Sentiment Sours, Companies More Cautious

FXStreet is reporting US Housing Slump Deepening; Firms More Cautious

U.S. companies are increasingly worried about the economy amid signs that the housing recession is deepening, according to a survey released Monday by the National Association for Business Economics (NABE).

NABE Survey Results

• 54% of respondents expect a "substantial" housing slowdown in the next six months, and over 40% expect a mild slowdown. Half of respondents expect housing to impact their firms.
• 43% of firms expect to increase capital spending over the next year, down from 50% in the July survey.
  
• Under one-third expect to increase payrolls over the next six months, down from 41% in the July survey.
• Thirty-six percent of respondents said tighter credit conditions have negatively affected their businesses, while 56% said they saw no effect.
• One-third of NABE respondents said they expect to charge higher prices over the next three months, up from 25% in the July survey, suggesting companies expect to achieve a greater degree of pricing power.

Bank Lending Soars

The figures from NABE suggest one thing but bank lending (at least on the surface) suggests another. The Wall Street Journal is talking about bank lending in Prior Loans, Future Pain?

Since midsummer, bank lending to businesses has risen at the fastest rate in more than 30 years, providing a cushion for the economy as lenders cut back on mortgages and other forms of loans.

The problem is, in many cases, banks never expected to make these loans. They had extended backup credit lines to such companies as tax preparer and mortgage lender H&R Block Inc. In August, when H&R Block, which has struggled to rid itself of its subprime-lending unit, couldn't borrow in the securities markets, it tapped $850 million of the $2 billion credit line it has with a group of banks to meet its cash needs, calling the banks "a more stable source of funds."

Besides credit lines, banks have been forced to take on loans they made to private-equity firms seeking to buy publicly traded companies. Normally, the banks would have sold these loans off to investors, but, when there weren't buyers, they had to hold on to them. Lehman Brothers Holdings Inc. estimates more than $150 billion in buyout loans still need to be sold by the banks in the months ahead. Some banks also are at risk of having to take billions of dollars in more debt onto their balance sheet because of troubles with some off-balance-sheet lending vehicles.

These factors contributed to the dreadful results reported by the major banks last week. Among the hardest hit was Citigroup Inc., which had its capital cushion fall just below its target level. J.P. Morgan Chase & Co., which held up better, is being conservative. "We've been very careful in our middle-market lending," James Dimon, J.P. Morgan's chief executive, said Wednesday.

Brian Denney, who heads Denney Jewelers in Springfield, Ill., says more of his customers are getting turned down on loans for jewelry. Meanwhile, jewelry makers, which had been providing 30-day grace periods before demanding payment for inventory, now want cash upfront. That has forced him to stock his shelves with less-expensive products.

Professor Kevin Depew discussed the lending surge in point number one of Monday's edition of Five Things : Bank Lending Surge a Good Thing? Not So Fast.

• Typically, such a large increase in commercial and industrial lending would be a sign of economic growth and of businesses seeking to expand operations.
• However, much of the growth now is the result of banks being forced to bring asset-backed commercial paper back onto their balance sheets as SIV's run aground.

Target Trims Forecast

I am quite skeptical about that "Pricing Power" mentioned in the NABE survey. It's unlikely to come on goods from China with Wal-Mart slashing prices and retailers like Target Trimming October Forecasts.

Target Corp. (TGT) on Monday trimmed its October forecast for sales growth at stores open at least a year to a range of 2% to 4%. In a recorded message, the retailer cited "greater than normal daily volatility and continued disappointing sales results for the first two weeks" of the month for the move. It had previously forecast same-store sales growth of 3% to 5% for October

Wal-Mart Reduces Planned Super-Centers

The latest analysis suggests that Wal-Mart may benefit from slower U.S. store growth.

Ahead of its two-day analyst meeting that begins Tuesday, analysts and investors said the world's largest retailer, which already scaled back its supercenter store growth plan, can use some additional cutbacks. Wal-Mart in June said it will increase U.S. square footage growth by about 4% to 5% for fiscal years 2008 and 2009 and lowered its capital spending forecast to $15.5 billion from $17 billion.

Same-store sales at U.S. Wal-Mart stores in the first 35 weeks of the year rose 0.8% this year, compared with 2.5% last year after the retailer failed to lure higher-income shoppers with more upscale apparel and home furnishing products, analysts said. The retailer last week cut prices on 15,000 additional items, 20% more than last year, as it said it plans to be more aggressive with price cuts heading into the holidays, many retailers' biggest sales and profit period.

In the U.S., Wal-Mart plans to open just 190 to 200 new supercenters this year, including relocations and expansions, from an original plan of as many as 270, it said in June. "Greater clarity on capital allocation would be a positive," said Goldman Sachs analyst Adrianne Shapira.

Greater Clarity

This was the second reduction by Wal-Mart in planned stores. Where is that corporate capital spending savior that everyone was talking about last year? Even with those cutbacks, Wal-Mart's expansion plans are still far too robust. Same store sales are lagging and further expansion is going to put continued pressure on prices, not only for its stores but for stores of its competitors.

Fear of losing market share keeps retail companies expanding no matter how silly (and costly) that expansion really is. Competitive overexpansion of stores is the retail sector version of Economic MAD (Mutually Assured Destruction).

The homebuilder version of economic MAD is quite similar. It can be summed up with the sentence: "Builders build until they go bust". On that score it's Neumann Down, More To Come as Chicago based Neumann Homes files chapter 11. Over expansion by Neumann in the face of a sentiment change by consumers sealed its fate.

The Central Bank version of MAD was detailed in Economic Chicken vs. Mutually Assured Destruction.

Job growth is already anemic because of layoffs in manufacturing, homebuilding, and the financial sector. Weak jobs growth is one factor that makes living paycheck to paycheck harder every month. (Please see Destined To Fail for more details) .

The jobs picture will take another turn for the worse if retail stores and restaurants like Wal-Mart (WMT), Target (TGT), Lowe's (LOW), Home Depot (HD), Best Buy (BBY), Pizza Hut (YUM), and Applebee's (APPB) all reduce expansion plans. There is every reason they should too, even if MAD has kept the commercial real estate party going far longer than expected.

All parties come to an end however, and consumers are leading the way with sentiment changes (first in housing, and now in retail). Retailers and restaurants will be forced to follow suit or they too will end up in bankruptcy court, just like Neumann.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Neumann Down, Many More To Come

It's all over for Chicago area builder Neumann Homes. Neumann will file chapter 11 shortly.

The crash in the Chicago-area market for new homes has claimed its biggest casualty. Suburban builder Neumann Homes Inc. said Monday it will file for bankruptcy and has laid off most of its employees. Warrenville-based Neumann blamed its predicament on a drop of more than 50 percent in annual sales within the Chicago and Denver markets. It also pointed to a decision in 2005 to invest in the Detroit market, a move it said cost the company more than $60 million.

Neumann said it will file for a Chapter 11 bankruptcy and that its lenders have agreed to provide limited additional funding so that its assets can be evaluated and sold.

It also said the earnest money of customers whose new homes haven’t started construction is safe in escrow. Neumann said it will ask a bankruptcy judge to approve refunds from those accounts. It also said it will work with lenders to ensure that homes will be completed if construction has started. Neumann said it has closed its sales, production and customer service offices. It gave no figures concerning layoffs.

“The market downturn in the Chicago and Denver housing markets [is] now in excess of 50 percent, with home prices dropping from 10 percent to 25 percent in some sub-market,” Kenneth Neumann commented in the fax. “Even after the significant help we have received from our lenders this year, the company can no longer weather this storm.”

The cause of Neumann's bankruptcy was not a slow down. The cause was over-expansion of spec homes. A search for Neumann Homes turned up 14 communities with 175 new homes for sale.

That is a lot of spec homes for sale in an extremely slow market. Carrying costs were clearly eating Neumann alive. Neumann was offering up to $80,000 off on select models. The largest price I could find for an active listing was $414,990. Assuming the original price was 494,990. The price reduction was 16%. Clearly not enough in this market.

Some townhomes were marked down 13% from $231,000+- to $200,000+-. Once again that was not enough. Perhaps those townhomes go for $140,000-$160,000 at an auction. Perhaps a lot less. For the person paying full price, that is a haircut of 30-40%.

To be sure, anyone paying full price will be trapped (unable to move) unless they bring money to closing. This is the kind of thing that can feed on itself.

Neumann down, many more to come.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Economic Chicken vs. Mutually Assured Destruction

While working in my garden this weekend I was thinking about a game of economic chicken. I was not the only one.

Economic Disconnect was writing about Superfund Strong Arm and a Game of Chicken.

Right now we are looking at a systemic banking crisis. The FED had to cut rates in a hurry, the discount window was open for business, Hank Paulson is running around on TV, in interviews, at any conference anywhere pushing the SIV Superfund. All these things are very rare and disquieting. The banks second front in their "War on Insolvency" is a game of chicken played against the FED, the US government, and the US taxpayer.

Let's play chicken.

The game of Chicken models two drivers, both headed for a single lane bridge from opposite directions. The first to swerve away yields the bridge to the other. If neither player swerves, the result is a costly deadlock in the middle of the bridge, or a potentially fatal head-on collision.

It is presumed that the best thing for each driver is to stay straight while the other swerves (since the other is the "chicken" while a crash is avoided). Additionally, a crash is presumed to be the worst outcome for both players. This yields a situation where each player, in attempting to secure his best outcome, risks the worse.

Payoff Chart in Chicken

The chart at the left shows what happens if neither person swerves. The result if no one swerves is a head on collision where both parties both likely die. One person usually swerves.

In practice both typically swerve at the last possible moment. If either person misjudges the other (or the speed of their own reactions), then two people die unless the other swerves hard enough and fast enough to compensate.

Is the ongoing game Mutually Assured Destruction (MAD) or is it Chicken? I suggest economic MAD is more like the game being played. All of the world's the central banks are involved as players. The current path is a massive economic failure at some point in the future. However, a peculiarity of the current game is that the first major player to "swerve" immediately causes his own demise as well as the demise of the other players.

For example, consider the threat by China to massively unload US treasuries. The threat is a hollow one. It is not in anyone's best interest to start a global credit crisis, but that is what would happen if foreign central banks start dumping treasuries in mass.

The same logic applies to players stuck in SIVs. Those who are not familiar with the SIV story, can read Enron Accounting at Citigroup, a Special Edition Five Things You Need to Know, and Marked to Fantasy to catch up.

In economic MAD, the first player to dump assets in a SIV immediately puts its own economic life at risk. More problematic is that it puts the entire system at risk. And so a phony plan to disguise the real worth of those assets is being put in place. As a stopgap, should someone sell, the SIV bailout plan is prepared to buy its own assets. Because that sounds preposterous (and it is), additional buyers of last resort are being sought.

Arm Twisting by Paulson

Paulson is now twisting arms internationally hoping to scrounge up support for his plan. Headlines last Friday stipulated SIV support grows.

"Paulson has done a short briefing on the SIV fund," Bank of Italy Governor Mario Draghi told journalists. "PIMCO and Fidelity have joined."

PIMCO's support comes as a surprise after Bill Gross, the chief investment officer of Pacific Investment Management Co. or PIMCO, criticized the effort as "a little lame" in a television interview.

A fire-sale of assets could lift borrowing costs globally, trigger big losses from investors and force banks to further write down some holdings on their balance sheets. Such sales could trigger huge losses for banks, and in the worst-case scenario tip the U.S. or Europe into recession.

Mario Draghi appears to be mistaken. MarketWatch is reporting "PIMCO is not participating" in the SIV bailout fund.

Player or not, Bill Gross' quip "a little lame" is an enormous understatement. The word "fraud" would be more appropriate.

It's important to remember the game we are in today is the price we paid for Greenspan's foolishness in slashing interest rates to 1% in the wake of the dotcom crash.

Greenspan did not make those rate cuts to prevent deflation. He made those cuts to bail out banks that made horrendously bad loans to dotcom companies and foreign banks. A side effect of the resultant credit bubble is that Greenspan has virtually guaranteed the deflation he claims to have prevented.

The problem with MAD is that we can pay a price today or a greater price in the future. At some point (perhaps it's starting now) there is no longer a choice. The day of reckoning comes when consumers are unwilling to borrow or banks are unwilling (or unable) to lend.

Because of the entanglement of $300 trillion to $500 trillion in derivatives (credit default swaps, options, and leveraged mortgage backed securities), the first player to swerve in a major way risks collapsing the system.

As in Global Thermonuclear War, "The only winning move is not to play." But it's far too late for that strategy now. Economic MAD has started, and there is no way to stop the game.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Destined To Fail

Paulson is twisting arms around the globe attempting to drum up support for his Super-SIV bailout plan.

Fund giants PIMCO and Fidelity have joined the so-called super SIV fund set up by three big U.S. banks, boosting confidence in the plan, Bank of Italy Governor Mario Draghi said at the close of a meeting of finance officials from the Group of Seven rich industrialized nations.

Draghi said U.S. Treasury Secretary Henry Paulson had discussed the fund with officials attending the meeting of central bankers and finance ministers from the United States, Canada, Italy, France, Germany, Britain and Japan.

"Paulson has done a short briefing on the SIV fund," Draghi told journalists. "PIMCO and Fidelity have joined."

Pimco first said no, then it said yes (or so it was reported). However, MarketWatch is reporting "PIMCO is not participating".

It's early yet and anything can happen, but futures are decidedly negative at 1:00AM central.

Last week yield curve watchers noticed that bad news was sold for the first time in a long time. What happened to the "Fed is going to cut again party?"

Are we now in an environment where all, news is bad news?

Given that for the longest time all news was greeted positively by the market, there is every reason to believe that all news can indeed be bad news for the market at some point. It's far too early to say if that transition has been made or not, but the timing is perfect if it has.

Perhaps the Fed does pull out all the stops. But what if no one shows up at the party?

Nothing Can Stop A Recession

Hedge funds and big banks buying commercial paper for each other inflated prices cannot stop a recession. Given government manipulation of GDP and CPI, it can easily be argued we are already in a recession as Housing Holds Back the Economy.

"We are in a housing recession in Northern California," said Scott Anderson, a senior economist with San Francisco-based Wells Fargo Bank. "I see the fingerprints of the housing slowdown in a number of industries."

Perhaps the most worrisome trend in the East Bay is the possibility that the housing malady has begun to infect the rest of the region's economy, Anderson warned. "We are seeing secondary effects on retail trade, there is some weakness in restaurants, clothing stores, home furnishing stores," Anderson said. "Some durable goods manufacturing that is related to housing is getting hit."

Some economists believe California and the East Bay won't soon escape the housing nose dive. "We don't think this will be over any time soon," Haveman said. "We expect home price declines in California to continue through 2009. Employment declines will continue into 2008. The real estate bubble has a long way to go before it completely bursts."

A Rolling Recession

The recession will roll from state to state to sate, just as the busting of the housing bubble did. Please see Grim Forecast for State Budgets for how various states are affected by the economic slowdown.

It's Not Just Housing

The Financial Times is reporting US loan default problems widen

US banks have raised reserves for loan losses by at least $6bn over the second quarter and by even larger amounts from last year, indicating financial executives believe consumers will be increasingly unable to make payments on a variety of loans.

Banks are adding to reserves not just for defaults on mortgages, but also on home equity loans, car loans and credit cards.

“What started out merely as a subprime problem has expanded more broadly in the mortgage space and problems are getting worse at a faster pace than many had expected,” said Michael Mayo, Deutsche Bank analyst.

“On top of this, there is an uptick in auto loan problems, which may or may not be seasonal, and there is more body language from the banks that the state of the consumer was somewhat less strong [than thought].”

Problem Banks

• Wachovia (WB) - credit loss provisions more than doubled from the second quarter to $408m.
• KeyCorp (Key) - non-performing assets rose $241m from last year and loan-loss provisions doubled.
• Comerica (CMA) - Loan loss provisions tripled from last year to $45m.
• Wells Fargo (WFC) - Net credit losses jumped from $663m last year to $892m due to home equity and car loan losses. Loans more than 90 days past due and still accruing increased to $5.53bn from $3.66bn last year.
• Citigroup (C)- Is seeking a bailout over SIVs.

Living paycheck to paycheck gets harder

The reason the SIV bailout must fail is simple: Living paycheck to paycheck gets harder.

The calculus of living paycheck to paycheck in America is getting harder. Across the nation, Americans are increasingly unable to stretch their dollars to the next payday as they juggle higher rent, food and energy bills. It's starting to affect middle-income working families as well as the poor, and has reached the point of affecting day-to-day calculations of merchants like Wal-Mart Stores Inc., 7-Eleven Inc. and Family Dollar Stores Inc.

While economists debate whether the country is headed for a recession, some say the financial stress is already the worst since the last downturn at the start of this decade.

To economize, shoppers are going for less expensive food.

"They're buying more peanut butter and pasta. And they're going for hamburger meat," Flickinger, the retail consultant, said. "They're trying to outsmart the store by looking for deep discounts at the end of the month." He said the last time he saw this was 2000-2001, when the dot-com bubble burst and the economy went into a recession after massive layoffs.

Fraudulent buying of asset backed commercial paper at inflated prices in attempts to hide losses is simply not going to do a thing for the average Joe struggling to make his house payment. Nor is it going to do anything for those recently laid off, nor is it going to do a thing for waiters receiving smaller tips because of declining numbers of people eating out, nor is it going to do anything for Wal-Mart, Home Depot (HD), Lowes (LOW), or Target (TGT) all who aggressively expanded in an attempt to steal business from each other.

The real economy is suffering and has been for some time. It's going to get worse too as retail stores, once a huge driver of employment, start laying off. No amount of fraud by Paulson can hide those simple economic facts.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Q&A With Mike Morgan About Homebuilder Bankruptcies

I had a brief conversation with Mike Morgan on Saturday about what might happen should Levitt declare bankruptcy. Here is the background story...

Fort Lauderdale-based Levitt and Sons halts all work on houses.

Levitt and Sons, the cash-strapped Fort Lauderdale company trying to survive the housing slump, said Thursday it has temporarily stopped building houses as it tries to restructure its debt.

The action is an inconvenience for consumers who plan to move into Levitt homes and now are in limbo.

My Comment: Inconvenience?! Putting down 10%-20% on a house and having the builder walk away in bankruptcy is merely "inconvenient"?

"I'm up in the air," said Angelo Palermo, 69, who's renting an apartment in Pembroke Pines while waiting for his $380,000 house in Port St. Lucie to be finished. "This is a very bad situation."

The builder's parent, Levitt Corp., said last Friday the subsidiary faces an uncertain future if it can't work out a deal with lenders.

My comment: "An uncertain future"? What's with these wimpy comments from Levitt? The future is very certain. If Levitt cannot work out a deal with lenders, the future is guaranteed. That future is called bankruptcy. Even IF lenders are willing to throw more money into this sinkhole, Levitt is still may go bankrupt. What new buyers would make a down payment on a house with Levitt with all this uncertainty over things?

"We realize that there are a number of questions from customers," said Michael Freitag, a spokesman for Levitt Corp. "But until the matter of financing is resolved, we don't have answers to those questions." Levitt home buyers can call 877-538-4889 for information about the status of their homes.

My Comment: Levitt does not have any answers so if you call them that is all you will hear. But there's the number to call in case you want an actual voice to tell you just that. By the way, I called the number and talked to "Loretta" who was very pleasant but could not answer media questions. No one answered the media phone number she gave me.

Bob Oblas of New York was scheduled to close on his two-bedroom house in Seasons at Tradition on Oct. 31, but said a company representative told him Thursday that it was not likely to happen. He wonders about a clubhouse and other amenities that have yet to be built. "I'm very concerned about the viability of the community," said Oblas, 66.

My comment: "Clubhouse"? Sheeesh That should be the least of your worries. People seem worried over the wrong things here. "Viability of the community" is certainly a more valid concern. There are a host of other pitfalls to be worried about as well which we will get to in a moment.

Joel Dramis, assistant building official for the city of Port St. Lucie, said his office has received no complaints about Levitt and Sons. But he said a contractor has filed nine liens against the builder.

Last month, Levitt Corp. said it was laying off as many as 200 of its 573 employees because of the housing downturn. Most of the cuts were planned at Levitt and Sons.

The builder did not pay $2.6 million of interest payments due last week to its five primary lenders. Levitt Corp. said it has loaned $84 million to Levitt and Sons through Sept. 30 but is unwilling to loan more money unless the builder can negotiate better financial terms with the lenders.

Levitt Corp. said it doesn't expect to recover the money it loaned to the builder.

Q&A With Mike Morgan

Mish: What happens in Florida if a builder goes bankrupt before the buyer closes?
Morgan: It depends. Most builder contracts request that deposits go into a general fund. You can opt out of the general fund, and your deposit will go into an escrow account, but this usually means you give up builder incentives. I’ve never had a single buyer opt out of the general fund for the escrow fund. It simply means giving up too much in incentives. So if the builder goes bankrupt, and your money is in the general fund, you are nothing more than an unsecured creditor. Even if your money goes into an escrow account, it depends how viable that escrow account actually is.

Mish: Who has first rights to the houses or partial houses?
Morgan: In each case I advise buyers to take their contracts to an attorney licensed in the state they purchased the home in as well as an attorney in the state they are in, if that is where they signed the contract and it is different than the state where the home is being built. Each state has different laws for contracts.

Mish: Should someone actually get to closing in these situations, what is the likelihood they will immediately be upside down on the loan.
Morgan: It's nearly guaranteed.

Mish: If someone decides to go ahead with a purchase shortly before or after a builder goes bankrupt are there any other potential pitfalls?
Morgan: Yes. It is quite possible that subcontractors who were not paid by the developer or only partially paid by the developer decide to slap mechanics liens on the house after closing. Another possibility is builder defects caused by rushed completions or builders cutting corners to save money. Both of these can be very expensive problems for the buyer sometime down the road.

Mish: Could a bankruptcy by Levitt be a blessing in disguise for those who have not yet closed on their homes?
Morgan: Absolutely. The smaller the original down payment, the bigger the potential blessing might be. This is true for any potential bankruptcy, not just Levitt. Depending on how contracts were written and whether any "outs" are present for the buyer, many potential headaches such as being upside down on a loan, amenities promised not being delivered, and the possibility of mechanics liens placed on homes for those who do manage to close, walking away can easily be the best option. Once again, I would advise talking to a real estate attorney over this matter. Contracts can vary for different buyers even with the same developer.

Contact information for Mike Morgan about this article or for Ground Zero Consulting Services to Wall Street and Retail Buyers
Email: Mike Morgan

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Money Supply - A Question About Credit

I have received several questions recently about my statement "The problem with using M2 or M3 as a measure of money is that both include credit transactions." (See Is the Fed Deflating? for the source of the question)

From HBR:

Why do you say there are credit components in M2? It looks to me like it is only physical currency, bank accounts, money markets, and CD's. None of those are credit.

This is from Wikipedia:
M2: M1 + most savings accounts, money market accounts, and small denomination time deposits (certificates of deposit of under $100,000).

From C:

The government website says this about M2:
"M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1."

Can you please explain what you mean by M2 containing credit transactions?
Thanks!

Mish:

Believe it or not savings accounts are not aptly named.

Saving accounts would be better described as lending accounts. By that I mean, savings accounts consist of deposits that by agreement, are make available for loans. In other words, banks take those deposits and lend them out. In return, depositors get interest. This arrangement is known by the depositor of that money. After all, how else could the bank pay interest on the money if the bank did not loan it out at a higher rate?

The reality then is that money in savings accounts is not really there (nor is it expected to be there). The money was lent out (spent or invested) with a promise by the borrower to pay the money back in the future. In the banking industry such accounts are called TDA accounts (Time Deposit Accounts).

Because the money was willingly lent out it's a credit transaction. There is no money in saving accounts. All that is there is a promise by someone to pay back what was lent out.

Checking accounts, however, are known in the industry as DDA accounts (Demand Deposit Accounts). Money deposited to a DDA (checking) account is by definition available on demand. At least its supposed to be. In actual practice, given that Greenspan authorized sweeps from DDA accounts, money that is supposed to be readily available on demand isn't really there in practice.

Sweeps are transactions that move (sweep) money from one account (in this case a DDA account) into another account (say a savings account) where the money can be lent out. This happens nightly and is done without the checking account depositor having any say in the matter. To repeat: Money that is supposed to be there, really isn't there. It's all a mirage. If you think money is sitting there in your checking account to the amount shown on your statement, you are mistaken. It was lent out.

The system would literally freeze up if all depositors wanted their money in cash tomorrow. Heck, there would be massive convulsions if even 10% of the people wanted their money in cash tomorrow. Far more money has been lent out than really exists.

Since the allowance of checking account sweeps, M1 has been under counted. That is why I add sweeps back into the monetary aggregate I call M Prime (M'). Please see Money Supply and Recessions for a complete description of M'.

A short version of the writeup is that M' is for all practical purposes what M1 was before Greenspan allowed sweeps. There are subtle differences between M' and what M1 used to be, travelers checks for example, but the amounts those are so small they can be ignored.

The problem with travelers checks is they are double counted. You buy travelers checks and the money sitting in your wallet as travelers checks is added to M1. But the Money you spent to buy the checks is sitting a bank somewhere as collateral. The net effect is that travelers checks are double counted. Travelers checks are not included in M'. As a practical matter however, the total amount of travelers checks in circulation is so small it can be ignored.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Heisenberg Uncertainty Theory Of Money

Heisenberg Uncertainty Principle :

It is impossible to have a particle that has an arbitrarily well-defined position and momentum simultaneously.

Uncertainty Principle Applied To Money:

By observing or attempting to observe money you alter where it is and/or the velocity at which it is traveling depending on whether or not you are watching with one eye or two. One can either determine how much money there is, where it is at, or the velocity and direction at which it is moving but not all of them at the same time.

This is complicated by the fact that watching is an aggregate thing not an individual thing. Where money is and how fast it is traveling is influenced by everyone's attempt to watch it.

Too many people are watching Bernanke's helicopter drop right now which explains why money turns up in mysterious places like the pockets of those working for Goldman Sachs rather than blowing in the breezes or floating around in thin air as logic would dictate.

If people would just stop watching, there would soon be a pile of bills accumulating in everyone's backyard via wind blown forces instead of the pockets of Goldman Sachs (GS), Merrill Lynch (MER), and Google (GOOG) employees.

Bernanke, being the hero that he is, has tried hard to defeat this travesty of justice by eliminating M3 reporting but so far it does not seem to be working. Somehow I think Bart at Now and Futures is the problem for Reconstructing M3. There are simply too many people still watching M3 that money does not flow to those who desperately need it.

Thanks to Blue Wire Studio for capturing Bernanke in action.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/