Alert
FLASH UPDATE - December 20, 2008
JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
FLASH UPDATE
December 20, 2008
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Growth Surges/Accelerates in Broad Money Components
Monetary Base Up 97.5% Year/Year
Fed Actions Begin to Kick In — For Better and Worse
U.S. Dollar Remains Key to Markets
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PLEASE NOTE: The full SGS newsletter currently is targeted for Tuesday (December 23rd), although it could slip to the Tuesday following Christmas (December 30th). In any event, there will be an update and advice early next week.
– Best Wishes for the Most Joyous of Holiday Seasons! John Williams
Bulk of M3 Components Surge an Annualized 63.4% in Latest Week. The seasonally adjusted data on M2, institutional money funds and large time deposits at commercial banks (M3 components that account for roughly 90% of the total measure) have shown a pattern of accelerating growth for the last three weeks (see the Fed’s H.6 and H.8 reports). In the three weeks ended December 8th/10th, annualized growth was 39.3%, the annualized growth for the last two weeks was 49.8%, and the annualized growth in the most recent week was 63.4%.
The growth here reflects a surge in demand deposits (checking accounts), savings accounts, institutional money funds and resumed growth in large time deposits. While these measures may reflect some impact from movement of personal funds out of Treasury bills back into the money supply accounts, greater impact is likely from some flow-through of the extreme systemic liquefaction launched by the Federal Reserve, and of increased bank lending, into the normal stream of commerce. Loans and leases in commercial bank credit have grown at an annualized 14.6% in the last three weeks, 9.3% in the last two weeks, and by 28.0% in the most recent week.
The good news is that the system may be starting to return to more-normal functioning. The bad news is that the cost of systemic salvation remains higher inflation, irrespective of the sharp, short-term impact of collapsing oil prices on consumer prices.
Although it is too early for a good approximation of the SGS-Ongoing M3 estimate for the month December, increasingly it appears as though the estimated annual growth of 8.9% in November will prove to be the low of the current cycle. If trends of the last several weeks continue — still a big "if" — the December annual growth rate could surge to over 15% or 16%, nearing recent historic highs. Outside of the current cycle, the last time M3 growth was that high was in 1971, months before President Nixon closed the gold window and imposed wage and price controls. The next round of money reports has been delayed until Monday (December 29th) due to Christmas.
With the broad numbers barely impacted, yet, by the monetary base, the upside potential for broad money growth remains extremely dangerous for inflation conditions.
Monetary Base and Reserves Continue to Explode. The St. Louis Fed’s Adjusted Monetary Base in the two weeks ended December 17th was up 97.5% from the year before, versus a 74.9% annual increase in the prior two-week period. Those numbers were up from less than 3% annual growth in August, before the Fed began its latest panicked operations. When cutting the targeted fed funds to a range of 0.00% to 0.25%, Fed Chairman Bernanke and the FOMC continued to indicate they would do whatever it took to stimulate systemic liquidity — broad money supply.
As previously discussed in the Money Supply Special Report (www.shadowstats.com, right hand column), the effects of money supply growth can be problematic as to economic activity. The Fed always can drive the economy into recession and deflation by contracting broad money growth. The reverse, however, is not true. Excessive money growth does not assure economic growth, although it always will assure higher inflation.
The surging monetary base — the traditional central bank tool for controlling the money supply — continued to reflect exploding growth in total reserves of depository institutions. Required reserves (seasonally adjusted) in the latest two week period were down 1.2% from the prior period, but up 32.4% (32.1% unadjusted) year-to-year, versus 29.7% (31.3% unadjusted) in the prior period, and against 5.0% at the end of August, before recent Fed actions. Growth in required reserves indicates growth in accounts that have reserve requirements. Excess reserves continued accounting for nearly all the near-term growth in total reserves, however, indicative of major ongoing lending issues with banks.
U.S. Dollar Volatility Suggests Changing Environment. Heavy dollar selling in the last week was countered partially by some jawboning — if not outright intervention — by the Bank of Japan and others. Nonetheless, the global financial community is showing increased wariness in holding what eventually will be a worthless currency. Even with year-end market distortions, the global system may be stabilizing enough to allow for increased flight to safety outside the U.S. currency. Beyond extreme near-term volatility and central bank machinations, the U.S. dollar ultimately is headed much lower, with resulting upside pressure on the dollar price of gold and on the dollar price of oil. While oil consumption will decline as a result of global recession, OPEC appears ready to continue offsetting much of the demand decline with production cutbacks.
As the flight to safety outside the U.S. dollar intensifies, such will pressure both the U.S. equity and credit markets to the downside. The general outlook remains unchanged.
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