Money Supply Growth: 24.3%!

Numerous people have written, asking about how much liquidity is really in the financial system. I suspect the underlying cause of this inquiry is the October 8 commentary by John Hussman, titled The Bag Will Not Inflate, and Liquidity Will Not Be Flowing.

I have a lot of respect for John’s methodology, but I think he may be understating the impact of all this cash sloshing around. Central bankers around the world can and do and are having an impact on money supply, liquidity, and equity prices.

Have a look at the October 11th St. Louis Fed’s U.S. Financial Data:

MZM (updated through 10/11/07)

chart courtesy of Federal Reserve Bank of St. Louis

To more specifically quantify this, the accompanying table reveals the degree of money creation at an annualized rate. As of August 08th, MZM had a growth rate of 24.3%:

MZM Annualized Growth Rate (08.06.07)


Note that this was before the Fed’s cut in the discount window rate, and prior to the global injection of liquidity by Central Bankers.

Despite the increase in dollars, and the decrease in dollar value, the government maintains the fiction that we have a strong dollar policy (U.S. Affects a Strong Silence on Its Weak Currency).

What is the impact of all this money supply growth? An incredible shrinking dollar.

While we can intellectualize about it, you really need to travel abroad to see the impact. Doug Kass is in Italy this week, and he is astonished at how feeble the dollar is overseas. The price of the Euro
against the U.S. dollar really hits home once you leave the USA. He notes that those that have been "non plussed by the continued
erosion of our currency will have a jolt of reality"
when going abroad.

Some spending figures from Rome:

Dinner for two last night in Roma? $320 (U.S.)
Price of refueling an
empty tank in my auto on Thursday? $175 (U.S.)
Hotel per night? $850 (U.S.)
Bellini? $24 (U.S.)
Dry Cleaning of shirt I poured Chianti on? $20
Two days in Roma? Priceless!

Doug is the 20th person who has related the same details to me . . .



U.S. Financial Data
Federal Reserve Bank of St. Louis
October 11, 2007

U.S. Affects a Strong Silence on Its Weak Currency   
NYT, October 10, 2007

The Incredible Shrinking Dollar
David Gaffen
Market Beat, September 27, 2007, 3:05 pm

What's been said:

Discussions found on the web:
  1. Brian B. commented on Oct 12

    side note, what happened to the font on this article? Thanks again for the blog, Great site!!


    BR: weird glitch, I fixed it . . .

  2. Paul commented on Oct 12

    Thanks Barry ….would be interesting to see John’s comments on this

  3. Stuart commented on Oct 12

    Good article but two difficulties I have are;

    first, there are many differing views on what is an appropriate and accurate reflection of money supply. M2, M3, MZM, Mike Shedlock has his own M’ (Mprime) he uses, Don Coxe references the spread between M2 and MZM…etc.. Would be nice if we get some consensus once and for all on which is the best indicator.

    Also, I read alot of articles and reports on money supply growth without referencing the corresponding demand for money or credit. To me, both supply and demand need to be discussed at the same time to get the complete picture and full context of the thrust of the article. JMHO.

  4. Justin commented on Oct 12

    Berry I don’t know if you can read this, because your posted material isn’t being shown on my screen for some reason.

    Justin L Tindall

  5. Stuart commented on Oct 12

    I have no doubt the weak dollar is directly related to the inflating money supply but there’s very likely something else going on. Henry Paulson the other day repeated the usual mantra about a strong dollar policy etc. but I think what is going on with the money supply and the dollar is the Treasury and the Fed are forcing China to wean itself off of the dollar by deliberate letting it depreciate to a level where China finds its inflationary levels no longer tolerable. In this way the US will shake China off the peg, forcing it to upwardly revalue to detach entirely. Clearly the US could not publicly announce this as if it was a policy objective, but I have no doubt they have not thought of this and its consequences on Chinese inflation.

    Inflation Is Threatening China’s Stability

    Posted 10/10/2007
    When the 17th National Congress of the Communist Party of China convenes Monday, President Hu Jintao will be confronted with some serious challenges. Foremost will be to ensure steady economic growth and price stability.
    Inflation is now at a 10-year high, reaching 6.5% (year over year) in August as measured by the consumer price index. Actual inflation is probably much higher given the defects of the CPI, which does not accurately reflect the consumption pattern of the present market-oriented system.

  6. dblwyo commented on Oct 12

    Jim Jubak’s column today happens to be on this very topic and takes a nicely balanced but short dive into explanations:
    Why the dollar keeps dropping
    Jim Jubak

    Don’t waste your energy worrying about a big crash. Here’s why the dollar’s decline will continue gradually and why investors should look to investing overseas.

    Highly recommended.

  7. Toro commented on Oct 12


  8. michael schumacher commented on Oct 12

    Me thinks Mr. Kass should have researched his trip a little more before spending $850 a night on a hotel room…..and then complaining about it.

    Unless he has the penthouse than he is getting taken as most unaware americans travelling abroad are……


  9. Fred commented on Oct 12

    is there something wrong with the blog??

  10. F commented on Oct 12

    In fact, a simple look at the graph reveals that MZM skyrocketed exactly when the discount rate was cut, not before. I’m sorry, but you’re misreading the chart again. The 24.3% is the annualized rate of growth from August 6th until October 1st.

    Of course, none of this changes your point, because if you look at the leftmost column, you can see that MZM has been growing pretty consistently at about a 10% annualized rate over the last year. You just gotta stop reading these charts too fast 🙂

  11. Jeff commented on Oct 12

    “As of August 08th, MZM had a growth rate of 24.3%”

    Barry -This is not what the table shows. It is a table of comparisons of different periods, in this case 10/1 to 8/8. Why pick the most extreme and make it a headline number?

    In your opinion, what would rate of MZM growth would be appropriate?

  12. sn commented on Oct 12

    I was just in Italy and I thought that the prices overall were really not different than traveling in the US. (when you travel it costs more than staying at home) Maybe Mr. Kass needs to reign in the extravagant lifestyle a bit, or at least not complain about the cost.

  13. David commented on Oct 12

    Yes, it costs more to travel internationally with a weaker dollar.

    How many Americans travel abroad each year? Considering something like 85% don’t have a passport, I don’t think that this will “hit home” to enough Americans to change policy.

    I don’t begrudge Mr. Kass his lifestyle, but before he thinks that a weaker dollar will manifest itself to more Americans than those who think aliens started human civilization or that 9/11 was an “inside job” he should realize that Americans, as a rule, don’t travel abroad and therefore don’t give a rat’s behind what it costs to have your shirt dry-cleaned in Rome (please lose the “Roma” affectation, you’re not Italian).


  14. Adilb commented on Oct 12

    I was in Rome in Oct 2004 when the Euro was at 1.25. Even if you add another 15% for the recent slide in the USD and inflation, those prices reflect Mr Kass’ hedge fund manager lifestyle.

    We paid $30US for dinner for 2 and between $125-150 for decent hotels. Italy is quite expensive but that is more a reflection of Europe being an expensive place (even for the locals) rather than the depreciation in the US dollar. It is expensive due to high real estate costs, taxes, bureaucracy, lack of competition, etc…

    The US dollar was simply wildly overvalued in 2001 so comparisons to that time are silly. I am Canadian. Americans don’t really know what an undervalued currency is. If your dollar ever went to 62 cents versus the Canadian dollar, then you would really know what a devalued currency is!!

  15. Grodge commented on Oct 12

    Methinks Kass is just showing off.

    Conspicuous consumption– and then complaining about it!

    Bellini?! Puh-leeez!

  16. Mike commented on Oct 12

    Even adjusting for currency, $175 to fill a tank demonstrates that the underlying price for gas is higher in Europe, unless of course he’s driving a monster SUV over there, which may be true given his other expenses but I doubt it.

    The flip side of this is that for the rest of the world things are very cheap in the U.S. Weak dollar, strong dollar–people will certainly complain about either.

  17. RealThink commented on Oct 12

    “The status of global money is not heaven-bestowed, and there is no way effectively to insure against the unwinding of “global imbalances” should China, with more than a trillion dollars of reserves, and other asset-rich central banks come to fear the unbearable lightness of their fiat holdings.”
    Benn Steil (2007), “Monetary Sovereignty as Globalization’s Achilles’ Heel”

    The value of anything depends on its scarcity. With these money supply figures, it is no wonder that the USD is losing value. As is any currency linked to it like the RMB.

    The point is that, unless the Fed changes course, the USD will lose value against real things, no matter what central banks of countries with Current-Account surpluses do with their exchange rates:

    – if they stop intervening and let their currencies appreciate against the USD, prices will keep stable in those currencies, but will rise in USD;

    – if they keep buying dollars and printing huge amounts of their currencies (as China, Argentina et al are currently doing), they will keep the exchange rates stable but will have high inflation, so prices of real things in USD will rise just the same.

    Players all over the world are starting to assume that the USD will just keep losing purchasing power in real things. The US is risking a massive run away from the USD and the loss of its role as reserve currency. As Krugman said in his latest paper, the USD could have a “Wily E. Coyote moment”. And as he also said, the US in 2007 isn’t Argentina in 2001. Only that, contrary to what he meant, the US could be in a much direr situation now. Because even when Argentina’s imports dropped from 20 billion USD in 2001 to 9 billion in 2002, she was an oil and natural gas exporter. What if oil and ng exporters now decide (realize?) that they have way more than enough USDs and USD-denominated debt in their reserves and stop selling their precious finite, absolutely-exhaustible resources to the US until they have exchanged at least half their stacks of printed paper for real things? Given that the US imports 59 % of the crude oil and petroleum products they consume, the impact on US life would be truly shocking.

    The one thing the Fed can do to stop this collision course is to send a very strong signal that they care about the USD’s role as international reserve currency and about it keeping its purchasing power in internationally traded goods. That signal would be a surprise rate HIKE of 50 bp before Oct 31.

    The Sep payroll numbers (and the Aug numbers revision from -4K to +89K), plus the quite decent Sep retail sales data today, provide more than ample support for reversing that cut. By doing that, the Fed would send this message to the world: “We acknowledge the important role the USD plays in global trade and we assure all countries that our monetary policy will be geared first and foremost to preserving the purchasing power of the USD for international transactions, so that countries can confidently hold it (or debt denominated in it) as a store of value.”

    Conversely, this was Sep. 18’s message: “Look, the only thing we care about when setting our monetary policy is the level of our internal economic activity. And by that we mean mainly the production of goods and services that you can’t buy from us. We don’t care much about the USD holding its purchasing power internally, let alone when measured in internationally traded goods. So, if you use our currency to trade between yourselves, it’s your problem. And if you are so stupid as to use it (or debt denominated in it) for holding your savings, you do need professional help.”

  18. Stuart commented on Oct 12

    Although this has been mentioned a number of times elsewhere, it’s useful to re-iterate for those who think we’re out of the woods.

    Goldman Sachs Group Inc. said Wednesday the size of its level 3 assets at the end of third quarter increased to $72.05 billion from $54 billion at the end of the second quarter.

    In terms of percentage, the New York-based investment bank’s third-quarter level 3 assets amounted to 7% of the total assets, compared with about 6% at the end of the second quarter.

    Level 3 assets are those that trade so infrequently that there is virtually no reliable market price for them, and valuations for these assets are based on management assumptions.

    The credit crisis has sparked concerns about the value of some of the assets investment banks hold on their balance sheets. Investors and analysts have been especially worried about banks’ exposure to turmoil in the mortgage market and recent trouble in the financing of big leveraged buyouts….

    Some firms began breaking down their financial assets into three levels at the start of their current fiscal year, which began in December, when they adopted early a new accounting standard related to fair, or market, value measurement. All U.S. companies will have to begin using it for financial years starting after Nov. 15….

    Goldman Sachs said level 2 assets at the end of third quarter amounted to $494.6 billion. There may be some market activity for level 2 assets but the valuations often depend on internal models. Assets in level 1 trade in active markets with readily available prices.

  19. HedgeFundAnalyst commented on Oct 12


    I travel to Europe once a month at least. My firm also has analyst teams in London and Paris.

    Europe being expensive to Americans is partly a function of a weak U.S. dollar and mostly a function of Europe being a freaking rip-off.

    Everytime I come back to state-side, I thank God I live in America where I can buy a European suit, shoes, and eat French food cheaper than it would cost me in Paris or Rome.

    Wages are not higher there and thus people there do not save. That’s the difference, it’s that simple. The European culture is if it’s more expensive, it must be better…full stop. Coupled with lack of competition, one can see why it’s a miserable place for the North Africans or anybody trying to make it to the next rung.

    With regard to why the dollar is shrinking commentary, it has nothing to do with MZM growth. Monetary profligacy is WORSE in other regions.

    Quite simply, it has to do with weak fundamentals in the U.S. economy relative to the price of money globally. When the housing bubble passes, the dollar will rally. But before that, anybody who doesn’t think Europe and the U.K. do not have housing bubbles of their own that they will have to deal with via crimped consumption (Spain has already burst), better wake up and smell reality.

    The Euro and Sterling bubble will burst sooner rather than later.

  20. Tom a taxpayer commented on Oct 13

    RealThink raises a good point about what the Fed could do to stop this collision with massive inflation: a surprise rate hike of 50 bps before Oct 31. Such a Fed move would call for uncommon courage.

    But consider the market-toppling stir caused by Axel Weber’s call to fight inflation:
    “European Central Bank governing council member Axel Weber said the bank may need to raise interest rates to a level that restricts economic growth to keep inflation under control.” (Bloomberg Oct 12)

    Axel’s rage against inflation reminded me of a Dylan Thomas poem, revised as follows:

    Do not go gentle into that good night,
    Old central bankers should burn and rave at the inflation of day;
    Rage, rage against the dying of the currency.

    Today’s news has the Federal Reserve and big banks concocting a $100 billion scheme to bail out shaky mortgage securities and other investments (Bloomberg Oct 13).

    The banks have suffered great losses, so how can they bail themselves out? What kind of shell game are the big banks and the Federal Reserve playing? Something is rotten in Washington and Wall Street.

    Paulson appears to be saying one thing but doing another. A few weeks ago he said the markets are going thru a repricing of risks. Yet here is conniving with his big banker buddies to prevent the repricing of risk.

    The bottom line is that Paulson, Uncle Ben, the federal home loan administrators, and the Wall Street establishment are doing all they can to prevent a repricing of risk, even if that means destruction of U.S. currency and run-away inflation.

  21. Ames Tiedeman commented on Oct 13

    We are destroying our own currency in more than one way.

    Wait until inflation hits.

    We are being governed by Neanderthal man.

  22. holgs commented on Oct 14

    I was just in Rome last weekend and we managed to spend about $15 bucks each per meal, including drinks. Compare $1.60 cappuccino’s made by real baristas in Rome to the $5.00 you’d spend at Starbucks. Doug just managed to find the really high end tourist traps. The most expensive meal we had (7 courses + 4 bottles of wine) was $600 between 6 people, but we were waited on hand and foot and the owner of the place even made us his own “specialty” salad to try. You can get some bottles of wine in the local grocery store for $2.50. A beer with a typical meal costs about $5.00. Not outrageous by any means. Our hotel cost us $280 for 4 nights, but we picked a low end hotel since we, unlike Doug, are frugal.

  23. bold’un commented on Oct 15

    Repressed inflation is already baked into the USA’s cake: if a European can download from Itunes at one single world price, why on earth should he pay more for a region-coded DVD than a US citizen? Publishers will need to balance a cut in the European price with a rise in the US. Then look at cars: European cars, say BMWs, are miles cheaper in the USA than in Europe, despite import costs, while American cars, eg a Cadillac CTS, cost about one-third more in Europe. Finally, how can China where there is 6%+ inflation, wafer thin margins plus a rising currency fail to raise prices to US customers?

    There is a big repricing in the works for the US consumer just to take account of PAST dollar depreciation (unless of course it bounces back which is what importers are hoping).

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