used to steer the economy were taxes and government deficits, the anti-Keynesians weapon was the Federal Reserve.  If the economy overheats, raise interest rates.  If it starts to sputter, lower them.  This seemed to work great until December 16, 2008.   That’s the day the Federal Reserve tried to stabilize the economy by lowering the interest rate all the way down to zero percent.

It didn’t work.   Economists around the world collectively shouted WTF??!?!?!?!?!?!?!

I also happened to be watching “Blame it on Rio” that day, starring Michael Caine (and a very young and very hot Demi Moore).   Which brings us back to Keynes.

Scratching their heads, and with literally nowhere else to turn, the economic gurus ran back to the only man who had come close to dealing with this kind of crisis…Keynes.   He even had a formula:   Figure out how much the economy SHOULD be producing, subtract how much it’s ACTUALLY producing…plug in something called a “Keynesian Multiplier” and voila:  you’ve got your answer on exactly how much the government should spend to jump-start the economy.

That’s precisely we are today, with Obama’s proposed $700-$800 billion stimulus package.   It’s a straightforward application of textbook Keynesian Economics.

In simpler terms, that’s about $10,000 per family in the United States.   For me, that’s playing Piano Man like 2000 times.

Man, I sure hope Keynes was right.

Obama Gives Keynes His First Real-World Test : NPR.