Decreasing liquidity could set us up for a very rocky autumn.
Guess what? The Federal Reserve has not only stopped depositing copious amounts of liquidity into the economy -- it now appears to be in the process of making a sizable withdrawal.
A close look at quantitative measures of monetary policy reveals a sudden change in trend. After growing at unprecedented rates for well over a year, these aggregates stopped rising several months ago and have since declined, according to data provided by the Federal Reserve Bank of St. Louis.
For example, the monetary base -- the raw material for the money supply -- has fallen at a seasonally adjusted annual rate of 8% from early April of this year through mid-August, after soaring at a 187% pace during the previous eight months.
And after ballooning from $100 billion to nearly $1 trillion between September 2008 and mid-May, adjusted reserves have since declined at a 43% clip, to just over $800 billion.
As a result, the Fed's two measures of the money supply, M2 and MZM, have begun to contract. M2 has shrunk at a 3% pace since the middle of June, while MZM, the St. Louis Fed's measure of liquid money, is down by 2% over the same period....MORE