As long term readers know, I watch money supply growth very closely. In the final quarter of 2011, 13-week annualized NSA M2 money supply growth was as high as 20% plus. The latest numbers show money growth at 6.0%. Obviously, a significant decline from 2011, but still solid growth. Thus, in my view, the reason for the sluggish economy, and I have been covering this on a daily basis in the EPJ Daily Alert, is this slowdown in money growth. It's not enough to send the stock market and economy crashing, but it is enough to slow the strong market and manipulated fast-pace economic growth of a few months back.
Where things go from here is up to that bronco rider Bernanke. If he accelerates money growth again, we will head higher with strong price inflation. If he keeps it at current levels will eventually go into a slow stagflation type economy, if he really slows the money growth from here, like he did in the summer of 2008, the economy will crash.
So we are, right now, on the edge of a turn in the economy, but how that turn occurs is up to Bennie.
Michael Duff emails and its relative to the above so I will print it (My answers are in italics):
I'd really like to see an inflation update from you after hearing these job numbers. Even the mainstream press is on to it now, talking about the reduction in labor participation rates in contrast to the apparent improvement in the unemployment rate.
There is still plentyof money being printed at 6% growth, so I expect continued price inflation. How much depends upon Bernanke.
Is the manipulated recovery stalling out?
It is in a slowdown phase but not completely dead, yet.
I'm still a bit unclear about where this money goes once it's printed. Bernanke issues money at ZIRP, primary dealers buy government debt with this money and turn over a guaranteed profit. But isn't most of this just sitting in reserves, not leaking into the real economy yet?
A lot of QE2 went into excess reserves where it sits, but required reserves have been climbing. Required reserves are reserves banks need to back up loan activity, so climbing required reserves indicates more money is getting out into to the economy. Fed money is not at ZIRP, that is mostly a myth. Fed funds are now at 0.15%
This money isn't inflationary until they spend it, right?
New money coming in that is loaned out is spent right away. People and companies borrowing don't usually sit on the money they borrow.
So all these companies are sitting on huge cash reserves, preparing for some huge crash or economic dislocation.
The demand to hold cash balances is an important factor in determining the price level. But as the Fed continues to print, price inflation starts to heat up and pushes corporations to spend the money. That said, at any moment, all money is being held in cash balances somewhere. It's the urgency to spend that counts.I'll answer more questions from MD tomorrow.