There was good news yesterday for all those who mistakenly think inflation is worth worrying about: The U.S. money supply experienced its sharpest contraction in modern history. For the rest of us, this can only spell one thing: ruinous D-E-F-L-A-T-I-O-N. The money supply story was reported yesterday by Ambrose Evans-Pritchard, the London Telegraph's man-on-the-scene in America. The news is likely to have been reported by the U.S. media as well, although we couldn't it anywhere else, even on Google's business page. Not surprisingly, Google led the section with the by-now smelly red herring about how wholesale prices jumped in July, putting still more 'pressure' on the Fed to 'decide' whether it should raise interest rates. We've been predicting for quite some time that a rate hike was not in the cards, since, even though the Fed talks relentlessly about inflation in order to distract us, Bernanke & Co. recognize full well that deflation ' the manifestly uncontrollable force that has been swallowing up the housing and banking sectors ' poses a far greater threat to the economy and the financial system than any mere price inflation could. Velocity Holds Key Now, with the news that M3, the 'broad' money supply, collapsed by $50 billion in July, we predict that the inflation story is about to go out of style. After all, how much inflation can we have if, instead of credit dollars flooding the system, they are now spiraling down the drain? Money velocity has been falling as well, and although this goes hand in hand with a deflationary contraction of the money supply, don't hold your breath waiting to hear more about it from Brokaw et al. Money velocity is one of those topics, along with campaign finance reform, that tends to make viewers' eyes glaze over, and that's
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