Friday, July 11, 2008

SUPER ALERT: Dramatic Slowdown In Money Supply Growth

After growing at near double digit rates for months, money growth has slowed dramatically. Annualized money growth over the last 3 months is only 5.2%. Over the last two months, there has been zero growth in the M2NSA money measure.

This is something that must be watched carefully. If such a dramatic slowdown continues, a severe recession is inevitable.

We have never seen such a dramatic change in money supply growth from a double digit climb to 5% growth. Does Bernanke have any clue as to what the hell he is doing?

Monetary growth is one thing. A slowdown in money growth is another. To jerk the money supply back and forth is to jerk the economy back and forth. Our guess is that the Fed is using models, in an attempt to sterilize their junk mortgage paper purchases, and that somehow they have miscalculated how much of the Feds portfolio had to be sold off for the sterilizations.

As of April 3, 2007, the Fed held $781 billion in various Treasury securities. By the start of April of this year, the Fed held only $589 billion in Treasury securities. As of July 10 of this year, the Fed held only $479 billion in Treasury securities. In the last three months, alone, the Fed has sold off (or traded for junk paper) $110 billion of its Treasury securities!

In the last year, the Fed has liquidated 39% of its Treasury portfolio and replaced it with mortgage junk. That last $110 billion to go out the window was 18.6% of what they had left. With a Fannie Mae bailout, a Freddie Mac bailout, rumors about Lehman and Merrill Lynch, the Fed will most assuredly be liquidating more Treasury securities to buy more junk. At the rate it is going (This is not a prediction) the Fed could be out of Treasuries by the end of the year, then its sterilization efforts will by necessity have to end and we would get a knee jerk reaction back to huge money printing as the Fed would have spent all the cash, i.e. Treasury securities, in its till.

Keep in mind that Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae's is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States.

Depending on the details of how a Freddie Mac/ Fannie Mae bailout goes, it could certainly result in the Fed liquidating the remainder of its government securities portfolio.

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