This topic is a little bit dry for the XDJMs who are only interested in stocks and trading. However, if you are interested in macroeconomics and its potential impact on the financial markets, please read on.
Earlier today I mentioned that the annualized increase in money supply (M3) last month is a whopping 22%. The fed pumped an amazing $155 billion into U.S. economy in the past four weeks. This number is extremely high for a developed country such as U.S. A reasonable number may be around 5%. What does this mean?
You certainly know the dynamic equilibrium of supply and demand from your basic economics. Let's use crude oil as an example. we all know the demand for oil from U.S. (more SUVs...) and the rest of the world especially China and India is increasing, while the supply is relatively stable. So the result is rising oil price. Fear of terrorism certainly makes things worse. Yet world oil trade is settled in US dollar. If there are more US dollars in circulation, it also further drives up the oil price.
The net results of rapid money supply is the rise of housing price, equity price and commodity price as more money chasing relatively stable amount of items short term. Then inflation comes. But this can not go on forever as the increasd money supply is in the form of debt, meaning people have to pay them back later. So when the money supply drops back to normal level (this will happen when interest rate rises), the price (including equity price) will drop.
Earlier today I mentioned that the annualized increase in money supply (M3) last month is a whopping 22%. The fed pumped an amazing $155 billion into U.S. economy in the past four weeks. This number is extremely high for a developed country such as U.S. A reasonable number may be around 5%. What does this mean?
You certainly know the dynamic equilibrium of supply and demand from your basic economics. Let's use crude oil as an example. we all know the demand for oil from U.S. (more SUVs...) and the rest of the world especially China and India is increasing, while the supply is relatively stable. So the result is rising oil price. Fear of terrorism certainly makes things worse. Yet world oil trade is settled in US dollar. If there are more US dollars in circulation, it also further drives up the oil price.
The net results of rapid money supply is the rise of housing price, equity price and commodity price as more money chasing relatively stable amount of items short term. Then inflation comes. But this can not go on forever as the increasd money supply is in the form of debt, meaning people have to pay them back later. So when the money supply drops back to normal level (this will happen when interest rate rises), the price (including equity price) will drop.
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