US Deflation Watch: Serious Decline In Money Supply

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Subject:	US Deflation Watch: Serious Decline In Money Supply
Date:	Sat, 12 Jun 2010 07:15:15 -0700
From:	Jas Jain

US Deflation Watch: Serious Decline In Money Supply

David Rosenberg; 06/09/10:

"MONETARY CONTRACTION RAISES DOUBLE DIP RISKS

"We are not sure who subscribes to John William's Shadow Government Statistics but it is always a great read…

"According to John, M3 contracted at an epic 5.9% YoY rate in May (from -5.0% in April) and is now bordering on the peak rate of monetary deflation seen in the 1930s (at -7.3%). The contraction in M3 seems to be at odds with the Fed's uber-easy monetary policy stance, but what is happening is that the funds the Fed has been injecting into the financial system, which has been bolstering base money, are not being re-lent out by the commercial banks but instead are being left idle on deposit at the central bank.

"As John points out, every single time in history when real M3 has contracted, a contraction in real GDP followed suit in short order. Double-dip risks are higher than many currently believe; then again, this is no different than the consensus views back in 2000 and 2007."

 

Two years ago I was inundated with e-mails and blog comments showing "Shadow Govt Stats" pointing to 10-15% inflation in M3. Now, the same inflationists are quiet when the shadow M3 is seriously deflating. Question is not if the US economy would have a double-dip, the only question is when, in 2010 or in early 2011. My forecast is that the next recession would begin in 2010. If so, we should definitely have a 20%+ decline in the S&P 500 from the recent high, i.e., below 975.

 

Soon we should have Guru Lakshman Achuthan of ECRI, with WLI crashing, claim that the double-dip could be avoided by urgent policy actions by the government. And three month later he would say that government screwed up again! The guru himself is a screwball when it comes to forecasting recessions. The guy can't interpret his own data, or may be he is afraid to. Bad economists are one of the many problems that Americans have to contend with.

Jas