-- Posted Monday, 31 May 2010 | Digg This Article | | Source: GoldSeek.com

The M3 money supply in the US is contracting at a rate that is only comparable with the period 1929-1933. This is the hidden killer that the global economy now faces.

M3 began shrinking last summer and the pace has accelerated since then, reported The Daily Telegraph yesterday. In the three months to the end of April M3 contracted by 9.6 per cent to $13.9 trillion, and institutional money market funds fell at a 37 per cent rate, the biggest ever fall.

Time lag

There is roughly a 12-month time lag between changes in money supply and the general economy. Less money in circulation means deflation or price falls, both for hard assets and consumer goods.

This then leads to a debt deflation spiral where the burden of debt increases in real terms while the money available to service it shrinks. It is the opposite of inflation that eliminates debt over time. With deflation a debt becomes a bigger and bigger burden.

For consumers with mortgages or countries with large public debts this is the nightmare that they just do not want to happen.

As The Daily Telegraph points out double-digit growth in M3 during the US housing boom gave a clear warning that this had become a bubble. The same story is being played out in China right now. And it was the sudden slowdown of M3 in the US in the first half of 2008 that heralded the collapse that followed. China has also just sharply cut its money supply.

Second stage to downturn

What appears obvious to ArabianMoney is that the US bailout package delayed the impact of the downturn, and even temporarily reversed it in the first half of 2010, but there is a second wave to come, probably much nastier than anybody would like to imagine at present.

You cannot really avoid the impact of such a money supply contraction, or doubt that the effect is coming. Only last week in the UAE the governor of the central bank said bank loan-to-deposit ratios would continue to rise and lending conditions tighten in the second half. He could have been speaking for any US bank.

Without credit or money supply you simply cannot have a recovery, and if it contracts sharply you will get a depression and deflationary debt spiral. The investment implications are clear: sell everything that you can; for cash is king as prices fall. The graph below tells the real story courtesy of ShadowStats.com:

-- Posted Monday, 31 May 2010 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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