USA money supply slows to near-record lows

M3 Jun10.png“Money makes the world go round” as the song from the musical Cabaret tells us. But the chart above, from BofA Merrill Lynch, suggests there isn’t too much money circulating in the world’s largest economy today.

It shows M3 (the broadest measure of money supply). Merrill note that its growth is now close to the lowest level seen since 1960. And a new estimate today suggests it fell 10% in the past 3 months – something not seen since the 1930’s Depression.

The reason is that banks are being forced to cut their leverage, after the financial crash. But this is easier said than done:

• Traditionally, prudent leverage was thought to be 12.5: 1. In other words, banks had to keep $1 in reserve for every $8 of lending
• But during the Boom, banks used leverage of two or three times this amount. This meant they had only $4, or even $2.50, for every $100 lent.

Deleveraging, as the blog has noted before, “is an ugly word and it has ugly implications“. The slowdown in M3 is a clear warning that the return to prudent lending policies could be a very painful experience over the next few years.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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