Money Supply Growth: 24.3%!

by: Barry Ritholtz

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 (U.S.)
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