US narrow money continued to surge in August, strongly suggesting a further pick-up in G7 six-month real narrow money expansion – viewed here as a key leading indicator of global economic momentum.

US six-month real narrow money growth is the fastest since March 2009, arguing, on the face of it, against sustained US economic weakness – see chart.

10 of the 11 postwar US recessions identified by the National Bureau of Economic Research were preceded by a fall in real narrow money. The exception – the 1953-54 recession – appears to have been triggered by severe fiscal tightening as defence spending was slashed following the end of the Korean war.

Extending the analysis further back, the five interwar US recessions were preceded by, at the least, a stagnation in narrow money.

Such considerations do not preclude renewed GDP contraction but suggest that it would be short-lived. Short recessions have sometimes been associated with a rise in US equities – the S&P 500 index was 5% higher at the end of the July 1990-March 1991 recession than at the start, for example.

Bears argue that the current narrow money surge is being driven by extreme liquidity preference caused by fears of Eurozone-led financial instability and has no positive economic implication. The velocity of circulation, in other words, is collapsing. They made a similar case in early 2009 when claiming that there was no end in sight to the recession or equity market slide.

Part of the build-up is, indeed, due to “hoarding” but the cash will be released into the economy and markets when risk aversion abates. The issue is what policy steps are needed to begin to rebuild shattered investor confidence. Earlier posts have suggested that the ECB needs to reverse its misguided tightening. This would represent an embarrassing U-turn but policy thinking in Europe is shifting rapidly, as evidenced by today's surprise commitment by the Swiss National Bank to cap the Swiss franc at 1.20 against the euro.