Sunday, March 28, 2010

M2 Money Supply Growth Collapses

The above chart is extremely important.

The information that it imparts explains why the dollar has been so strong against the euro and most other currencies. It explains the weakness in gold. And, I believe it signals an eminent crash in the U.S. stock market--which will lead to the second leg of the double dip recession.

How does the chart signal all this? Simple supply and demand. There are fewer dollars entering the system. Fewer dollars changes the supply structure that existed when the Fed was aggressively printing.

Specifically, fewer dollars means that its price will go up in terms of most other currencies and gold. There will also be fewer dollars to support the current structure of the stock market.

Here are specifics:

The M2 growth rate on an annual basis fell in the week ending March 15 to 0.85%, the lowest money growth rate since May 1995.

In each of the last 10 weeks, M2 growth has been below 2.5%.

Mark Perry details a lot of these specifics at his blog. His focus, though, is on the lack of price inflation that will exist because of this collapsing growth. He is correct, but I think he is missing the much bigger picture of the impact this will have on foreign currencies vis a vis the dollar, the impact on gold, and most important the stock market and overall economy.

In other words, all hell is about to break loose, again. And few are ready.

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