Thursday, December 11, 2008


Because of the Thanksgiving holiday, I haven't calculated money supply growth rates for a couple of weeks. In early November, I reported that M1 nsa was climbing at a three month annualized rate near 25% and that M2 nsa was growing at a three month annualized rate of 7.7%. The M1 growth rate of 25% was huge.

Things have changed.

The three month annualized M1 nsa is now climbing at an astounding rate of 64.1%. Three month annualized M2 nsa is climbing at a rate of 17.1%.

As long time readers know, I generally don't look at seasonally adjusted numbers, since the money out in the economy, and not "seasonally adjusted" money, is the only money that can have an impact on the economy. But given that this is December and that currency (which is part of M1) tends to climb in December, it pays to take a look and see how much of the sky rocketing M1 can be attributed to seasonal factors, rather than fear. The answer is some, but three month annualized and seasonally adjusted M1 is climbing at 39.5%.

Bottom line, enormous fear remains in the economy. That is the only thing that can account for the tremendous shift into M1 money supply components, currency and demand deposits. The economy will not turn until this dramatic growth in M1 slows down, at a minimum, to the growth rate of M2.

And speaking of M2, which is a great long term measure of how much the Fed is trying to spark the economy, three month annualized growth of 17.1% is major. Once the fear subsides, the economy will turn much quicker than most expect, and a jackknife up in inflation is very possible.

December always has unusual crosscurrents, so things could start changing as soon as January, and if the fear subsides simultaneously, we will have record upside action in the stock market. The T-Bill market and Treasury bond markets will then see a reversal of their current upside performance.

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