US credit shrinks at Great Depression rate prompting fears of double-dip recession

Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

By Ambrose Evans-Pritchard

FedRes: Ben Bernanke has been appointed to a second-term at the helm of the US central bank, the Federal Reserve Photo: AFP

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

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The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

Japan GDP shrinks at record pace

by Roland Buerk BBC News, Toyko

Japanese shoppers are spending less

Japan's economy shrank less than previously thought in the first three months of the year, but still contracted at a record pace.

Gross domestic product - the sum of the nation's goods and services - shrank by 3.8%, equivalent to 14.2% over a year.

Earlier it was estimated at 4%, but there have been brighter signs in recent weeks.

Japan has been hit hard by the global downturn because it relied on consumers abroad to buy its cars and electronics.

People in Japan are starting to hope that the worst might be over.

The Government now says in the first three months of the year the economy shrank by 3.8%, less than was earlier estimated but still the worst on record.

The reason for the revision is that capital expenditure - spending on factories and equipment - was cut by less than had been previously thought.

Modest growth?

In this quarter the world's second largest economy is forecast to grow modestly.

Firms are benefiting from increasing demand from China where the Government is spending nearly $600bn (£365.5bn), some of it on infrastructure.

And massive stimulus measures by Japan's Government, including cash handouts, are starting to have an effect.

But Japan's exports are still around a third lower than a year ago and factories are being run far below full capacity.

If companies continue to cut jobs and investments it could cause a fragile recovery to stall.

U.S. Economy: GDP Shrinks, Marking Worst Recession in 50 Years

U.S. Economy: GDP Shrinks, Marking Worst Recession in 50 Years

April 29 (Bloomberg) -- The U.S. economy plunged again in the first quarter, making this the worst recession in at least half a century.

Gross domestic product dropped at a 6.1 percent annual pace, weaker than forecast, after contracting at a 6.3 percent rate in the last three months of 2008, the Commerce Department said today in Washington. The report, which reflected a record slump in inventories and further declines in housing, comes hours before Federal Reserve officials decide how much money to pump into the economy.

Smaller stockpiles may set the stage for a return to growth in the second half of the year amid signs Fed efforts to reduce borrowing costs and unclog lending are starting to pay off. The contraction persisted even as lower gasoline prices and larger tax refunds helped bring an end to the worst slump in consumer spending in almost three decades.

“We are likely to emerge from this recession very slowly and the recovery will be very weak,” said Richard Berner, chief U.S. economist at Morgan Stanley in New York. “The aggressive policy response we have gotten will take time to work, but it will counter the still-strong headwinds holding the economy back.”

Stocks rose for the first time in three days as bank shares rallied on an analyst report that non-performing assets will peak this year. The Standard & Poor’s 500 Index was up 2.1 percent at 872.76 as of 10:50 a.m. in New York. Treasuries were little changed, with benchmark 10-year notes yielding 2.99 percent.

Slump’s Magnitude

The world’s largest economy has shrunk 3.3 percent since peaking in last year’s second quarter, already making this the second-worst recession since the Great Depression. GDP shrank 3.8 percent during the 1957-58 contraction, according to figures from the Bureau of Economic Analysis.

The median forecast of 71 economists surveyed by Bloomberg News projected GDP, the sum of all goods and services produced, would shrink at a 4.7 percent pace. Estimates ranged from declines of 2.8 percent to 8 percent. Today’s advance report is the first of three estimates on first-quarter growth.

Consumer spending, which accounts for about 70 percent of the economy, climbed at a 2.2 percent annual pace last quarter, the most in two years. Purchases dropped at an average 4.1 percent rate in the last half of 2008, the biggest slide since 1980.

Part of the improvement may be due to government efforts to stem the recession. In its last meeting on March 18, the Fed pledged to double mortgage-debt purchases to $1.45 trillion and buy as much as $300 billion in long-term Treasuries. That’s helped bring down rates on mortgages and auto loans.

Fed Statement

The central bank’s statement today, due at around 2:15 p.m., may acknowledge that the pace of economic decline has moderated in the past six weeks and may reiterate it will keep the benchmark rate low for an extended period and continue to boost its balance sheet to revive lending.

“Most people are saying we could bottom out in the second half of the year, maybe in the third quarter, and then see positive growth again,” Christina Romer, the White House’s chief economist, said in a Bloomberg Television interview. “We’re certainly looking for some positive news towards the end of the year.”

Companies trimmed stockpiles at a $103.7 billion annual rate last quarter, the biggest drop since records began in 1947. Excluding the reduction, the economy would have contracted at a 3.4 percent pace.

Good and Bad

“This is one of those good-bad numbers,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said in a Bloomberg Television interview. “Businesses are running about as lean as they possibly can be. It sets up the reality that any sort of increase in demand will cause firms to have to increase production.”

As a result, Naroff predicted growth won’t “be nearly as bad in the current quarter, and will probably be reasonably good.”

Companies cut total spending, including equipment, software and construction projects, at a record 38 percent annual pace.

Residential construction also decreased at a 38 percent pace last quarter, the most since 1980.

“The hangover from the Bush administration is even worse than we thought,” Congresswoman Carolyn B. Maloney, chairman of the Joint Economic Committee, said in a statement. “These numbers reflect a drawdown in business inventories and continued weakness in the housing and commercial real estate markets. Americans are starting to spend more and I’m optimistic that we will begin to see the effects of the stimulus next quarter.”

Obama Stimulus

President Barack Obama signed a $787 billion stimulus plan into law in February that included increases in spending on infrastructure projects and a reduction in taxes.

One reason for the larger-than-projected decline in GDP was that government slashed spending at a 3.9 percent pace, the most since 1995. The drop reflected a cutback in defense spending and the biggest decrease in state and local government outlays since 1981, reflecting slumping tax revenue.

Recent announcements by companies including General Motors Corp. indicate the economy will shrink again this quarter, albeit at a slower pace. GM last week said it will idle 13 U.S. assembly plants for multiple weeks to trim production by 190,000 vehicles from May through July. Sales in its home market fell 49 percent this year through March.

Still, data in recent weeks, including signs of stability in home sales, residential construction and consumer confidence, signal the recession will ease.

Ford Motor Co., working to avoid a federal bailout, is among companies seeing some improvement. The automaker last week posted a first-quarter loss that beat analysts’ estimates.

“We’re not quite sure where the bottom is,” Ford’s Chief Executive Officer Alan Mulally said in an April 24 Bloomberg Television interview. “But we believe with the stabilization of the banks, freeing up the credit, and the stimulus packages we have, both monetary and fiscal, that we’re going to see an uptick in the third and fourth quarter.”

U.K. Shrinks Most Since Thatcher Era Dawned in 1979 (Update2)

U.K. Shrinks Most Since Thatcher Era Dawned in 1979 (Update2)

April 24 (Bloomberg) -- The U.K. economy shrank more than economists forecast in the first quarter in the biggest contraction since Margaret Thatcher came to power in 1979.

Gross domestic product fell 1.9 percent from the final three months of 2008 as manufacturing and business services posted record declines, the Office for National Statistics said today in London. The median prediction in a Bloomberg News survey was 1.5 percent. On the year, GDP slumped 4.1 percent.

The recession, which may turn out to be the worst since the 1930s, prompted Prime Minister Gordon Brown’s government to say this week that the budget deficit may swell to a record and is casting doubt on Britain’s credit rating. The Bank of England nevertheless argues the slump may be easing as they print money to stave off deflation and keep rates at a record low.

“It’s shockingly bad,” said Alan Clarke, an economist at BNP Paribas SA in London. “People still aren’t pessimistic enough. This casts shadows over any green shoots of recovery. This recession will be more prolonged than people expect.”

The pound was little changed against the euro and the dollar after the figures were released and traded at $1.4607 at 11:17 a.m. in London.

The U.K. is the first Group of Seven nation to report first quarter GDP data. Leaders from the G-7 meet in Washington today as unemployment, deflation and toxic bank assets still stand in the way of a rebound from the global recession.

European Economy

Reports today gave a mixed picture about the health of Europe’s economy. Spanish unemployment rose to a decade-high of 17.4 percent, while Germany’s Ifo business confidence index rose for the first time in 11 months.

U.K. business services and finance shrank 1.8 percent, the most since records for the category began in 1983. Manufacturing contracted 6.2 percent, the most since at least 1948, the statistics office said.

The worsening recession may see Britain’s economy shrink by the most since 1931 this year, the London-based Centre for Economics and Business Research said today, forecasting a 4.5 percent annual contraction.

This is the first time GDP has contracted by more than 1 percent for two consecutive quarters since modern records began after World War II. GDP declined 1.6 percent in the fourth quarter of 2008.

‘Anxious’ Consumers

“The best we can say is that the pace of economic decline may slow in the coming months,” said John Cridland, deputy- director general at the Confederation of British Industry. “Given that unemployment will continue rising sharply, even if businesses begin to see the rate of decline in activity starting to ease, consumers are likely to feel anxious.”

The economy last shrank by more in the third quarter of 1979. Labour Prime Minister James Callaghan began that year by saying he wouldn’t declare a state of emergency and denying that the country had been left in chaos because of rampant strikes. Margaret Thatcher replaced him as the nation’s first female premier after the Conservative Party won the election in May.

Brown must hold an election by June 3 next year. His ruling Labour party trails the opposition Conservatives in opinion polls, lagging by 19 percent in a BPIX poll published April 19.

Chancellor of the Exchequer Alistair Darling predicted in his April 22 budget that the economy will contract about 3.5 percent this year, and rebound with a 1.25 percent expansion in 2010. That’s at odds with the International Monetary Fund, which predicts a GDP drop of 0.4 percent next year after shrinking 4.1 percent in 2009.

Public Finances

Britain’s “balance sheet is deteriorating rapidly, due to a combination of weakening revenues and the accumulation of sizeable assets and contingent liabilities as a result of successive bank bailouts,” analysts at Moody’s including Arnaud Mares in London wrote in a report yesterday. “The government is taking risks with public finances.”

Brown told reporters today that he’s satisfied Britain will retain its top sovereign credit rating. He has spent 1.4 trillion pounds ($2.1 trillion) bailing out British banks crippled by the crisis, pushing this year’s budget deficit to 12.4 percent of GDP, the highest of any Group of 20 nation.

Darling this week offered motorists a 2,000-pound ($2,928) payment to trade in old cars for new ones to stem job losses at manufacturers. Auto sales slid 31 percent in March.

Lloyds Banking Group Plc, which has received billions of pounds of state guarantees, said yesterday it will cut 985 jobs. Michael Page International Plc, the U.K.’s second-largest recruitment company, said April 7 first-quarter profit slumped 32 percent as the pace of layoffs increased.

Rising Unemployment

U.K. unemployment rose in March to the highest level since Brown’s Labour Party came to power in 1997 as the recession forced companies to cut jobs.

Retail sales still climbed 0.3 percent in March, the statistics office said in a separate report today. Economists predicted a 0.3 percent drop, according to the median of 26 forecasts in a Bloomberg News survey. Debenhams Plc, the U.K.’s second-biggest department story company, said yesterday that sales rose and profit margins increase.

Bank of England policy makers said there are signs the pace of economic contraction may be moderating, minutes of their April 9 meeting show. The bank is spending 75 billion pounds to buy bonds with newly created money after it cut the key interest rate to 0.5 percent, the lowest since it was founded in 1694.