Wednesday, 5 July 2017

Financial Instability Again Lurks As Money Volatility At Last Jumps Above Average

The money supply growth rate affects prices overall and relative prices. The latter influences the structure of production as capital is attracted to sectors where prices grow faster. Economic developments are affected accordingly.

The money supply growth rate also affects financial conditions. A steady growth rate promotes financial stability to a larger degree than a volatile one over the short- to medium term. Combined with lower interest rates, a steady and upward sloping money supply growth rate is a boon for stocks.

For many years, the stock market has benefited from an influx of new money, courtesy of first the Fed and then the banks. In recent years, stocks seem to have benefited greatly from a stable money supply growth rate and continued low interest rates which have, it seems, kept financial instability at bay (for now). This again seems to have fueled speculative booms to new highs, especially for stocks.

But an unprecedented era of a steady money supply growth rate appears to have now altogether ended as money volatility has jumped in recent months.

It now remains to be seen how markets react to this change to the very foundation of the more than eight year old bull market in stocks and other financial assets. 

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