August M3 Estimated up 14% Year-to-Year, 0.4% Month-to-Month

Bailouts Should Intensify Inflationary Pressures

Unusual Systemic Instabilities

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PLEASE NOTE: The monthly estimates of the money supply data have been updated on the Alternate Data page of ShadowStats.com. New to the money supply data, per subscriber request, are monthly levels in the downloadable data file, as well as graphs of the various monthly M levels, for the period since the Fed ceased publishing its M3 estimates. The monthly dollar and alternate-unemployment graphs and data also have been updated.

The Bureau of Labor Statistics published "Addressing misconceptions about the Consumer Price Index" in its August 2008 Monthly Labor Review, and we have posted a public Special Comment on same. This has pushed publication of the next newsletter to over the coming weekend.

– Best regards to all, John Williams

Treasury bailouts of Fannie Mae and Freddie Mac, Congress talking with U.S. automobile manufacturers about government loans, and wild markets that remain far from rational, highlight increasing systemic instability of a nature rarely seen. When I offer that my general outlook is unchanged, which it remains, I am not at all insensitive to the massive short-term hit taken by precious metals or the significant strength seen recently in the U.S. dollar. My outlook generally is for the long-term and is based on the underlying fundamentals of an intensifying inflationary recession, intensifying systemic solvency crisis and eventually a hyperinflationary great depression. The underlying fundamentals remain place and, if anything, are getting worse. The markets eventually will catch-up with the fundamentals

The Federal Reserve, in conjunction with the U.S. Treasury, is doing its best to prevent a systemic collapse. The efforts have been successful so far, and likely will continue to be for a while. The Fed and the Treasury will do whatever is necessary to save any entity that might otherwise implode the system. They will create and spend any money needed, they will arm-twist anyone they have to, they will manipulate any market, financial statistic or news medium that will help contain the still-intensifying crisis. Failure here is not an acceptable option.

Under such circumstances, activity in the financial markets can be extremely volatile and appear irrational to the investing public, while various forms of covert crisis management are going on behind the scenes. The cost of the system’s salvation eventually will be in higher money growth and debasement of the U.S. dollar: inflation. The current instabilities, including the rapidly deteriorating fiscal condition of the U.S. government, will be explored more deeply in the upcoming newsletter.  

August M3 Continued to Grow, Albeit at Slower Paces than in July.  Based on roughly 25 out of 31 days of data, the SGS estimate of ongoing M3 annual growth slowed to about 14.0% in August versus 15.4% in July. With monthly growth slower than it was a year ago, annual growth continued to soften for the fifth consecutive month, although it remained at an historically high and inflationary level. Seasonally-adjusted, month-to-month change slowed to roughly 0.4% in August, from 0.6% in July, although the monthly change numbers should not be relied upon too heavily, given incomplete data and the usual problems with the Fed’s seasonal adjustments.

As to M1 and M2, preliminary estimates are for August annual rates of change of roughly 1.6% and 5.5%, respectively, down from 2.4% and 6.3% in July. Estimated on a monthly basis, seasonally-adjusted M1 change was a drop of 0.6%, versus a 1.1% gain in July. M2 was down a rounded 0.0% in August, versus a 0.5% gain in July.

To the extent that the U.S. Treasury directly lends cash to private entities, or purchases otherwise illiquid assets from troubled banks, such actions should spike money growth directly, eventually adding to upside inflationary pressures.

Week Ahead.  Trade Deficit. Due Thursday (September 11th), market expectations are for some deterioration in the July deficit. Such is not unreasonable, given what appears to have been the underreporting of the trade shortfall in recent months, and what still should be a further rise in reported oil prices. The "improving" trade numbers were key to generating the reported strong growth in second-quarter GDP. Since this report will be the first of two used in the "advance" estimate of third-quarter GDP — the last such GDP estimate before the election — do not be too surprised with any continuation of better-than-expected numbers.

Retail Sales. Expectations are for a small increase in August retail sales, due for release on Friday (September 12th). Reporting risk generally should be to the downside of expectations, but, more importantly, monthly and annual changes likely will continue to show contractions, after adjustment for inflation.

PPI. Consensus forecasts suggest a 0.5% monthly contraction the August PPI, per briefing.com, thanks to the sharp decline in oil prices. This series is randomly volatile, but shifting seasonal-adjustment factors could offer a little upside reporting risk to the consensus outlook.

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