Thursday, 10 March 2016

CRASH ALERT: The U.S. Money Supply Growth Rate is Diving!

The prime driver of GDP, stock market prices, consumer spending, and other major economic aggregates is not productivity increases. Nor is it population growth or a declining unemployment rate. Anything measured in monetary terms is primarily driven by...you guessed it, the quantity of money (money supply). More specifically, the determining factor is the growth rate of the money supply. 

Following some four and a half years of massive monetary injections, the money supply growth rate settled at a more "normal" rate of expansion beginning in the last quarter of 2013. And there it remained, fluctuating around the 7.5% mark, below the longer term average y/y growth rate 8.2%. 

But something has changed in 2016, and especially since the second half of January - the growth rate is now diving. Since January 18, the growth rate has plunged from just north of 7.0% to the most recent 5.8%...


...the lowest y/y growth rate reported since November 2008 (the eye of the banking crisis). 


The likely reason for the sharp fall is a decline in the growth rate of bank lending. With the fall in oil prices and increased uncertainty, banks watching their reserves more closely is a natural development at this stage of the cycle. It therefore appears increasingly likely that a stock market crash and large scale economic adjustments (deflation and recession/depression) are moving ever closer unless the Fed resort to QE4 shortly. Follow the money supply in the coming weeks, I'll keep a close eye on it. 


7 comments:

  1. I don't see it at TMS: https://research.stlouisfed.org/fred2/graph/?g=3Laj
    still at 7.6%

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    1. Dmitry
      Excellent to see someone is paying attention on this important matter.

      Note that I use a short version of the TMS, reported weekly and presented as "Percent change from year ago", which excludes the items only reported on a monthly basis: http://www.ecpofi.com/2013/08/introducing-short-version-of-austrian.html. In addition, the figures are not seasonally adjusted. I also see you include "Deposits with Federal Reserve Banks, other than Reserve Balances: U.S. Treasury, General Account" which is something I need to look into.

      Atle

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    2. Treasury General Account change the picture. I don't know where are this new money come from.

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  2. U.S. Treasury, General Account: "This account is the primary operational account of the U.S. Treasury at the Federal Reserve. Virtually all U.S. government disbursements are made from this account. Some tax receipts, primarily individual and other tax payments made directly to the Treasury, are deposited in this account, and it is also used to collect funds from sales of Treasury debt."

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  3. So this money doesn't exist for market while they just stay at this account. Your short version of TMS is still correct?

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  4. Well, it is money as far as I can see so I suppose it should be included as some Austrian economists suggest. The balance is usually not very large, but it has been quite large in recent months. Your thoughts? I'll look at both series going forward and might change the series eventually. Will have another look.

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    1. I agree this is money. I guess treasure account play big role for stock market in recent month. More money treasure account has (treasure rise debt) than less liquidity stock market has, less money treasure account has (treasure pay debt) than more liquidity stock market has. https://research.stlouisfed.org/fred2/graph/?g=3MKE

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