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Wednesday, June 18, 2008


deflation now increasingly likely in the united states

i earlier passed on the analysis of the bank of england through the telegraph, noting that the collapse of monetary aggregates in the UK were demonstrating accelerating deflationary credit destruction.

"The money supply is plummeting. This is potentially serious," he said.

... The Bank of England says the overall M4 figure - growing at 11.1pc - is distorted by strains in the interbank markets. Once this effect is stripped out, the M4 growth rate is down 16pc a year ago to 4.5pc in the first quarter.

put that side by side with the reportage of marketwatch's irwin kellner:

From a compound annual rate of more than 16% between the middle of January and the middle of March, M2's growth rate in the past two months has slowed to a little over 1%, according to the Federal Reserve Bank of St. Louis.

The growth rate of highly liquid funds, which the St. Louis Fed calls MZM (money of zero maturity) has skidded even more, from an annual rate of 34% to only 6.5% at last count.

Further up the line, growth of the monetary base, reflecting the Fed's own balance sheet, has slowed from 7.4% to only 1.1%. Meanwhile, the St. Louis Fed's measure of bank reserves is actually lower today than it was in June 2007.

this stuff gets reported here. m2 has been conspicuously flat since february. bank credit (page 17) peaked in march as well at $9.55tn and has fallen through may 28 to $9.38tn. notably, commercial and industrial loans -- an oncoming source of tremendous concern for regional and community banks -- is still growing.

both credit demand and credit supply are fading fast, with banks facing the gradual closing of capital markets to further capital raises.

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