Broad Money Supply Declines by $50B in US, Fire Up the Printing Presses

If you’re not interested in the relationship between broad money supply growth and stock prices, then today’s Markets and Money is probably not for you. You might prefer to take a walk, read a good short story by Kafka, or eat a burrito. But if you ARE crazy enough to be interested in M3 growth…read on.

Ambrose Evans-Pritchard reports in today’s U.K. Telegraph that M3 in the U.S. (broad money supply) declined by US$50 billion in July and is growing at just a 2% annualised pace. So what?

Well, it takes new money to keep a credit bubble inflated (or to keep it from deflating). If the figures from the Fed can be trusted, and if they show that new money isn’t forthcoming (or that it’s forthgoing) then it may be a sign of even greater financial asset deflation in the months ahead.

Translation: it’s going to get a lot worse. What does that mean? It means if stocks are cheap, they’re going to get even cheaper. It means if good resource projects are good value now, they’ll be even better value as the market falls.

Not that it’s an easy thing to stomach. But let’s remember what we’re watching here. As investors de-lever and pay down debts, they sell assets to raise cash. It’s a bull market in cash. And money that is used to pay down debt is money that is not spent on stocks or new cars or the things people spend money on when they aren’t worried about debt.

There are some market analysts, most notably Richard Russell at Dow Theory Letters, who believe the market is signaling full-fledged deflation ahead. By the way, we send our best wishes to Mr. Russell, who recently told his readers he’s had a mini-stroke and will be cutting back his daily posts to once every other week.

Russell is the God Father of financial commentary on the internet. He works as hard as anyone we know and has been through more up and down markets than nearly anyone alive. Get better soon Mr. Russell and keep on bloggin’.

Russell’s latest comment leaves us in a quandary. He cites the producer price figures released in the U.S. yesterday. They show wholesale inflation rising at the fastest pace in 27 years. Yet Russell tells it’s deflation he’s worried about. Not inflation.

Russell says, “From what I see, the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling big money, sophisticated money, is cashing out, raising cash, preparing for world deflation.”

“This is probably why Lowry’s Selling Pressure stays at its high,” says Russell. “Smart money is selling into the stock market, day after day. They’re raising cash in preparation for the hard times when deflation is in the saddle. Deflation is ushering in the new strong dollar. Big money sees deflation and the lower rates that go with deflation. Look, if you have five million dollars and you are only receiving 2% in interest on your money, that’s only an income of hundred thousand dollars on your five million. Big money realizes that in a deflation you need a mountain of cash to keep up your lifestyle.”

“What I see is a coming world deflation, and I believe that’s the message the markets are sending. What’s the best stance in a deflationary situation? Lots of cash, and safe, solid, investments. Two areas that fit that requirement US dollars and US Treasury paper. What happens to stocks during deflationary times? They’re sold to raise cash. What happens to business in deflationary times? It’s crushed by ever-lower prices. What happens to the average citizen who’s loaded with debt during deflationary times? They’re battered unmercifully, as income buys less and less and as debt crushes them. What happens to assets during deflationary times? They’re worth less and less and their sale brings in fewer and fewer dollars. Isn’t the price of gold and oil already telling us that?”

We have enormous respect for Russell. However it seems to us that the monetary authorities will fight the broad money supply figures and debt deflation with money printing (or simply mailing checks to the American people). They’ve always done it in the past. And let’s not forget, their product is paper money. They have an interest in preserving the system they’ve designed, even it means innovation of some sort (which we reckon is around the corner).

The proper way to handle debts (if you are a believer in fiat money) is to pay them off with new money. Inflate them away. The U.S. government wants to do this, but at a rate of inflation which does not spark panic among its creditors, who are up to their eyeballs in dollar denominated bonds or currency reserves. Ultimately, inflation and deflation both achieve the same result: they destroy value. But they go about it in different ways.

But for reasons we’ll go into tomorrow, we don’t believe a real debt deflation is possible in a world with central banks. In a world without central banks? Different story.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "Broad Money Supply Declines by $50B in US, Fire Up the Printing Presses"

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Darryl Robert Schoon would argue the opposite: “Depressions are monetary phenomena caused by central bank issuance of excessive credit. In 1913, the newly created US central bank, the Federal Reserve, began issuing credit-based money in the US. Within ten years, the central bank flow of credit ignited the 1920s US stock market bubble; and shortly thereafter, following the collapse of the bubble in 1929, the world entered its first Great Depression in 1933 [sic]. [The ‘suspension’ of the gold standard during WW1 played a major part in the credit expansion of the 1920s]. “Investment banks are the undoing of central… Read more »
My Mum just had a mini stroke too. Hers was caused by high cholesterol. To all you readers out there- get your cholesterol down now or it might kill you! They say on tv that heart attacks and strokes are the biggest killers of humans, but what they should really say is that cholesterol is the biggest killer of humans , because it CAUSES the other two. I didnt know but I just found out (in the emergency ward)when my Mum had a mini stroke, that if cholesterol clogs the 2 big arterires that are one on each side of… Read more »
Coffee Addict
I agree with Richard Russell on this. The credit crisis continues to remove “phantom wealth” from circulation in the markets. Asset prices in the market simply fall as consequence. As Bill Bonner point out the money presses are (in a sense) working overtime to inflate the debt away (I’ve also been blogging this point for the last 18 months now). Nominal consumer prices are therefore on the increase. As most commentators here has said (for the past 18 months) the end result is likely to be a long term L curve for the world economy. Unpackaging this scenario to… Read more »
It seems the greatest deflationary factor is largely market driven and uncontrollable by the govt in the lack of uptake of credit removing money from circulation … lowering the money supply. The inflation factor is the printing press. So wouldn’t the final deflation-inflation speedometer be driven by the net of the two? Christina … you might want to Google some articles about how arterial ‘inflammation’ plays into the circulatory system game. There is a community out there that feel inflammation is the real cause and cholesterol plaques out as a result … like albumin in egg white coagulates as a… Read more »
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