Reply #2: notes

[rapier]

The money supply shrinking is extremely unusual. It is three months long and counting now since it began.

Why it is shrinking I have an idea, but others will probably debunk it. At any rate the reason is the sharp drop off in mortgage borrowing, especially refinancing ever since rates spiked up off the bottom this spring.

What it means going forward for the economy is impossible to say. Traditional analysis would insist that it will slow the economy. Perhaps but I am not certain. Traditional macro economic theory in regard to monetary and credit issues has been thrown out the window in the new world of finance. Credit growth or shrinkage used to be strictly the result of banks propesity to lend. No more. Banks are now an almost minor player in the credit markets now. Supercedeing them has been Wall Street and it myriad avenues of securitization of loans, and most important of all perhaps, the mortgage lending jugggernaugt.

Will the money supply continue to shrink? Who knows? What does it mean for the future? That is not know either but in general one must guess that it will be a negative, in so far as the traditonal measures of 'growth' in our nutty culture of consumption will say.

<I should note that Econ 102 says that money is created only one way. That is by bank lending in a fractional reserve banking system. That was thought to be absurd in 1890, today it is dogma. What is considered absrud now, if considered at all is that all the non bank lending, the Wall Street secruitizations and the mortgage lending behemoth create money as well, and it is a zero reserve system. Debt backed by nothing but faith>