* By Polar Bear
During 2008, the US M3 money growth rate has fallen from almost 19% to 2.1% on an annualised basis. Coincidentally, the US Dollar made a capitulation low at 70.70 on March 17, 2008 and a higher low at 71.315 on July 15, 2008.
It is interesting to observe Jim Rogers urging all and sundry to get out of the US Dollar just after it had made that March low. Yet, it appears that the declining US Dollar had been inversely related to economic expansion and credit growth over the last few years.
A close perusal of the first link shows that US broad money growth peaked out shortly before the US Dollar made its March low. Now that the broad money growth has collapsed, may we expect the upward trend of the US Dollar, now seemingly well established, to continue?
If US housing and other asset prices continue to decline, it seems logical to expect that broad money will continue to shrink, notwithstanding all the efforts to sustain bank liquidity via repurchase agreements and borrowings at the Federal Reserve discount window. In the context of diminishing collateral to sustain borrowing, a stronger US Dollar paradoxically portends bad news on the deflation front.
There are other straws in the wind. The Baltic Dry Index has now fallen to 5663, just above the January 29 low of 5615. A fall below the January low would presage a global contraction in manufacturing. Another is the sharp rise in the Gold price relative to Silver. Typically, Silver outperforms Gold during expansions, and Gold outperforms Silver during contractions. In addition, we are now seeing Gold starting to outperform the Industrial metals. From the bottom of the recession in 2002 to 2007, before the subprime crisis erupted, the trend generally favoured the Industrial Metals.