Wednesday, 26 November 2014

The Money Relation Signals Decreased Inflationary Pressures

The Money Relation is pointing in the direction of a less inflationary environment in the U.S. as money supply growth slows and as the personal savings rate increased somewhat in October. The reading for the month, -44.5%, was a nine month low and represented the 10th month in a row in negative territory (suggesting money is becoming less "abundant").

As U.S. government deficit spending is shrinking (for now) and as the Fed ended QE3 in October, the money supply growth going forward is likely to continue to decrease. Unless QE4 is implemented shortly, only increased bank lending and security purchases by banks from the non-bank public can offset this likely reduction in the money supply growth rate. The Fed will however continue to roll over its assets and large proportionate purchases from the non-bank public might offset the decline in the money supply growth rate somewhat, though likely marginally. 

For now, the Money Relation is not pointing to an imminent economic collapse, but it is pointing in that direction. Do keep in mind that things can change quickly, as 2006 and 2008 demonstrated very clearly when the Money Relation as defined here also declined for ten consecutive months. 

The current development is certainly no good news for stocks, especially as stock prices and earnings are grossly inflated and reliant on further money supply growth in my opinion as I've tried to highlight in numerous charts and articles (e.g. here).