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To: ild who wrote (114911)	7/30/2001 11:31:15 AM
From: ild	Read Replies (2) \| Respond to of 436258

bondtalk.com 11:07 AM FED TALK: Money supply growth accerated last week, as most forecasters had anticipated, with M3 expanding $26.4 billion. Money supply data continues to suggest that liquidity is plentiful. M3, for example, the Fed's broad measure of money supply growth, has gained at an annualized rate of 12.7% so far this year. This rate is extraordinary as is the year-over-year gain of 11.3%, a nearly 20-year high. While there's no doubt that the surge in money growth can be partly attributable to a shift in assets from equities to zero maturity assets such as money market funds, the increase is also the result of credit expansion, as evidenced by the robust level of corporate bond issuance so far this year; bond issuance is running close to double last year's record pace. While the data also hints at conservative attitudes that might not easily be changed, the flipside is that investors have ample cash to plough into the equity market if they become so emboldened. Investors might be encouraged to shift this liquidity back to stocks if the economy shows true signs of stabilizing. The shift to money market funds could be last longer than usual, given the severe and painful drubbing that investors took in 2000. Investors are clearly now more interested in the return of capital instead of the return on capital now that the financial bubble has burst. This has been the case in the Japan for 10 years and is a reminder of just how long lasting painful memories of stock losses can be. If investors do indeed stay away from stocks and therefore invest less in the economy, economic weakness will surely be the result. In turn, the Fed will have to cut rates still-more aggressively in order to battle the classic elements of a liquidity trap--the so-called pushing-on-a-string dilemma that occurs when cutting interest rates produces no response in the economy. But the gains in the money supply also suggest sufficient liquidity exists for a recovery in the economy.