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

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

In real terms the growth rate is also slowing.

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.

Veloc­ity of MZM 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.

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

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. 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.

Note: The source for all graphs is Plexus Asset Man­age­ment, based on data from I-Net Bridge.

Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.

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