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Velocity of US Money Supply Finally Edging Up


Consumer sentiment must improve to keep this economy going.

Despite ballooning Fed reserves to bail out banks, money supply -- as measured by the growth in money supply with a zero maturity (MZM) (notes and coins, check accounts, savings deposits, and money-market accounts collectively) -- continues to slow.

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The slowing growth is contra to what normally happens when the Fed lowers the federal funds rate.

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In real terms, the growth rate is also slowing.

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The slowing in MZM growth is a consequence of US banks' tight lending standards. The trend is likely to continue until the banks relax these standards.

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Velocity of MZM in the economy is, at long last, picking up after it started falling in the first quarter of 2007 -- six quarters before economic growth slumped. The increase in MZM velocity effectively points to increased economic activity. Further increases in this velocity are essential for sustained economic growth.

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Bottoms in consumer sentiment and MZM growth coincide, emphasizing the importance of improved consumer sentiment to get the economy going.

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Lastly, the US bond market is an excellent indicator insofar as MZM velocity is concerned. Currently, the yield on the 10-year note is pointing to further improvements in money velocity in the US. The US bond market, therefore, also suggests that consumer sentiment is likely to continue improving and that the current improvement in the economy is sustainable, albeit probably at a slow rate.

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