Thursday, May 27, 2010

Plunging Money Supply Has Ominous Implications

The lifeblood of the world financial system is money.  When there's more of it sloshing around, times are typically good unless there TOO much of it, causing inflation.  Econometric studies have shown that of the 10 components of the Index Of Leading Economic Indicators (LEI), 2 are the most predictive of future economic activity:  growth in the Money Supply and changes in the Stock Market.

It can be argued, quite convincingly, that the Stock Market is itself is highly dependent on growth in money.  In fact, it's possible, that ALL 10 components of the LEI are driven by growth in money. 

The money supply is SCREAMING!  Is anyone out there listening?

The broadest measure of money, called M3, is contracting at an accelerating rate that now rivals the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal orgy in history.

The M3 figures - which include a broad range of bank accounts and are tracked by monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer.  The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6%.  The assets of insitutional money market funds fell at a 37% rate, the sharpest drop ever.  While a rising money supply does not always translate into boom times, a FALLING M3 has historically ALWAYS been followed by an economic contraction and a falling stock market.

Record stimulus spending has been an utter failure in triggering job growth and has barely produced any economic recovery.  First quarter Gross Domestic Product (GDP) was revised lower to 3% from 3.2% this morning.  The economy has lost more than 8 million jobs since the downturn began.

The Obama Administratio has an entirely different explanation for the failure of stimulus measures to produce the hoped for results.  They are opting instead for further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97% of GDP next year and 110% by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to approve another  $200 billion stimulus package to produce economic growth.

Federal Reserve head Ben Bernanke no longer pays attention to the M3 data.  The bank stopped publishing the data five years ago, considering it too erratic to be of much value.

Mr. Bernanke has conveniently forgotten that double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control.  The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a very clear warning that the economy and stock markets were about to go into freefall.

The White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4% of GDP) this year and set up a commission to target cuts.  Mr. Obama, clearly a reader of "Marko's Take", has now understood that the second dip of this Double-Dip Hyperinflationary Depression is imminent.

The dominant voices in US policy-making, Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke are all Keynesians who reject monetary theory and have an extreme distaste to any mention of the quantity of money.  Once they read "Marko's Take", perhaps they ought to open up their copies of "The Monetary History of the United States" by Milton Friedman and Anna Schwartz.

The die is cast.  The crash in M3 has ominous implications.  It means the second dip is imminent,  the stock market will have trouble and on the plus side, interest rates will NOT rise for a long time.

Marko's Take

Interested in ideas on how to fix Social Security?  "Social In-Security:  The Solution"  will be posted in the next 24-48 hours.  To familiarize yourself with the ponzi scheme called Social Security, please check out our video entitled "Social In-Security: The Problem" by clicking here


  1. Marko

    Great analysis! The truth maybe too ugly to handle at this point... the force of change may eventually come from a different place....


  2. What is Marko trying to do? Confusing people with facts? :-)



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