Money Supply Data Reveals "New Major Dip" Ahead

Trillions of dollars have been spent on US stimulus, and like all activities — the good, the bad, and the extremely dubious — it must eventually, necessarily come to an end. This is true if for no other reason than it’s simply too expensive to support. Heck, even the Brits have ended their version of quantitative easing… and so now Bernanke is reviewing US options for doing the same.

An article in Barron’s today suggests the stimulus has been a good thing, and points to the fact that “the money stock is shrinking in real terms” to defend why it should persist. To support the case, John Williams of ShadowStats is cited:

“As John Williams, the proprietor of Shadow Stats, explains, the drop in real M3 is a sign of the double-dip ahead. ‘In modern economic history, every time there has been such a year-to-year liquidity contraction, the economy subsequently has turned down, or if already in recession, the economic downturn has intensified,’ he writes in a report to clients.

“‘A signal for such an intensification of economic contraction was generated in November and December, and the signal got significantly stronger in December,’ Williams adds.

“Based on this contraction in broad money, the question for a double-dip isn’t if, but when.

“‘The timing on this is open, but I would be surprised if the recognition of the onset of a largely unexpected new major dip in a double- or multiple-dip economic downturn does not roil the markets significantly in the year ahead. The renewed economic weakness should be increasingly evident in the next couple of months,’ he concludes.”

The quote from ShadowStats shows that Williams is dissatisfied with the way the stimulus has worked, because it’s clearly still ongoing — it hasn’t been stopped — and yet it’s been ineffective. But somehow, in light of this data, the Barron’s author comes to a different conclusion, stating:

“If so, why the rush to withdraw the reserves the Fed pumped into the system to make sure banks had a more-than-adequate cushion? That’s the question I’d like to hear Bernanke answer. But I doubt it will be asked.”

It seems fairly straightforward that stimulus needs to be wound down because the financial burden to the nation is too high. This is, of course, in addition to the fact that the stimulus has already been shown to be ineffective at boosting the economy. The market has experienced a temporary upturn, but with little support in job growth or other key areas needed for ongoing economic expansion.

Poke around a bit more on the Shadow Stats site and Williams’ intensive and ongoing research into government figures actually seem to result in opinions more consistent with this reaction that he has to the work of the Federal Reserve:

“The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression.

“Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment.

“The current U.S. financial markets, financial system and economy remain highly unstable and vulnerable to unexpected shocks. The Federal Reserve is dedicated to preventing deflation, to debasing the U.S. dollar.”

Williams predicts a “hyperinflationary great depression,” within the coming year. He also fingers the Fed for “debasing the U.S. dollar.” It’s difficult to see him supporting the use of his statistics in a case for ongoing stimulus.

However, you can make your own opinion on the matter by visiting Barron’s coverage of money supply data and what the figures may mean for the US economy.