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Posted by on May 28, 2010 in Economy, TG Roundup

Textbook Case of Deflation, but..

A few days ago I mentioned that fiat money’s march towards M0 is classic outcome of a deflationary economic cycle. The following news confirms my worst fears. [Via UK’s Telegraph]

AP Photo

US money supply plunges at 1930s pace as Obama eyes fresh stimulus
The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so

in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of institutional money market funds fell at a 37pc rate, the sharpest drop ever.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

[Read full article here]

Frightening indeed. Ladies and gentlemen, I am getting more and more convinced that the economy is going to get very ugly. I really hope that I will be proven wrong.

My bet is on deflation. On the contrary… Hugh Hendry warns us to get ready for hyperinflation. He has access to better data. But, I am sticking with my guts.

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.

Money Week 28 May 10 -Hugo Hendry Interview