Wonder why credit is shrinking? All money is created by debt. Banks are not lending.

Economic data released today, Oct 27, 2009, in the euro zone showed that M3 money supply for the three months average ending in September, declined to 2.5% inline with projections and lower than the revised prior reading of 3.1% from 3.0%; while on the year it fell to 1.8% from the revised reading of 2.6% from 2.5%, which is worse than the forecasted reading of 2.2%.

Loans for individuals and firms, posted their first annual slump on record in September, as a consequence of the decline in demand on credit, which shows that the financial sector is still impacted by the financial crisis that hit global economies last year.

Banks, which received aid from European national governments and ECB, are more reluctant to lend. The financial crisis already wiped out capital and set banks to hoard cash to restructure their balance sheets, which are ailing with diluted investments.(more here)

M1: M1 includes funds that are readily accessible for spending. (1) M1 consists of: currency outside Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Bank reserves are not included in M1.

M2: Equals M1 + savings deposits, time deposits less than $100,000 and money market deposit accounts for individuals. M2 represents money and "close substitutes" for money. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.[

M3: Equals M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. M3 is no longer published or revealed to the public by the US central bank. However, it is estimated by the web site Shadow Government Statistics.

Here is the problem:

In the US, M3 has shrunk at an annual rate of 6.5% over the last three months, a pace of contraction not seen since the 1930s. US bank loans have plummeted since May.

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False Reading: Brisk GDP Growth Can't Last WSJ

The economy is about to post growth numbers reminiscent of the good old days, otherwise known as the "old normal." But a "new normal" of slower growth might be inevitable.

The Bureau of Economic Analysis is set to release Thursday its first read on third-quarter gross domestic product. Economists estimate GDP grew at a 3.2% annualized rate, after shrinking 0.7% in the second quarter. A handful of economists expect growth of 4% or higher.


Among the reasons for growth: Companies dumped inventory in the third quarter, though less aggressively than during the previous three months. By the math of GDP accounting, merely slowing down inventory liquidation will boost GDP's growth rate by at least one percentage point, according to many estimates.

The government's cash-for-clunkers program was another lift, though many of the new cars purchased were foreign-made, subtracting from GDP.

The tax credit for first-time home buyers encouraged some home building, another GDP booster. But many buyers borrowed against the credit to cover their down payment, leaving them with little cash to buy furniture, lawnmowers and such.

All together, GDP growth could rank as the fastest since the third quarter of 2007. Many economists expect a repeat in the fourth quarter, driven by still-lower inventory liquidation and more government stimulus effects.

A 3.2% growth rate would almost match the economy's average pace of the past 60 years. But this is no typical economy.

In typical recoveries, "real" demand rises to make the recovery self-sustaining. That may yet happen, but debt remains a big hurdle. Consumers still have debt loads near record highs. Defaulting might shed some of that burden, but will ruin credit ratings and hit the banks again.

Many small businesses still have trouble getting loans, and commercial real estate is a looming balance-sheet nightmare that will keep bank lending tight for months

The government is borrowing more than enough to fill the gap, pushing total U.S. debt outstanding, including that of households and financials, to a record 373% of GDP.

That is helping growth now, but it must be repaid. Most repayment options -- including higher interest rates, higher taxes and slower consumption -- will result in economic growth below normal.

Write to Mark Gongloff at mark.gongloff@wsj.com