Tuesday, August 19, 2008

U.S. Broad money M3 in sharp contraction in July 2008

The deflation - inflation debate is raging. While inflation indicators are flashing red hot warning signs, commodity prices have come down from their peak levels in early July. A world wide economic slowdown is expected to put the brakes on prices. Another warning sign comes from the growth of monetary aggregates in the U.S. Ambrose Evans-Pritchard, a writer for the Daily Telegraph, points to a sharp drop in M3.

From the Daily Telegraph:
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.
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.

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The US Federal Reserve took the controversial decision to stop reporting M3 in 2005 on the grounds that the modern financial system had rendered the data obsolete. Monetarists however insist that M3 still is a lead indicator for asset price moves. The data should be viewed with caution because three-month shifts in M3 can be highly volatile.

source: Sharp money supply contraction points to Wall Street crunch ahead
By Ambrose Evans-Pritchard, The Daily Telegraph http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/19/cnusecon119.xml

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