Friday, September 04, 2009

Money Supply Growth Turns Negative

Compared to 52 weeks ago, the MZM money supply measure in the week to August 24 was up 8.9% and M2 is up 7.6%. However, just like with price inflation, the 1 year increase is deceptive, except that monetary trends are more deflationary than they seem while price trends are more inflationary (for now). Most of the increase came during the first 6 of those 12 months. MZM peaked in early June (after having increased slowly since March) and M2 in mid-March. For more than 5 and 2 months respectively then, we have experienced a mild form of monetary deflation. As the graph illustrates though, most of the drop has happened during the last 4 weeks which is why the effect so far has been limited.

Because of the lagged effects of previous money supply increases , we have seen a stock market rally, a pick-up in price inflation and a stabilization of output.

If the recent more deflationary monetary trends continue, then the risk of a stock market sell-off and a double-dip recession will be very high,


Blogger Celal Birader said...


Do you see this as evidence that America is pulling back on it's 'stimulus' of the economy ?


12:13 PM  
Blogger stefankarlsson said...

Celal, no, I think it instead reflects weak demand for credit.

3:04 PM  

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