$$ Broad Money Supply Growth Turns Negative

Dartmouth man John Williams runs ShadowStats.com which seeks to clear the haze of biased and manipulated government financial reporting. In a recent interview, Williams stated that annual broad based money supply growth turned negative in December 2009. He says historically this means we'll soon see a downturn in economic activity:

"Whenever the broad money supply–adjusted for inflation–has turned negative year over year, the economy has gone into recession, or if it already was in a recession, the downturn intensified. It's happened four times before now, in modern reporting. You saw it in the terrible downturn of '73 to '75, the early '80s and again in the early '90s.

In December of 2009, annual growth in real M3 turned negative. It's now at a record low in terms of decline, down more than 6% year over year. What that suggests is that in the immediate future you're going to see renewed downturn in economic activity.

In all the prior instances that I mentioned, this event led recessions, except for '73 to '75. That's when you had the oil spike and a recession that came from that. When the money supply turned down in that recession, the economy accelerated in its decline. We're going to see something along those lines, now, with about a six-month lead time.

You're going to have negative economic growth this year. The implications for that are extraordinary, because the projections on the federal budget deficit, a number of the state deficits, and the solvency and stress tests for the banking system all were structured assuming positive economic growth in the 2% to 3% range for 2010. Instead it's going to be negative.

Many states are going to be in greater difficulty than they thought. Most likely, you're going to have federal bailouts there. The banks are going to have more troubles. All this means more government support, more government spending, greater deficits and greater funding needs for the U.S. Treasury."

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Note the government stopped tracking M3 money supply several years ago, but Williams tracks current M3 using the government's old methodology.