Monetary Conditions Turn Deflationary
Even M1 and M2 fell back last week, though they (particularly M1) are unlike MZM still up significantly compared to late July.
This provides an explanation of the massive combined stock- and commodity price sell-off in recent weeks. As long as this monetary contraction continues, we will likely see a continued bear market in stocks and commodities.
This decline has happened despite the record fast expansion of the monetary base created by the Fed's various schemes to prop up the banking system. It thus seems that at least for now, the inflationary effects of the Fed's various schemes have been overwhelmed by the deflationary effects of the increased risk premiums created by the recent financial distress.
One thing interesting to note is that even as the quantity of deposit money is declining, traditional paper and metal money (aka cash aka currency in circulation) is increasing at a record fast pace, being up nearly $10 billion or 1.25% in 3 weeks. This mirrors the development during the Great Depression when currency in circulation increased rapidly even as overall money supply fell fast, as popular mistrust in banks caused people to withdraw their deposit money and hold them as notes and coins. These numbers indicate a similar development (although so far much less dramatic, but that might change).