Credit Contraction Heralds Recession

5 May

Does a contraction in the growth of Broad Money Supply say that recession is looming?  Australia’s most recent history responds with a resounding ‘Yes’.

Take a look at the following chart, showing the 12 month percentage change in Broad Money Supply. Note in particular the time frame of Australia’s last recession – Paul Keating’s “recession we had to have” – back in the early 1990’s. See how Broad Money Supply growth peaked in June/July 1989, before falling sharply and eventually turning negative in Nov ’91 – Mar ’92  (click image to enlarge):

Now, consider the dates of the most recent peak (and fall), coinciding with the onset of the Global Financial Crisis.  Broad Money Supply growth peaked again in December 2007 – coincident with the peak in the Australian (and global) stock markets:


Broad Money Supply in Australia has been falling ever since December 2007.

According to John Williams of ShadowStats (commenting on the US economy) –

Money supply and credit are now generally contracting. We’re going to see an intensified downturn in the near future. I specialize in looking at leading indicators that have very successful track records in terms of predicting economic or financial turns. One such indicator is the broad money supply. Whenever the broad money supply–adjusted for inflation–has turned negative year over year, the economy has gone into recession, or if it already was in a recession, the downturn intensified. It’s happened four times before now, in modern reporting. You saw it in the terrible downturn of ‘73 to ‘75, the early ’80s and again in the early ’90s.

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One Response to “Credit Contraction Heralds Recession”

  1. GoWest May 6, 2010 at 10:08 pm #

    Increasing interest rates, an overproducing mining industry pumping raw materials into an over supplied china economy ready to burst, combined with out of control government spending. Once again most are ignoring the crash signs. Wont be long now.

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