15 November 2014

Is a financial market crash in the offing?

Many commentators have expressed concern that a financial market crash could be coming soon. Others have said the US economy is chugging along nicely and there is nothing that can go wrong in the near future.

The graph below showing Year-on-Year growth of Corrected Money Supply offers insights into what could happen.

It suggests that the danger point for financial markets is when the Y-o-Y growth of CMS approaches the zero mark or falls below it. Right now the Y-o-Y growth is around 14%, so there is still some way to go before a major crash.

It is important to understand what the graph is not saying. It does not say that the instantaneous growth rate of CMS is 14% right now. In fact, as the graph below showing Corrected Money Supply from January 2011 to September 2014 reveals, CMS growth has levelled off. What the first graph suggests is that when CMS remains flat or contracts for a year or more nasty things happen in financial markets.

A natural question springs to mind. If money growth is flat why are the financial markets booming? The explanation is simple. When we say that financial markets are booming we usually mean that stockmarkets are booming as they are now or were from 2006 until the beginning of 2008. But the stockmarket is not the only financial market. We know now with the benefit of hindsight that from 2006 to 2008 the housing market was contracting and that it eventually brought down all other markets.

We can be sure that during the past six months, with money growth flat and the stockmarkets booming, some other financial asset market is contracting. What that market is we can do no more than guess.

For those familiar with the history of the US economy and financial markets the graph below showing Y-o-Y CMS growth from 1961 to 2000 may be interesting.

An especially interesting episode is around 1994 when the sharp monetary contraction resulted in the bond massacre of 1994. If the monetary contraction now under way results in a bond market crash a reasonable guess will be that it will not result in a recession.

Category: Economics


Philip George
Understanding Keynes to go beyond him

Buy my new ebook
Contact Me
Categories
Books
Communism
Economics
Google
Income-Tax
Internet
Kerala
Mathematics
Miscellaneous
Mobile-Sites
Science
Search-Engines
Archives
February 2024
April 2023
October 2022
September 2022
March 2022
January 2022
October 2021
August 2021
July 2021
August 2019
October 2018
April 2018
December 2016
October 2016
August 2016
July 2016
April 2016
March 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
June 2015
May 2015
February 2015
November 2014
October 2014
August 2014
May 2014
April 2014
December 2013
October 2013
July 2013
May 2013
January 2013
November 2012
October 2012
August 2012
July 2012
June 2012
May 2012
March 2012
February 2012
January 2012
December 2011
November 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
August 2010
October 2009
May 2009
June 2008
March 2008
February 2008
January 2008
December 2007
August 2007
June 2007
May 2007