Thursday, August 15, 2013

Is Slowing Money Supply Signaling Another Stock Market Crash?

According to Austrian Business Cycle Theory, when a central bank slows its money printing that has fueled a manipulated stock market boom, the stock market is very vulnerable to a crash.

Murray Rothbard in his book America's Great Depression explained how it occurred before the October 1929 crash:
It is generally acknowledged that the great boom of the 1920s began around July, 1921, after a year or more of sharp recession, and ended about July, 1929. Production and business activity began to decline in July, 1929, although the famous stock market crash came in October of that year. [...] the total money supply of the country, beginning with $45.3 billion on June 30,1921 and reckoning the total, along with its major constituents roughly semiannually thereafter. Over the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight-year period. This is an average annual increase of 7.7 percent, a very sizable degree of inflation. Total bank deposits increased by 51.1 percent, savings and  loan shares by 224.3 percent, and net life insurance policy reserves by 113.8 percent. The major increases took place in 1922–1923, late 1924, late 1925, and late 1927. The abrupt leveling off occurred precisely when we would expect—in the first half of 1929, when bank deposits declined and the total money supply remained almost constant. 
The money supplied slowed before the October 1987 crash:

It slowed before the 2008 September Financial Crisis:

And it is slowing again now:

Austrian economics also teaches us that it is a very complex world and that there are many, many inputs on an economy at any one time, so just because something occurred a certain way in the past it doesn't mean it will develop exactly that way in the future, BUT central bank money manipulation does play a big role and it is crashing once again.


  1. Bob, there also is another reason as to why the market crashed, which was outlined in the following paper by Mark Mitchell and Jeffrey Netter:

    "Triggering the 1987 Stock Market Crash: Antitakeover Provisions in the Proposed House Ways and Means Tax Bill?" Journal of Financial Economics, vol. 24, no. 1 (September 1989), pp. 37-68.

    This was a time of leveraged buyouts, many of which were financed by junk bonds, and a lot of powerful people who didn't like the idea of having to be accountable to their stockholders did a "shocking" thing: they ran to Washington, and specifically to Congress for protection.

    You might remember that the media was demonizing Michael Milken and Drexel Burnham Lambert at the time when, in fact, the media should have been taking a hard look at how American corporations needed restructuring and needed to be entrepreneurial again. Not surprisingly, the government destroyed Drexel Burnham, jailed Milken, forced S&Ls to divest themselves overnight of junk bonds in their portfolios, and then people were shocked, SHOCKED when the S&Ls took a hit. Of course, the government blamed Milken and junk bonds for that, too.

    I believe that cronyism and protection for politically-connected American businesses is so endemic in our economy that we cannot get rid of it anymore. There is no sizable constituency that is pushing to get rid of what is eating this economy from the inside.

    There might well be another crash and it could be related to the money supply, as you point out, but the 1987 crash was too closely linked to proposed legislation for us to ignore.

  2. No... money base is soaring (quadrupled in the past 5 years). What you guys are missing is that the $45 Bln / month treasury purchases DOES matter as it goes directly into the economy.

    Besides, using government stats these days is a fool's game. Look no further than True Money Supply to get the real picture of what is going on.

    The Fed is only emboldened by the herd's consternation of the erroneous conclusion of a "crashing money supply". It gives the Fed firepower to prolong QE, to postpone the "taper", etc.

    Stocks have soared since the Fed reflation policies since early 2009 - they will continue up as a consequence of money printing. Not only do goods and services rise as one consequence, but so do asset prices. Now repeat that 10 times and get back to me class.

  3. money growth rate slows down but still is positive and long way to go...