The prime driver of GDP, stock market prices, consumer spending, and other major economic aggregates is not productivity increases. Nor is it population growth or a declining unemployment rate. Anything measured in monetary terms is primarily driven by...you guessed it, the quantity of money (money supply). More specifically, the determining factor is the growth rate of the money supply.
Following some four and a half years of massive monetary injections, the money supply growth rate settled at a more "normal" rate of expansion beginning in the last quarter of 2013. And there it remained, fluctuating around the 7.5% mark, below the longer term average y/y growth rate 8.2%.
But something has changed in 2016, and especially since the second half of January - the growth rate is now diving. Since January 18, the growth rate has plunged from just north of 7.0% to the most recent 5.8%...
...the lowest y/y growth rate reported since November 2008 (the eye of the banking crisis).
The likely reason for the sharp fall is a decline in the growth rate of bank lending. With the fall in oil prices and increased uncertainty, banks watching their reserves more closely is a natural development at this stage of the cycle. It therefore appears increasingly likely that a stock market crash and large scale economic adjustments (deflation and recession/depression) are moving ever closer unless the Fed resort to QE4 shortly. Follow the money supply in the coming weeks, I'll keep a close eye on it.
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