By Ambrose Evans-Pritchard
LONDON, England - August 19, 2008 - The U.S. money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months.
Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.
"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.
On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualized) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.
The growth in bank loans has turned negative to a halt since March.
"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr. Stein.
Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare.
The overall debt burden in the U.S. economy is currently at record levels, raising concerns that a recession - if it occurs - could set off a sharp downward spiral.