April 4, 2007
ANOTHER WARNING FROM MONEY SUPPLY DATA?
Money supply gets no respect, but that doesn't stop it from setting new, albeit minor milestones in the 21st century.
The latest comes by way of weekly M2 money-supply numbers through March 19, the most recent posted by the Federal Reserve. Based on those stats, M2 grew by 6.1% over the year-earlier amount. As our chart below shows, that beats the previous 52-week rolling peak of 6.0% set back in January 2005.
More importantly, M2's expansion rate continues to climb. The rise this year has been steady, jumping from under 4% at last year's close to the recent 6%-plus level. The trend may or may not be temporary, but it's increasingly clear that the Fed has been deliberately elevating M2 in a meaningful way.
Context, of course, counts for something. With that in mind one might ask, How fast is the current 6.1%? For perspective, consider that the economy's growing at a nominal rate (i.e., at the current dollar rate) of 4.1%, based on the annualized change in current-dollar GDP in last year's fourth quarter, according to the Bureau of Labor Statistics.
There are any number of explanations (some encouraging, some less so) for why money supply's rate of increase continues to move higher. Anxious types, such as your editor, worry that the reason is related to the central bank's inclination to provide aid and comfort to a slowing economy. But the aid and comfort appears to be coming in the form of increasing M2 at rate above and beyond the pace of economic expansion. You can only indulge in that strategy for so long before you run the risk of stoking inflation's fires.
Perhaps the M2 pace of change will turn down. Perhaps the economy's expansion will pick up a head of steam. Perhaps Bernanke and company will dispense monetary medicine in exactly the right dosage that satisfies growth while keeping inflation at bay. But for now, we reserve the right to stay mildly skeptical.
Posted by jp at April 4, 2007 9:41 AM
And, in opposite, M1 is collapsing...
Posted by: theroxylandr at April 4, 2007 11:09 PM
I don't think we have much of a choice other than to keep inflation high. Our debt to gdp is so high that a slowdown would usher in a massive credit crunch. The fed is trying to slowly monetize everything.
Posted by: Shrek at April 4, 2007 1:38 PM