Where Is All This Excess Liquidity Coming From?

by: Bill Cara

“Mike” wants to know “where is all this excess liquidity that is driving the reflation coming from?”

Another reader today points out that by googling “reflation,” he came up with an article of mine, which I suppose implies that others are not seeing the occurrence or possibly the importance of this issue as I do.

But, then, neither are you hearing the term Stagflation from many sources either, but that’s what’s happening. People don’t want to hear that term because the implication is deadly for stocks and bonds, which goes against our positions, and is a negative for wealth.

I, on the other hand am not so much forecasting as I am trying to get readers to think about what’s happening today, and stop listening to cheerleaders.

Reader “Mike” goes on to say: “Looking at the 2 attached charts of M1 and M2, it doesn't appear to be coming from the U.S. So, is global money supply really growing that much more rapidly?”

Here are the charts of M1 and M2 that Mike passed along. I hope they aren’t under copyright.

M1 stats

M2 stats

For M3, I encourage readers to go to John Williams' Shadow Government Statistics website.

Here is the Williams chart of a reconstructed M3, which he says (i) uses a formula that has five-9s correlation to the original data back to 1980, and (ii) adjusts for the missing Eurodollars element, which in any case affected (pre-adjustment) only about 3% of total M3 so should not have a material effect on the total.

M3 stats

So, as the Fed Open Market Committee begins its two-day meeting on interest rates and monetary policy, it behooves us to focus on M3 data they deliberately are withholding from us.

It would be important, I think, for the next Congress to make demands of the Federal Reserve to return to transparently reporting this M3 data.

It is not a coincidence that conspiracy theories started and that the public’s and Wall Street’s understanding of capital markets ran off the rails after Ben Bernanke took over the Fed and Henry Paulson left his chair of the Goldman Sachs firm to take on his duties as Treasury Secretary.

From the Williams’ reconstructed M3 data, which reflects the +10 pct growth in Money Supply I have been referring to in my Week In Review, I’d say it’s time for traders to zero in on the reflation debacle I see about to unfold in 2007.

This situation is really not much different than the late 1990’s Y2K-related reflation. Equity markets first boomed, and then went bust.

It happens every time politicians and their puppets get involved in capital markets. All we can do is raise our stops, get positioned long in hard money plays like precious metals, and wait for the paper crash.