Although markets rallied on Friday with the Dow recording the biggest one-day gain since April I am here one more time to warn that things do not look as they appear. While most market participants and bloggers - summed up at macroblog - cheered the surprisingly strong preliminary growth figure of 3.8% (Q2: 3.3%) a look at Econbrowser's chart (and the BEA press release) shows that government spending has become a major factor in the strenghtening process.
I do not consider this great news. While this can be partly explained by hurricane-induced clean-up spending it also means that the US government has been piling on more debt again and this trend shows no slowdown. Quite the opposite. Public debt rose another $26 billion in the last 5 working days alone.
It also contradicts the administration's philosophical line of "starving the (government) beast to death," which conservatives like to cite so often.
Sitting on empty coffers latest money supply figures for both the dollar and the Euro-area indicate an acceleration of the (electronic) printing presses. While seasonally adjusted M3 money stock rose 7.6% year-on-year in the US, the European Central Bank (ECB) reported (pdf) a further jump in M3 growth from 8.2 to 8.5% for September, saying that the growth relied on further credit expansion to both consumers and governments.
Adding some interpretation to the US data I want to point out that velocity growth is only a minor factor in exploding money supply as the chart below shows.

CHART: The velocity of dollars in circulation has slowed dramatically between 1995 and 2003 but is picking up slowly again. Data: Economagic.com

Coming back to Europe, inflation data shows that even the decline of oil prices did not lead to a slowing in the process of Euro-devaluation. Eurostat reported in a flash estimate (pdf) that inflation in October ran at an annual rate of 2.5% after 2.6% in September.
European central banks begin to grow weary about the inflation trend. A research paper from the Austrian central bank (Oesterreichische Nationalbank), done by Peter Kugler and Sylvia Kaufmann and titled "Does Money Matter for Inflation in the Euro Area?" warns that a robust cointegration is found between money growth and inflation. According to their results an M3-growth rate of slightly above 5% is compatible with a non-accelerating average rate of inflation of 2%.
So what do you think now about explosive money supply growth?