Money Supply Growth: 24.3%!

Numerous people have written, asking about how much liquidity is really in the financial system. I suspect the underlying cause of this inquiry is the October 8 commentary by John Hussman, titled The Bag Will Not Inflate, and Liquidity Will Not Be Flowing.

I have a lot of respect for John’s methodology, but I think he may be understating the impact of all this cash sloshing around. Central bankers around the world can and do and are having an impact on money supply, liquidity, and equity prices.

Have a look at the October 11th St. Louis Fed’s U.S. Financial Data:

MZM (updated through 10/11/07)

chart courtesy of Federal Reserve Bank of St. Louis

To more specifically quantify this, the accompanying table reveals the degree of money creation at an annualized rate. As of August 08th, MZM had a growth rate of 24.3%:

MZM Annualized Growth Rate (08.06.07)


Note that this was before the Fed’s cut in the discount window rate, and prior to the global injection of liquidity by Central Bankers.

Despite the increase in dollars, and the decrease in dollar value, the government maintains the fiction that we have a strong dollar policy (U.S. Affects a Strong Silence on Its Weak Currency).

What is the impact of all this money supply growth? An incredible shrinking dollar.

While we can intellectualize about it, you really need to travel abroad to see the impact. Doug Kass is in Italy this week, and he is astonished at how feeble the dollar is overseas. The price of the Euro
against the U.S. dollar really hits home once you leave the USA. He notes that those that have been "non plussed by the continued
erosion of our currency will have a jolt of reality"
when going abroad.

Some spending figures from Rome:

Dinner for two last night in Roma? $320 (U.S.)
Price of refueling an
empty tank in my auto on Thursday? $175 (U.S.)
Hotel per night? $850 (U.S.)
Bellini? $24 (U.S.)
Dry Cleaning of shirt I poured Chianti on? $20
Two days in Roma? Priceless!

Doug is the 20th person who has related the same details to me . . .



U.S. Financial Data
Federal Reserve Bank of St. Louis
October 11, 2007

U.S. Affects a Strong Silence on Its Weak Currency   
NYT, October 10, 2007

The Incredible Shrinking Dollar
David Gaffen
Market Beat, September 27, 2007, 3:05 pm

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Yesterday, Traders embraced the release of the FOMC minutes. Indices were flat up until just before the 2:00pm release, and then took off, with the Dow gaining near 1%.

The thinking behind the Fed action was clearly revealed in that release. The emphasis was on the subsequent impact of credit on the entire system. The WSJ reported:

"Federal Reserve officials worried that credit-market
turmoil could reinforce slower growth at a time of "particularly high
uncertainty," leading to their half-point interest-rate cut last month,
minutes from the meeting show.

Without a cut, there was concern that "tightening
credit conditions and an intensifying housing correction would lead to
significant broader weakness in output and employment," the
rate-setting Federal Open Market Committee said. The minutes, released
yesterday, also showed members worried that market turmoil "might
persist for some time or possibly worsen."

They offered no clues about
the direction or timing of the Fed’s next move."

That last sentence is quite intriguing. Understanding whether or not a rate cut is forthcoming impacts yields, stocks prices, etc.

Given the significance of the Fed’s action, one would suppose that the markets which trade the Fed Futures would be, if not prescient, than at least telling about their future price action. One of the more fascinating aspects about this, however, has been the way the Fed Fund Futures have functioned over this time. They have been wildly wrong, forecasting an imminent rate cut since January 2006. I thought it might be instructive to look at why this maybe so, and what it might mean . . .

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