Monday, May 7, 2012

What's Ahead for the Economy?

I don't know.

 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.


  1. Interesting commentary. I recently did a bankruptcy/deleveraging with my business to restructure unsustainable debt after my business crashed in 08'.(April of last year).

    I walked away from a $500,000 commercial building with a credit line secured to it as well and had to switch banks as a result.

    (it worked thankfully and the new business model is very successful despite being 1/3 of my original size in 03')

    I told my new bank(regional) the whole deal when I moved my account last year and got a call from the VP of it last month asking if I needed/wanted a loan!!!!

    lol....I reminded them I came out of a bankruptcy/restructing situation just last April and got "no problem" as a comment in return.

    I think they got a pile of cash they are desperate to loan out....

  2. This is a premium level of service, Bob. I'll have to come up with better questions.

  3. You write: "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 to firm up the forecast a bit this seems to me to be the following:

    Scenario A): If money growth rate increases, prices will increase strongly (strong price inflation compared to the "stagflation type economy"). Since, presumably, "Stagflation type economy" is similar to the late 70s where inflation averaged close to 10%. So scenario A, double-digit increases in consumer prices if money growth rate is higher than 6%.

    Scenario B): "Stagflation type economy" seems to be inflation between 5-10%, growth below 2% (below potential).

    Scenario C): "Economy will crash" if money growth rate slows below 6%. Crash to me seems to indicate negative growth.

    So that makes a forecast contingent on money growth covering the whole set of possible developments here. Let's see how good your model is over the next year. I don't think any of these scenarios are remotely likely to occur given my non-Austrian, mainstream macro model of Dr. Ben Bernanke. (By the way, why is it often Dr. Ron Paul, even though his doctorate is not in Economics, but never Dr. Bernanke or Dr. Krugman, who actually have relevant credentials?)

  4. Please explain how "climbing required reserves indicates more money is getting out into to the economy". This statement makes no sense to me. Doesn't increased reserves mean LESS lending all other things equal?

    1. Because federal banking regulations require a certain amount of 'money' set aside in 'reserves' for a given amount of loans. This is the entire premise behind fractional reserve banking. For example, if you deposit $100 in the bank with a 10% reserve requirement, the bank can loan out $90 and put $10 in reserves. Then the $90 can be put in deposit and loaned out as $81 with $9 in reserve…. etc.

      Higher required reserves are the direct result of lending activity and by the regulations all banks operate under, must occur from this activity.

  5. @Anon 150

    I won't even bother with your mindless economic analysis.

    To answer your only intelligible question, it is often, although it should always be, Dr. Ron Paul as he is the only individual with the credentials of a Doctor, that is a doctor of medicine. The idea that anyone who studies a 'doctorate' in one of the social sciences (and economics is unarguably a social science) is deserving of the title of Doctor is a most recent phenomenon, and all together insulting to those who dedicated their lives to helping others. The creation of 'doctorates' of social sciences is a result of the more recent humanistic movement in an attempt to 'value' social sciences and increase university attendance rates. That Bernake would be considered a Dr. is simply beyond comprehension.

    1. Social scientists were referred to as "doctor" when surgeries were still performed by barbers. You don't know your history which is pretty funny, considering you attempt to teach others.

  6. Where the heck are you getting those numbers?

    I use this:

    And I calculate 6.2% annualized growth, by taking the 13 week average NSA M2 ending Jan 30 of 9667.6, and the 13 week average NSA M2 ending Apr 23 of 9814.8.

    I do

    (9814.8 - 9667.6)/9667.6 = 0.015226116, or 1.522% for 13 weeks ending Apr 23.

    Annualized, this is

    (1 + 0.015226116)^(52/13) = 1.0623, or 6.23%.

    What numbers are you using? Or did you just round to the nearest percent?

    1. If Wenzel is doing this in his head, he is probably taking the 0.015226116 and rounding that down to 0.15 and multiplying by 4, i.e 52/13, to get the 6.0% growth.

      This would give him a simple annualized rate (4x) versus a quarterly compounded annualized rate (^4). If he considers the three months (13 weeks)period to be the dominant time frame impacting the economy, which he appears to do, the simple rate would be the legitimate method to use.

      The compounding method you are using adds complexity without insight. Money supply is about changes in growth, not projected out compounded growth. Indeed, just because you have the actual growth for a 13 week period, there is nothing that says this should be compounded on a quarterly basis. Why not daily, weekly or monthly compounding?

      Keep it simple.