Fire Up the Printing Presses - more dollars to circulate!

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

By Dan Denning • August 20th, 2008 •
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'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..."

Norton's comment: This seems to be the opposite opinion for the future than the Leebs Newsletter. Leeb's sees inflation ahead. Commodities, energy and precious metals as returning to new highs since the emerging markets will continue to grow and require increasing natural resources. Read it carefully.