It's not entirely coincidental that along with the acceleration of money growth that began in late 1994, early 1995 was the beginning of a stock market bubble that ended with a thud in 2000 as money growth waned (see the chart below).

S&P 500

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Also not coincidental is the fact that as money growth re-accelerated in the post stock market bubble years came the biggest bubble of them all - the bubble in real estate (both residential and commercial). One would normally conclude that as the stimulus was constantly applied, prices of both homes and housing stocks would continue but not this time. The reason, in my opinion, is that there is now so much leverage in the system that stimulus no longer is stimulative.

S&P Super Composite Homebuilders Index

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S&P/Case Shiller Home Price Resale Index

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Note the distinct difference between the two charts above. When M3 decelerated in 2000, it shouldn’t have been a surprise that the bubble created in equity prices quickly retreated—the S&P 500 fell 50% from peak to trough and technology stocks fell by nearly 85% from peak to trough as depicted below.

NASDAQ 100

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One would think that as money supply explodes that the economy would grow rapidly, but as we can clearly see in the chart below, the real economy is barely growing at all. In fact, if you remove the positive effect from exports and inventory build, the U.S. economy most likely contracted in the first quarter. I would imagine that most parts of the G-7 are not far behind as all of the problems I speak about are global in nature.

Quarter-over-Quarter Annualized GDP Growth

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During money supply acceleration one would expect both the economic output and job creation would accelerate. During the 1995-2000 period, as monetary stimulus was being applied, jobs grew rather consistently. There was a sharp drop-off in jobs, however, as the Fed raised rates in 2000.

However, it's a different story today. With M3 growth going off the charts, jobs are contracting monthly. When you exclude the jobs created by the Bureau of Labor Statistics birth/death model, the picture is much worse.

Birth/Death Model Statistics for April 2008

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A while back, I wrote a piece called You Have Got to be Kidding Me, and these numbers from the BLS would fit very nicely into that piece. Note that in April 2008, 45,000 new construction jobs were supposedly created, and 83,000 new jobs in leisure/hospitality, even as the consumer is more and more stretched and indebted. 

And professional/business adds 72,000 jobs? Unfortunately, Wall Street and commercial banks are in headcount reduction mode. It seems like a daily occurrence that someone I know is being laid off and most folks I know are frightened if the ax will fall on them.

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