Thursday, August 26, 2010

Kelly Evans On Watching the Money Supply

Sometimes I think the only person that makes any sense at WSJ is Kelly Evans. Read her stories, ignore everyone else, and you will get a decent picture of the economy.

Kelly has a nice piece about money supply in today's WSJ:
What isn't signaling deflation these days? Perhaps this: Despite the weakening economy, the U.S. money supply has been growing again.

The nation's money stock, which includes currency plus bank deposits and households' money-market fund holdings, grew to about $8.64 trillion as of Aug. 9, from $8.48 trillion at the start of the year, according to the Federal Reserve.

And the increase has largely taken place during the past four months. The 13-week average, which smoothes out weekly volatility, has risen every week since May 3.

On Thursday, the Fed will release its latest weekly tally of the money supply, or "M2." Although the figure rarely makes headlines, the money supply's behavior is critical to the economic outlook. It is tough to sustain economic growth when banks, which transmit money from the Fed to the broader economy, aren't lending and the money stock isn't growing...

While this is progress, it may prove fleeting. The money-supply growth seen so far may be tapering off. M2 grew by an average $7 billion a week in the 13 weeks through Aug. 9, down from $11 billion on average in mid-July.
Kelly also gets a nice quote out of Anthony Crescenzi as she explains excess reserves:
The Fed's survey of senior loan officers, for example, found lending standards eased during the second quarter both for households and businesses. In other words, banks may be starting to put a sliver of their $1 trillion of excess reserves to work.

"I've always viewed the reserves as this mass of fuel, but the match is miles away from it," Pimco strategist Anthony Crescenzi says. "We would say that the match has moved a little closer to the fuel."
Kelly's focus on money supply is spot on, although when looking at money supply growth it is best to look at money supply growth rates rather than absolute numbers. She is looking at the right data. But money growth rates are under 5%, and nothing is going to get the economy into another pseudo boom unless growth is closer to 10%, so we have a long way to go before any short-term heat up in inflation.

Further, while watching money supply growth is very important, and it will get the economy going with another round of a Fed money induced manipulation of the economy, Kelly does call this "progress".

The only thing at this point that I would consider progress is if Kelly picks up a copy of the Mystery of Banking by Murray Rothbard so that she can understand why no Fed money manipulated growth is required and that the economy will do just with a stable no growth money supply.

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