The Telegraph is reporting Sharp US money supply contraction points to Wall Street crunch ahead.



The US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.



Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959. "Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.



On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.



The growth in bank loans has turned negative to a halt since March. "It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.



My Comment: What would be more worrying would be if banks kept lending in a world where asset prices are plunging. Those with good credit do not want to borrow and those with bad credit can't borrow. This is actually a good development. Banks need to raise capital, as opposed to lending recklessly in a word of overcapacity in nearly everything.



Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.

My Comment

should not

The overall debt burden in the US economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.

My Comment

Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

My Comment

M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover.

My Comment

People are failing to take into consideration why M3 is soaring. And right now the why is extremely important. The answer is businesses are tapping credit lines for fear they cannot tap them later. They are parking that money in institutional money market accounts and in response M3 and MZM have been soaring. These certainly are not inflationary conditions.

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