Broad Money Supply Declines by $50B in US, Fire Up the Printing Presses


If you’re not interested in the relationship between broad money supply growth and stock prices, then today’s Daily Reckoning is probably not for you. You might prefer to take a walk, read a good short story by Kafka, or eat a burrito. But if you ARE crazy enough to be interested in M3 growth…read on.

Ambrose Evans-Pritchard reports in today’s U.K. Telegraph that M3 in the U.S. (broad money supply) declined by US$50 billion in July and is growing at just a 2% annualised pace. So what?

Well, it takes new money to keep a credit bubble inflated (or to keep it from deflating). If the figures from the Fed can be trusted, and if they show that new money isn’t forthcoming (or that it’s forthgoing) then it may be a sign of even greater financial asset deflation in the months ahead.

Translation: it’s going to get a lot worse. What does that mean? It means if stocks are cheap, they’re going to get even cheaper. It means if good resource projects are good value now, they’ll be even better value as the market falls.

Not that it’s an easy thing to stomach. But let’s remember what we’re watching here. As investors de-lever and pay down debts, they sell assets to raise cash. It’s a bull market in cash. And money that is used to pay down debt is money that is not spent on stocks or new cars or the things people spend money on when they aren’t worried about debt.

There are some market analysts, most notably Richard Russell at Dow Theory Letters, who believe the market is signaling full-fledged deflation ahead. By the way, we send our best wishes to Mr. Russell, who recently told his readers he’s had a mini-stroke and will be cutting back his daily posts to once every other week.

Russell is the God Father of financial commentary on the internet. He works as hard as anyone we know and has been through more up and down markets than nearly anyone alive. Get better soon Mr. Russell and keep on bloggin’.

Russell’s latest comment leaves us in a quandary. He cites the producer price figures released in the U.S. yesterday. They show wholesale inflation rising at the fastest pace in 27 years. Yet Russell tells it’s deflation he’s worried about. Not inflation.

Russell says, “From what I see, the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling big money, sophisticated money, is cashing out, raising cash, preparing for world deflation.”

“This is probably why Lowry’s Selling Pressure stays at its high,” says Russell. “Smart money is selling into the stock market, day after day. They’re raising cash in preparation for the hard times when deflation is in the saddle. Deflation is ushering in the new strong dollar. Big money sees deflation and the lower rates that go with deflation. Look, if you have five million dollars and you are only receiving 2% in interest on your money, that’s only an income of hundred thousand dollars on your five million. Big money realizes that in a deflation you need a mountain of cash to keep up your lifestyle.”

“What I see is a coming world deflation, and I believe that’s the message the markets are sending. What’s the best stance in a deflationary situation? Lots of cash, and safe, solid, investments. Two areas that fit that requirement US dollars and US Treasury paper. What happens to stocks during deflationary times? They’re sold to raise cash. What happens to business in deflationary times? It’s crushed by ever-lower prices. What happens to the average citizen who’s loaded with debt during deflationary times? They’re battered unmercifully, as income buys less and less and as debt crushes them. What happens to assets during deflationary times? They’re worth less and less and their sale brings in fewer and fewer dollars. Isn’t the price of gold and oil already telling us that?”

We have enormous respect for Russell. However it seems to us that the monetary authorities will fight the broad money supply figures and debt deflation with money printing (or simply mailing checks to the American people). They’ve always done it in the past. And let’s not forget, their product is paper money. They have an interest in preserving the system they’ve designed, even it means innovation of some sort (which we reckon is around the corner).

The proper way to handle debts (if you are a believer in fiat money) is to pay them off with new money. Inflate them away. The U.S. government wants to do this, but at a rate of inflation which does not spark panic among its creditors, who are up to their eyeballs in dollar denominated bonds or currency reserves. Ultimately, inflation and deflation both achieve the same result: they destroy value. But they go about it in different ways.

But for reasons we’ll go into tomorrow, we don’t believe a real debt deflation is possible in a world with central banks. In a world without central banks? Different story.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. Darryl Robert Schoon would argue the opposite:

    “Depressions are monetary phenomena caused by central bank issuance of excessive credit. In 1913, the newly created US central bank, the Federal Reserve, began issuing credit-based money in the US. Within ten years, the central bank flow of credit ignited the 1920s US stock market bubble; and shortly thereafter, following the collapse of the bubble in 1929, the world entered its first Great Depression in 1933 [sic].

    [The ‘suspension’ of the gold standard during WW1 played a major part in the credit expansion of the 1920s].

    “Investment banks are the undoing of central banking. While all banks, central, commercial and investment, view credit as the opportunity to exploit society’s growth and productivity, investment bank exploitation of growth and productivity exposes society to extreme risks—for investment banks use society’s savings to make their volatile and speculative bets.

    “The speculative risks undertaken by investment banks is done by leveraging the savings of society; and, when investment bank bets are sufficiently large enough and the bets go bad—as they inevitably do as the luck of investment bankers is due more to their proximity to credit than to their ability to foresee the future—it is society that will bear the brunt of the pain in the loss of its savings.

    “Inevitably, investment bankers cannot resist the temptations of excessive credit and, like the buyers of teaser-rate home mortgages, they will always overreach themselves—an overreaching that will have disastrous consequences for the society whose savings they bet.

    “The leveraged overreaching by investment banks in the 1920s caused the Great Depression of the 1930s and their more recent overreaching in this decade, the 2000s, is about to cause another Great Depression in the next, the 2010s” (“The Great Depression of the 2010s”,, May 5, 2008).

    When the argument is presented that ‘central banks’ can prevent ‘depression’ the best analogy, for me, is ‘alcohol’ at a ‘social’ party. What ‘alcohol’ is to a ‘social’ party ‘credit is to a ‘financial’ party.

    The social party begins and the guest start to imbibe. They are having a good time and so the alcohol consumption is increased. The party is ‘alive’.

    A few hours later the guests have had enough ‘alcohol’ so that they can’t consume any more – they have reached the alcohol saturation point – so the party begins to wind down and some of the guests begin to leave. While some may continue drinking the rate of consumption begins to taper off.

    But if the host wants to keep the party going and the guest to stay no matter how much more ‘alcohol’ he provides he can not tempt the quests to keeping drinking – the party is over.

    So it is with ‘credit’ at a financial party. When the debt saturation point has arrived no matter how much credit is provided the ‘credit’ afflicted guest cannot stomach any more – the party is over.

    The three great fiat systems, that began as a result of war, that preceded the present one, eventually ended in deflation, after the post-war bubble economies burst. The post-Cold War bubble economy will deflate and the fiat system introduce during the Vietnam War, a theater war of the Cold War, will have no different outcome to the ones that preceded them – deflation.

  2. My Mum just had a mini stroke too. Hers was caused by high cholesterol. To all you readers out there- get your cholesterol down now or it might kill you! They say on tv that heart attacks and strokes are the biggest killers of humans, but what they should really say is that cholesterol is the biggest killer of humans , because it CAUSES the other two. I didnt know but I just found out (in the emergency ward)when my Mum had a mini stroke, that if cholesterol clogs the 2 big arterires that are one on each side of your neck- you have a stroke, and if cholesterol clogs the arteries around your heart you have a heart attack. You can test them now to see how clogged they are. They can even test your neck arteries now to see how clogged they are. You could be a walking time bomb- but if you get your cholesterol down, your risk goes down too and you become healthy.

    Ps- if you ever see anyone slurring their speech and confused, or cant talk, or even walking a bit funny, call an ambulance as it may be a stroke. Thanks goodness I knew that. A stroke is not always someone clutching their chest and falling to the ground – the only symptoms (like with my Mum) can be slurred speech and then hardly any speech, and a bit confused. I just thought I’d tell you all that stuff I just learnt so it can help someone else.

  3. I agree with Richard Russell on this. The credit crisis continues to remove “phantom wealth” from circulation in the markets. Asset prices in the market simply fall as consequence.

    As Bill Bonner point out the money presses are (in a sense) working overtime to inflate the debt away (I’ve also been blogging this point for the last 18 months now). Nominal consumer prices are therefore on the increase. As most commentators here has said (for the past 18 months) the end result is likely to be a long term L curve for the world economy.

    Unpackaging this scenario to predict the stagflation impact on various asset class values and consumer price baskets will require more analysis. Collateral damage associated with dramatic up and down shifts in relative prices will be high.

    Dan is also on the risght track.

    Coffee Addict
    August 21, 2008
  4. It seems the greatest deflationary factor is largely market driven and uncontrollable by the govt in the lack of uptake of credit removing money from circulation … lowering the money supply. The inflation factor is the printing press. So wouldn’t the final deflation-inflation speedometer be driven by the net of the two?

    Christina … you might want to Google some articles about how arterial ‘inflammation’ plays into the circulatory system game. There is a community out there that feel inflammation is the real cause and cholesterol plaques out as a result … like albumin in egg white coagulates as a result of heat in your frying pan. I am not a med expert at all, but with a family history of circ pbms and high chol, I have been following the arguments on both sides. As an engineer and investor, I have seen many conflicts of interests and it seems like the pharma companies have been leaning more towards drugs that require “forever” doseages versus “healing” doseages.
    Just one contrarian’s viewpoint. Best of luck to you.


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