Kevin Spires, CFA, FRM
Yesterday after the market close, the Federal Reserve released its weekly Money Supply (H6) Report. M1 Growth continues to decelerate with the Q/Q growth rate at 5.82% while the Y/Y growth rate is still quite steamy at 16.76%. Looking at the chart to the left, the sharp deceleration in the quarterly rate is slowly flowing through to a slower yearly growth rate.
For now, there is plenty of money in the system, but if the quarterly growth rate turns negative, expect the Fed to leap into action on QE3
For now, there is plenty of money in the system, but if the quarterly growth rate turns negative, expect the Fed to leap into action on QE3
M2 Money Supply growth has also decelerated. with the Q/Q growth rate at 4.78% versus a quite healthy 9.58% yearly growth rate.
Operation Twist hasn't been a boost to Money Supply (or Credit) growth. The big boost to Money Supply has come from the Federal Reserve's outright money printing from QE1 and QE2. As big banks continue to come under pressure to delever, expect Ben Bernanke to rev up the helicopters again this fall and print money in a QE3 operation.
Watching how Money Supply & Credit Growth behaves over the next 2-3 months is crucial to calling the exact meeting where Bernanke will be able to convince the FOMC to undertake QE3. QE1 and QE2 were undertaken in response to money growth rates close to zero. If quarterly money growth rates continue to drop over the next quarter, expect the FOMC to leap into action.
This does not mean that I think QE3 is necessary or good for the economy. In my quest to understand Ben Bernanke's outlook on the world, I have come to believe he would rather ignite an inflationary episode like the 1970's rather than repeat the mistakes of the 1930's. Unfortunately, I think the Fed's medicine is counterproductive and is allowing a massive leveraging up of the Federal Government that will ultimately have to be unwound. There is an increasing probability that the unwinding of the Federal Government's fiscal situation will be accompanied by a debt crisis that will make the current European Debt Crisis pale in comparison.
Operation Twist hasn't been a boost to Money Supply (or Credit) growth. The big boost to Money Supply has come from the Federal Reserve's outright money printing from QE1 and QE2. As big banks continue to come under pressure to delever, expect Ben Bernanke to rev up the helicopters again this fall and print money in a QE3 operation.
Watching how Money Supply & Credit Growth behaves over the next 2-3 months is crucial to calling the exact meeting where Bernanke will be able to convince the FOMC to undertake QE3. QE1 and QE2 were undertaken in response to money growth rates close to zero. If quarterly money growth rates continue to drop over the next quarter, expect the FOMC to leap into action.
This does not mean that I think QE3 is necessary or good for the economy. In my quest to understand Ben Bernanke's outlook on the world, I have come to believe he would rather ignite an inflationary episode like the 1970's rather than repeat the mistakes of the 1930's. Unfortunately, I think the Fed's medicine is counterproductive and is allowing a massive leveraging up of the Federal Government that will ultimately have to be unwound. There is an increasing probability that the unwinding of the Federal Government's fiscal situation will be accompanied by a debt crisis that will make the current European Debt Crisis pale in comparison.
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