Thursday, August 21, 2008

The bottom line is that one has to look not only at what M3 is doing, but why it is doing it. Nearly everyone got this wrong.

M3 Contraction - The Future Is Now

The Telegraph is reporting Sharp US money supply contraction points to Wall Street crunch ahead. The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months. On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms. The growth in bank loans has turned negative to a halt since March. "It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.

Posted by malct @ 05:38 PM (762 views)
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5 thoughts on “The bottom line is that one has to look not only at what M3 is doing, but why it is doing it. Nearly everyone got this wrong.

  • According to the venerable John Williams of, it is a fiction that M3 contracted. It did not in fact contract.
    I can’t post his text as it is from a subscription-only email, but subscribe yourself if you want to read the real skinny.

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    It means that monetary inflation has been high, generally over double-digit, for the last couple of years at least. But just recently the rate of increase has moderated to about 2%.

    So you are supposed to be frightened that the deflation bogeyman is coming to get you, and be grateful that your political masters and their masters intervene and make you poorer.

    Because otherwise the deflation bogeyman will come and get you.

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  • Gardenia,

    Understanding money supply:

    If you have £100 in your pocket then the total money supply is £100. If you put it in a bank who then lends £50 to someone else, then you still have £100 printed on your bank statements and the other person also now has £50. The total money supply is now £150, an increase of 50%.

    Now if that person also puts their £50 into a bank account and the bank lends out £25 of it again, the new money supply is £175, an increase of 16%.

    If the bank decides to play it risky and lends out £90 per £100 deposited instead of just £50 then the money supply is £190 after the first round.

    As the banks lend more and people borrow more, money supply increases. This has been the situation for most of the last century, in (almost?) every year the amount of lending has increased and the money supply has therefore increased too. We’re now reaching a situation where the banks can’t lend any more and people are wary of borrowing any more. Money supply has stopped growing.

    (Note: that’s my understanding of it, please feel free to correct me)

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