JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

FLASH UPDATE

December 31, 2008

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M3 Growth Is Accelerating

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PLEASE NOTE: The full SGS newsletter is close to publication, likely on Friday, January 2nd.  What follows is a brief preview of the developing story of the Fed’s extreme liquefaction of the system and the nascent upside movement in the broad money supply, as a result.

– Best Wishes for a Happy, Healthy and Prosperous New Year!   John Williams

Corner Turned on Slowing M3 Growth? Based on a continued weekly pickup in key M3 components, slowing annual growth in the SGS-Ongoing M3 Measure may have bottomed at 8.9% in November, with December likely to show renewed acceleration in annual growth. M3 components that still are published by the Fed (M2 and large time deposits) and that are largely still reported by the Fed (large time deposits), in aggregate account for roughly 90% of M3. On a seasonally-adjusted (as well as unadjusted) basis, they have shown sharp weekly growth in recent weeks, with the trend continuing. 

In the most recent reporting of the Fed’s H.6 and H.8 on December 29th (for weeks ended December 15th and 17th respectively), annualized weekly growth in the seasonally adjusted aggregated numbers was 33.7%, down from 62.0% the week before. Nonetheless, the annualized rate of growth for the last four weeks has held at 38.3%, a pace suggestive of the Federal Reserve’s massive systemic liquefaction of the last several months beginning to work its way into broad money reporting.

For December, annual growth rates likely will exceed 17% for M1 (versus 11.5% in November), exceed 9% for M2 (versus 7.6% in November), and exceed 10% for M3 (versus 8.9% in November). These numbers are reflected in the accompanying graph, but will not be published on the Alternate-Data tab at www.shadowstats.com until the monthly estimates are more solid. It is cautioned that these numbers are but an early indication of possible annual growth rates for the money supply measures in December. The estimates will be refined over the next several sets of weekly reports in Flash Updates, with a hard-number estimate of M3 level for December likely to be reported in the next weekly analysis.

If the indicated trends continue to hold, the financial crisis would appear to have calmed to the point that investors are starting to take cash out from under their mattresses, and that banks are beginning to lend somewhat more normally. Given the recent excesses of Fed activity, however, annual growth in the broad money supply — as reflected in the SGS-Ongoing M3 Measure — likely will surge to the highest levels seen since before the creation of the Federal Reserve in 1913. Implications are for a significant pickup in consumer inflation by mid-2009 — despite a severe economic contraction — with likely negative impact on the exchange rate for the U.S. dollar, and likely positive impact on precious metals prices and prices for dollar-denominated commodities such as oil.