Disappearing Money Supply in USA

Two interesting factors seem to have largely gone either unnoticed or have been given low priority. One, credit has been declining at a rate of nearly 1% a month in the USA, the largest consuming nation, and Two, the M2 supply as show in the Graph below is indicative of disappearing money. That unfortunately is not a good sign. The last time that credit declined at such a rate was during the Great Depression. It is pertinent to note that the during April 2009, the M2 Money Stock (M2MS) has actually declined from US$8376.4 billion to US$ 8327.3 Billion in July to US$8294.2 billion in August 2009.

While a few months are not indicative of a major in policy, if it does continue for a longer period of time, then the US economy (and with it the global economy) could face a greater prolonged downturn. The chart below provides a better perspective of the gradual decline in money supply (with the chief culprit being the banks, which are refusing to lend).

If the banks continue to withdraw from the lending, then no amount of stimulus would be available for businesses (especially small and medium enterprises, which account for more than half of the employment in USA) and instead it would be used by the larger funds to simply speculate in the financial markets.

This would invariably exacerbate further, the pressure on the US consumers who seem to have
only begun their long overdue but painful readjustment from the excesses of the recent bubble. The chart below of US Household liabilities shows the liabilities are still at historically high and unstainable levels considering the destruction of household wealth.