by John Williams, Executive Editor
January 14, 2008

Quote Originally Posted by John Williams
Having used broad money growth in economic forecasting, I have found that solid M3 growth signals strong economic growth some of the time, but often times it does not. Adjusted for inflation, however, M3 growth slowing sharply to the downside, as did happen in the last two years, is a reliable leading indicator of an economic contraction.

On the inflation front, double-digit broad money growth usually is followed within a year or two by double-digit increases in consumer costs. Inflation, as used here, means price increases as seen in consumer goods and services. Of course, the prior events in the 1970s and early 1980s were before many of the methodological changes to the CPI that have resulted in current, regular understatement of CPI inflation.

The inflation currently signaled by M3 is not for financial asset inflation, such as in the equity markets. From the standpoint of financial assets, a very short-term leading indicator has tended to be M1, which currently is in annual contraction.

The present money supply growth levels are consistent with a deteriorating inflationary recession, which only recently has started to gain broad public recognition. One of my best bets is that inflation will continue to get worse, not better, despite an accelerating downturn in economic activity and widening solvency issues for major financial services firms.

Regardless of how much pressure is placed on the financial and banking systems, the Fed will do everything in its power to prevent a 1930s-style collapse in the system and money supply. Federal Reserve Chairman Bernanke is a student of that period and has indicated he would liquefy the system as much as needed. While the Fed has the power to that -- and it appears already to be doing so -- the ultimate cost will be in higher U.S. inflation and a debased U.S. dollar.

So spake, John Williams, underlined emphasis above is my doings.