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Money Supply Says No-Go to Inflation

June 1st, 2010 Michael McDonough

A precipitous decline in money supply could be choking the U.S.’s economic recovery, while supporting deflationary fears.  While the Fed no longer tracks M3, one of the broadest measures of the U.S. money supply, professional forecasters estimate the index has fallen 9.6% on an annualized basis from February through April; matching what was last seen during the Great Depression.  Looking at another broad measure of U.S. money supply, referred to as the St. Louis Fed’s MZM, which measures assets redeemable at par on demand, money supply has fallen 1.5% since the end of last year.  M2, a more popular measure of money supply, has remained positive, but diminished to a growth rate of 1.6% y/y from a peak of 10.1% in 2009. 

Professor Tim Congdon from International Monetary Research has called the trend in the M3 data ‘frightening’.  He also said, “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly.”  To put it simply, as long as banks remain hesitant or unable to lend inflation should remain tame in an environment of stunted economic growth.

Source: Fed

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