Liquidity Is Evaporating Even Before Fed Taper Hits Markets
- Gap between money-supply growth and GDP is now below zero
- Negative readings in last decade spelled trouble for S&P 500
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A measure of U.S. financial liquidity whose declines foreshadowed two of the decade’s worst equity routs is flashing alarms even before the Federal Reserve embarks on its planned winding down of asset purchases.
The signal is obscure, but has sent meaningful signs in the past. Roughly speaking, it’s the gap between the rates of growth in money supply and gross domestic product, an indicator known to eco-geeks as Marshallian K. It just turned negative for the first time since 2018, meaning GDP is rising faster than the government’s M2 account.