The M3 Menace

Ambrose Evans-Pritchard is warning that America's M3 number, the broadest gauge of the amount of actual money and credit in the economy, is currently showing the largest contraction since the Great Depression.

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."

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.

In other words, banks aren't lending. They are in fact hoarding cash, and by doing so and failing to counteract the massive deflationary pressures of the twin residential and commercial real estate market crashes, they are setting up a secondary "double-dip" recession.

In fact, right now the bank hoarding of cash has gotten so bad it has more than counteracted the stimulus package in the last month, leading to these staggering annual contraction rate numbers.

Our economy is freezing up again like it did this time last year, only it's happening at an even faster pace. Yves Smith at nakedcap has more:

Note that the “reducing loans” takes place not only via tougher lending standards, but also pricing. Look at how banks have jacked up rates on credit cards. Now admittedly, many consumers are trying to cut back, but now it is becoming too costly not to.

William White, of the BIS, one of first to warn of the dangers of leverage, today said that he saw a strong recovery as particularly unlikely. But the true believers are not deterred.

Go go happy face financial media! Clap harder and you too can save the economy...

[UPDATE 11:45 AM] Helicopter Ben says the recession is over.

Sure it is, we've got to clear the decks for the next recession, you see.