U.S. Dollar Global Liquidity Growth Is Slowing Dramatically
There has been a great deal of talk
about how the Fed has been
accommodative with the various
measures of money growing fairly
rapidly in the U.S. We have no
argument with that. However in
terms of global liquidity, which is
really what we must look at in this
increasingly interconnected global
world, U.S. monetary aggregates
like M-1, M-2 or M-3 may not be
the best indicators of global U.S.
dollar liquidity. What we prefer is
a statistic we were alerted to by
Charlie Clough of Merrill Lynch
in the late 1990s during the Asian
Crisis. At that time, when the
world was facing a deflationary
implosion, this measure of U.S.
dollar liquidity shrunk by nearly
5% as measured over a 52- week
period. The U.S. Dollar Global
Liquidity is comprised of U.S. dollars held in foreign banks, plus the U.S. monetary base. If you want to know how bubbles are created and then deflated, you only have to look at this chart. When the world's central bankers were facing a deflationary disaster in the late 1990's Asian crisis, the U.S. created huge amounts of money out of thin air. Money growth grew to 15% and provided the fuel for the stock market bubble in 2000. Taking some of that growth back from around 15% to 2% or 3% by late 2000 set us up for the first leg of the new secular bear market in equities.
Fearing a total meltdown and a deflationary collapse like that suffered in Japan, Ben Bernanke, Alan Greenspan and others put the pedal to the metal once again. This time growth reached up to an astounding 22%. It had to
because with the economy so severely in debt now, greater and greater amounts of money are required just to keep the economic patient breathing. With that astounding monetary growth which set interest rates at artificially low levels, a housing bubble has been created. Realizing the dangers of unlimited money growth the Fed has once again begun taking back some of that growth so that the latest 52-week growth rate is a still hefty
9.05%. But that is down very sharply from the 22% rise in mid 2004. We think the direction of U.S. dollar global liquidity growth is a very important indicator of the direction of the U.S. economy and the global economy. Thus, this measure is also included in our Infaltion/Deflation Indicator. What it is telling us now is that in the weeks and months to come, we can expect an economic slowdown and with that slowdown should come a decline in commodity prices. Whether this will be the start of the K-winter freeze up remains to be seen, but it could. Inflation and deflation are two sides of the same diseased economic coin. They are both caused by excessive creation of money and credit. First comes the inflationary phase and then the a limit is met when new credit/debt no longer breeds inflation but actually triggers a contraction. Are we there yet? I don't know but we will continue to watch very carefully for all the signs we can get our hands on.
I would like to make one more point about the U.S. Dollar Global Liquidity stat. The holdings of U.S. dollars by foreign banks has decreased over the past four weeks at an annual rate of around 9%. This would be consistent with rumors that foreign banks are seeking to diversify partly out of dollars and into other currencies including quite possibly gold.
September 25, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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