January 15, 2007
The markets are closed today in the United States, in honor of Dr. Martin Luther King Jr., but the government's printing presses never take a holiday. In fact, the Federal Reserve has been spitting out dollars at an annual pace not seen since in nearly two years.
M2 money supply advanced by 5.6% for the past 52 weeks through January 1, 2007, according to Fed data. That's the fastest rate of increase for 52 weeks since February 7, 2005. Calculated on a 10-week basis, M2's pace isn't quite a strong relative to recent history, but it's clearly taken flight and is just a shade under the previous 10-week peak of 2.4% set back in May 2003.
No matter how you slice it, money supply is growing at an accelerating pace these days. The optimistic interpretation is that the trend is as it should be. The economy has been holding up better than anticipated and so more money is needed to grease the growth. But let's not go overboard with the definition of growth. GDP, at last count, was expanding by an inflation-adjusted 2.0% a year in the third quarter, down from 2.6% in the second quarter. No, the economy's not about to stumble into recession, but neither is it about to surge.
Inflation, meanwhile, is looking more cooperative, at least from a top-line perspective. But the jury's still out on whether anxiety's still warranted for core inflation (which the Fed watches like a hawk, or dove, depending on your perspective). Consumer prices less food and energy advanced by 2.6% for the year last November, a pace that's close the highest logged so far in the 21st century.
Thus, the question du jour: Should M2 money supply be growing at an annual pace that's nearly triple the rate of GDP growth and more than twice the annual rate of increase in core inflation? An answer may avail itself later this week, when the Labor Department releases the inflation update for December. In the meantime, we can gaze at the money supply trend and wonder if it'll continue and if such things still have relevance in the 21st century.
Posted by jp at January 15, 2007 9:30 AM
I quote real GDP because that's the more widely quoted figure. You're correct, however, in that I wasn't making an apples-to-apples comparison. Nonetheless, it's still clear that M2's rate of change has taken flight. Meanwhile, nominal GDP rose 3.8% in the third quarter, down from 5.9% previously. Nominal M2 on a 52-week basis is still growing faster than nominal GDP.
Posted by: Jim Picerno at January 18, 2007 9:31 AM
You, please, speak yourself of an inflation-adjusted GDP-measure (growth rate of ca. 2,6%) and the M2 growth is in nomnal terms!
Since nominal GDP grows with very similar rates, the monetary expansion - as described here - shouldn't be so concerning. Or do I get it completely wrong?
Posted by: Saviano at January 17, 2007 6:07 PM