Dimanche 28 décembre 7 28 /12 /Déc 21:26

B-2’s beautiful Christmas gift!


B-2
(the Northrop Grumman B-2 Spirit, also known as the Stealth Bomber), Ben Bernanke, offered a really nice Christmas gift to the Americans and the world!


Indeed, yields Notes reached their low point on 17 and December 18 (the 10-year at 2.08% and the 2-year at 0.66%) after the surprise drop rates by the Fed at absolute zero (markets took some time to reflect and to properly interpret this historic decision!)

Figure 1:

Click here to enlarge the chart.


Indeed, these yields are beginning to increase slightly after the FOMC decision, which is the beginning of their upward on a long and strong trend from that point of reversal.


Whew!


The crisis is over! but the recovery is still quite hard because the collateral damages are important!


For now, only the large Treasuries market (Notes) reacts correctly: capitals are still refugees in large numbers on the Bills whose yields are at zero point zero and not much for 100,

Chart 2:

Click here to enlarge the chart.


The Henry Paulson’s decision not to use so the first version of his rescue plan (black spot on the charts) dived the Treasuries, the stocks and so on to complete the creative destruction, which was very effective!

Chart 3:

Click here to enlarge the chart.

 

The yields of Treasuries will all increase on a long upward trend (with first, the 10-years dating back to 5% as in 2006-2007), which means that capital will leave their shelter to invest in corporate bonds and especially stocks, the equity indices will finally regain their normal level,

Chart 4:

 


Click here
to enlarge the chart.


The crisis is over, in fact it was not a crisis, but just a small slowdown in GDP growth to burst two bubbles and inflation, and then to restart on excellent fundamentals, i.e. with sound money through the reorganization of the financial sector where many people have taken good slapping with investments in risky derivatives.


Hacks and patters will welcome the recovery by attributing to the policy of Barack Obama, who is for nothing in this course!


The spread 10-year less 2-year continues to decrease after reaching a high point as I had already noted above,

Chart 5:


Click here to enlarge the chart.


The US recovery will even transmit to Germany: the spread 10-year Bund less the 2-year Schatz also, after reaching high points (corresponding to a negative growth) will fall (which means that growth will start in Germany)

Chart 6:

 


Click here
to enlarge the chart.


The yield curve is fairly strong in Germany, which signals a recovery,
Chart 7:


Click here to enlarge the chart.


The Club Med countries will still be heavily handicapped by the Euro-system, and the slippage of the monetary supply and their public deficits: the spread between the yields of 10-year Treasury bonds of Italy (4.313%) and Germany (2.936%) still beats yesterday's record on December 22 to 46.9% (at the end of US trading session),

Figure 8:

 


Click here
to enlarge the chart.


With a spread of 16.5% the French 10-year OAT (3.420%) is close to its record,

Chart 9:

 


Click here
to enlarge the chart.


The Club Med countries will not sink, but the disorder will be increased and unsustainable.
The American strategy of disorder is very effective everywhere in the world and particularly in the Middle East and Russia, which is expected to prevent real wars (high-intensity military say).


Gods, that monetarist war is pretty!

***

Par Jean-Pierre Chevallier
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Dimanche 28 décembre 7 28 /12 /Déc 18:57

Globalization balances


Once again, good old Alan Greenspan is right: the balances must be considered and implemented now at the level of nations and financial institutions taking into account the global balances, which is a little trickier than the time he chaired the Fed ...


He addressed this problem in his book, The age of turbulence, particularly with regard to productivity gains and the global equalization of trade balances.


Chinese farmers increase their productivity considerably by working in factories (and they derive great benefits), which also benefits Americans who can buy goods costing less than if they had been produced in the United States.


The balance of trade of China and the United States are both highly unbalanced but the global balance is achieved, which is essential and overall productivity gains are higher than the endogenous productivity of each country.


Globalization is a win-win game (these ideas are already well known).


The financial and monetary problems are more difficult to understand and control because the balance must be achieved in a way globally, nationally and in each financial institution (banks and insurance companies).


The Central Bank of China holds reserves in U.S. $ ($ 1 900 billion), which enables it to catch up with the banking and monetary imbalances inherited from previous decades (time of Mao’s communism).


Also, Treasury Bills (covering the deficits of the government) do not need to be purchased by capital from activities conducted in the United States. They have to be purchased by regularly earned dollars on markets without creating monetary, which is the case.


Again the balance is achieved globally for the benefit of all parties while an imbalance appears in each nation, which has no disadvantage.


On the other hand, it is important, and this is fundamental, even vital, there is sound money in each nation, i.e. without monetary creation, without hypertrophy of the money supply.


However, people from the Fed, including Alan Greenspan and B-2 (Ben Bernanke), identified the existence of two bubbles in the financial sector: first, the so-called sub-prime, broke on the 2nd half of 2007 and first quarter 2008, the second erupted dramatically from last September 15 (the so-called crisis CDS).


Once again, derivatives, although they represent a considerable mass of commitments, are not dangerous as long as they are properly covered (which has almost always been the case since they exist).


If this is not the case, profits are not right, that unearned money circulates (it is monetary creation), a very dangerous bubble needs to burst at the earliest.


Otherwise, there are monumental losses ... which are healthy then the bubble bursts in absorbing the unearned money.


Conclusion: it was essential that the new generation Stealth bomber takes action to destroy the second bubble, which was done with the help of his loyal employees, including Henry Paulson.


They hurt very badly, but then it will the best for the good of us all!


***


Complements ...


The creative destruction continues in the US banks. Their sanitation through the necessary recapitalization from so-called public capital, i.e. capital channeled through government agencies.


As money managers have lost faith in banks, they prefer to place them in Treasuries and capital will then move to the capital of banks.


There is no monetary creation in this circuit (as the capital borrowed legitimately exists and moves normally) or real deficits because the amounts borrowed are not spent but invested in the capital of banks. These banks will be viable and will again benefit when these disturbances are over (in a few months).


Moreover, Alan Greenspan notes that the ratio of equity to assets of banks was 100% 5 000 years ago, it was still at 60% in 1840 in the United States to fall to exceptionally low levels (less than 10%) after the WWII.


Insofar as there is no a priori possible financial institutions, laws or rules effective in preventing the development of bubbles from commitments not covered in derivatives, enforcement of contracts is the only feasible thing. But it weakens the financial institutions (investors have more confidence in their accounts).


Logical consequence: banks must increase their equity (in relation to their total debt of my credit multiplier μ) to consolidate their credibility.


This is what happens in the United States.


Finally, the Fed is not really a lender of last resort, but a reprocessing plant of capital which, under the label prosecutions, can recapitalize the banks when the markets have more confidence.

After the irrational exuberance of the markets, the Fed is now obliged to intervene to counter their irrational depression.


If Americans operate well in the current turbulence, it is not the same elsewhere, and particularly in Europe: Sarkozy & co do everything so that there is no creative destruction in the financial sector or elsewhere. This prevents the return of fundamental balances, and worse, they increase government deficits by spending intemperately.

The rescue plan announced by Barack Obama will be financed by recovery (which will happen within 6 months) and offset by cuts in unjustified public spending, this is not actually a Keynesian stimulus.

In addition, hypertrophy of the money in the euro area condemns these countries to a lowest potential growth optimal for decades to come, as in Japan.

***

Par Jean-Pierre Chevallier
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Vendredi 22 février 5 22 /02 /Fév 15:28

The age of turbulence


The latest figures yesterday published by the Fed are worse than those of the previous week: Americans increased their savings of $ 40 billion compared with the previous week, and especially to $ 127 billion over the last 4 weeks ending February 11.

It's worse than last August at the height of the subprime crisis.

It is worse after the terrorist attacks on September 11, 2001: Americans have increased their savings than $ 50 billion but in the following weeks, they continued to spend their money normally, which maintained growth.

The main concern of Alan Greenspan was returning to the American economy and he intervened strongly in this direction.

Ben Bernanke is not responding and it is a problem ...

- Either he is incompetent and oblivious to the gravity of the situation created by maintaining the rate of the Fed too high for too long (and the Wall Street Journal published an article in this direction by reviewing his possible successor!),

- either Americans voluntarily create a shock as part of their strategy of disorder they finally emerge victorious (a recession in the United States will have a major impact throughout the world).

The behavior of Americans changed completely from the collapse of Jan. 21: before that date, they normally spend their income, which worked for growth, but since they spend less and save more, slowing growth.
If this trend continues in the coming weeks, GDP growth will be negative for this first quarter compared to the previous.


M2-M1 rose by 8.5% year on year, as the worst time of last August. The trend of early January has been completely reversed,

Chart 1:
2008.02.22.US.1.M2M1.gif
(Click here to enlarge the graph)

As GDP growth is inversely proportional to the variation in the free money supply, this growth will be negative if the behavior of Americans will not change radically in the coming weeks,

Chart 2:
2008.02.22.US.2.FRM.gif
(Click here to enlarge the graph)

M2 increased by 6.8% a year-on-year, far too much while the increase was returned to normal at 5% before January 21,

Chart 3:
2008.02.22.US.3.M2.gif
(Click here to enlarge the graph)

Americans must spend more immediately to ensure that growth does not fall,

Chart 4:
2008.02.22.US.4.FRM05.gif
(Click here to see graph)

Alan Greenspan has rightly observed that the future will be different from the past: changes in the behavior of the Americans could create strong turbulence that will be very difficult to manage.

It is a time of turbulence, a book to read!

Par Jean-Pierre Chevallier
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Vendredi 15 février 5 15 /02 /Fév 15:39

Bad

Bad


The latest figures published yesterday by the Fed are bad: M2-M1 rose by 8% (year o year) since 2 weeks,

Chart 1:
2008.02.15.US.1.M2M1.gif
 (Click here to enlarge the graph)

The stocks market collapse, which was amplified during the week on January, 21 (with Société Générale) prompted Americans to reduce their consumption expenditure to increase their savings because they fear that their situation will deteriorate in the future .

The demand falling, supply adjusts. GDP growth is low: 2.5% year on year, or 0.6% over the previous quarter to an annualized rate, as the fourth quarter 2007,

Chart 2:
2008.02.15.US.2.FRM07.gif
(Click here to enlarge the graph)

This is a reversal of the positive trend of the previous 4 weeks confirmed by M2 which increased by 6.6% year on year,

Chart 3:
2008.02.15.US.3.M2.gif
(Click here to enlarge the graph)

If Americans behavior do not change quickly, the recovery can be achieved only from the second quarter 2008 because the decrease of Fed target have positive effects only 6 months after it began to lower its rate, i.e. in September 2007,

Chart 4:
2008.02.15.US.4.FRM05.gif
(Click here to see enlarge the graph)
***

Par Jean-Pierre Chevallier
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Vendredi 8 février 5 08 /02 /Fév 22:34

Reversal of trend?


Americans increased their savings to $ 47.4 billion in the week ending January 28, which is significant because an increase of this magnitude occurred only once previously in history: in the week after September 11, 2001 with $ 51 billion,
Chart 1:
20080208US0M2M100-copie-1.gif

 (Click here to enlarge the graph)

$ 47.4 billion had not been spent, as less sales therefore as less growth.

The increase in M2-M1 was 7.7% from one year to another,

Chart 2:
2008.02.08.US.1.M2M1.gif
(Click here to enlarge the graph)

The increase in the free money supply was only 7% during the previous weeks, which corresponded to a GDP growth at its optimum potential 3.5% because real GDP growth is inversely proportional to the variation in the free money supply,

Chart 3:
2008.02.08.US.2.FRM.gif

(Click here to enlarge the graph)

The trend of the increase in M2-M1 at the beginning of January was good, but the new trend is worrying because the increase in M2-M1… decreases much more slowly, which means that GDP growth is less that the high figures of the previous weeks.

The drop of the stocks because of massive sales by Société Générale on Monday, January 21 (which was a public holiday in the United States, therefore with little opportunity to control by American authorities) explained this behavior change of Americans.
The French financial community led by its mistakes a situation that could have serious consequences in the United States and elsewhere in the world if this new trend prevails over the previous one.
Frenchies are dangerous!

For the moment, it is not possible to know what is the trend that will prevail during the coming weeks either, Americans continue to consume as at the beginning of January, which will maintain growth, or they will continue to save, thus slowing growth.

The increase in M2 was around 5%, which was reassuring, now it rises to 6%, which is worrying,

Chart 4:
2008.02.08.US.3.M2.gif

(Click here to enlarge the graph)

In these circumstances, it is not surprising that Americans are wary Europeans and French in particular. They have consistently refused to enter into the capital of American banks while sovereign Arabs and Asians funds were admitted…
***

Par Jean-Pierre Chevallier
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Vendredi 1 février 5 01 /02 /Fév 21:27

Productivity and growth


American companies increase their sales (GDP increases normally at 3.5%), but they do not create jobs.

Overall they have even removed 17,000 in January including over 50,000 in the manufacturing sector.

Productivity gains are now very high in the United States, as in August 2003 when 48,000 jobs cut.

Productivity gains peaked at 4.8% (in the 6 first months 2003) before recovery with real GDP growth in excess of 4% in the 6 first months 2004,
Chart:
2008.02.01.US.PVT.gif
(Click here to enlarge the graph)

Productivity gains were weak since 2004, but they are rebounding and tend to their historical average of 2.5% resulting in GDP growth.

The reversal of the growth takes place now as in 2003. Everyone fears a worsening economic situation while the recovery is very strong.

We can detect these reversals of major trends only by careful observation of changes in monetary aggregates.

The turnovers and especially corporate profits and their stocks will rise.

Knowledge of the economy is fuelling winning speculation …

Neither government plan nor lower rates by the Fed would be justified: the markets are picking up for themselves.

***

Par Jean-Pierre Chevallier
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Vendredi 1 février 5 01 /02 /Fév 12:17

Confirmation of my analyses…


The latest figures released by the Fed on January, 31 (and those of the GDP growth) confirm my previous analyses: the increase in the aggregate M2-M1 is slightly less than 7% (from one year to another) on January 21, which means that real GDP growth is 3.5% (year on year) in the beginning of this year, i.e. at its optimum potential.

Chart 1:
2008.02.01.US.1.M2M1.gif
 (Click here to enlarge the graph)

The trend is now well established as the increase in M2-M1 was less than 7% for 4 consecutive weeks.

Americans continue to well react: they work, make money and spend it, which maintains the growth. The fundamentals are good.

As real GDP growth is inversely proportional to the variation of the free money supply in M2-M1 (decreasing), growth is picking up spontaneously,

Chart 2:
2008.02.01.US.2.FRM.07.gif
(Click here to enlarge the graph)

The rate of real GDP growth in the fourth quarter 2007 was 2.5% year on year in accordance with my predictions but 0.6% over the previous quarter to an annualized rate compared with 0.7% for my predictions (!).

Real GDP growth varies with the inverse of the variance of the free money supply for recent quarters, as for more than 50 years…
Chart 3:
2008.02.01.US.3.FRM.05.gif
(Click here to enlarge the graph)

The observation of changes in monetary aggregates is really the best indicator of future economic activity for 50 years…

Chart 4:
undefined
(Click here to enlarge the graph)
***

Par Jean-Pierre Chevallier
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Mercredi 30 janvier 3 30 /01 /Jan 21:54

American growth at 2.5%!


The rate of real GDP growth in fourth quarter 2007 was at 2.5% year on year, exactly in line with what I predicted under my law on free money supply: the free real GDP growth varies with the inverse of the variance of the free money supply,

Chart 1:
20080125US3FRM0508-copie-1.gif
(Click here to enlarge the graph)

This law operates from variations in rates from one year to another. I predicted a rate at 0.7% over the previous quarter to an annualized rate when it was 0.6%. Given decimals, the percentage change from one year to another of my predictions are confirmed.

For the first quarter 2008, my predictions are for an increase of 3.5% year on year and 4.5% over the previous quarter to an annualized rate.
The growth is returning to normal, i.e. 3.5% from one year to another because all the fundamentals are good, the money is sound, the American economy is very strong.

Americans continue to react well: they anticipated lower rates of the Fed from September 18 with more spending, which fuels growth.

Once again, the drop in base rates by the Fed under the neutrality of 4.25% is not justified
The FOMC members created too strong growth since next August, which will force them thereafter to rise too high their rate, thus perpetuating unnecessarily cycles of the past.

The observation of changes in monetary aggregates is really the best indicator of future economic activity for 50 years…

Chart 1:
200702052M2M160-copie-2.gif

(Click here to enlarge the graph)

***

 

Par Jean-Pierre Chevallier
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Lundi 28 janvier 1 28 /01 /Jan 13:21

Free money supply and growth


Part 1: M3 free money supply


The variation of the real GDP growth rate is inversely proportional to that of the free money supply which is the difference between the increase of M3, the money supply in current data and (less) the growth rate of the real GDP.


In fact the variations of this free money supply are important: as it increases, the real GDP growth decreases, and conversely.

The free money supply is a concept derived from the free cash-flow which is the total cash-flow less the part which will be in any case used to finance the renewal of the fixed assets (to maintain in state the outputs), the payment of the income taxes and of the dividends.

This free cash-flow is important for a company: it varies a lot according to the economic situation and to the (good or wrong) decisions of its managers.


M1 is the cash in billfolds and current accounts of the consumers, M2-M1 their savings and M3-M2 the whole of treasuries of companies.

The variations of these aggregates are thus found in those of the M3 free money supply.


Thus, in a normal situation, the real GDP growth is 3.5 percent and that of the free money supply is also 3.5 percent. The increase in M3 is at 7 percent in current prices. It integrates full inflation and a wealth effect.


As the variation of the free money supply accelerates (by exceeding 3.5 percent more and more), the real GDP growth slows down more and more under its optimal potential of 3.5 percent and conversely: as the variation of the free money supply decreases (while passing more and more under 3.5 percent), the real GDP growth increases more and more, over its optimal potential of 3.5 percent.

Chart 1:
2007.02.05.1.M3.gif
(Click here to enlarge the graph)


To start again the GDP growth (when it is below its optimal potential as in 2002-2003), the central bank have to decrease its target to reduce the free money supply. Indeed, in this case consumers save relatively less (by spending and investing more, which boosts demand), and free cash flows decrease (the companies increase their business investment, which boosts demand and supply) .


Conversely, to decrease a growth of a real GDP too strong, above its optimum potential as in 2006 and in 6 first months 2007 (thus inflationary and unsustainable in the long term), the central bank must raise its target to increase free money supply thanks to the increase of savings (on savings accounts in M2-M1, consumers anticipating an economic slowdown while increasing their precautionary savings by consuming relatively less and investing less, which reduces demand), and through the increase in cash flows (M3-M2 by investing less, which reduces supply and demand, and by increasing earnings in 2006 and in 6 first months 2007).

The central banks make move the markets in the wanted direction, by increasing or decreasing their basic rate according to circumstances, to vary the free money supply so that the real GDP growth is nearest possible to its optimal potential without inflation.


The ideal would be that the growth of the real GDP is stable at 3.5 percent, without variations, but such situation of balance is never durable. However, with the passing of years, the Fed succeeds in decreasing the range of the real GDP growth and of the free money supply which were sometimes important: it increased more than 10 percent in 2001 and it decreased in end 2003 beginning 2004, which corresponded to a recovery very (too much) strong of the real GDP thereafter because inflation set out again.


Contrary to the commonly widespread ideas, it is thus not by increasing the free money supply that a central bank can start again the economic activity, but on contrary by restricting it (by decreasing its basic rate) provided that there no were before monetary skids (as in Japan for example in 80s and now in euro zone).

Conversely a central bank slows down the GDP growth by increasing its basic rates, that increases the free money supply.

The evolution of the free money supply (in rise or fall) is important because the real GDP growth is it inversely proportional.


On the long term, the increase in the free money supply is higher than the real GDP growth of a half point at least, which is due to an wealth’s effect of the consumers and companies. Indeed, when the growth of the real GDP increases, their wealth increases, the consumers save more and the profits increase more.


The Fed does not publish any more since March 13, 2006 the data of M3, which prevents from well analyzing these problems.

However, this measurement does not present major disadvantages because the variations of the free money supply in M2-M1 are significant and the evolution of the cash-flows of the companies can be known by other reliable means.


Part 2: M2-M1 free money supply


The variation of the free money supply depends in fact (especially in the United States) on the variation on only one aggregate: M2-M1, i.e. of the savings of the consumers (on savings accounts) which must drop so that the real GDP increases. Indeed, by saving less, the consumers spend more: demand increases and supply answers it (so, the real GDP increases).

Chart 2:
200702052M2M160-copie-1.gif

(Click here to enlarge the graph)


Conversely, the Fed has slowed the real GDP growth by maintaining its base rate at 5.25% in 2006 and during the 6 first months 2007, above its neutrality at 4% (or 4.25%), which led to an increase of consumers savings (i.e. an increase in the M2-M1 free money supply) by a relatively small increase in consumption. The Fed has sought to slow the real GDP growth as it was above its optimum potential, which is not tenable in the long term because this was inflationary.

The financial and monetary situation of the United States is generally sound: Americans have largely accrued predictable pension costs (in pension funds), the deficit of the State is contained in the standards, cash flows have never been higher, the indebtedness of companies is generally low.

The Fed waited until the core inflation return back in the acceptable area (an increase in the PCE: PILFE must be below 2%, preferably fluctuating between 1 and 1.5%) due to the slowdown in GDP growth .


Part 3: free money supply and behaviorism


To understand the relations between the free money supply and the GDP growth, it is necessary to understand with what actually correspond, concretely, the variations of the monetary aggregates.


As consumers fear that their situation is degraded in a near future, they spend relatively less and thus they increase their precautionary savings, which means that M2-M1 increases and that the real GDP growth slows down: savings and growth are inversely proportional.

Conversely, as they anticipate an improvement of their situation, they spend more by decreasing their savings: M2-M1 decreases and the growth of the real GDP increases. Finally, this law of free money supply is simple!


What is important is thus the reaction of the consumers, i.e. individuals, which is visible starting from the variation of the monetary aggregates.


The behavior of the consumers is thus determining: it explains this almost perfect correlation between the M2-M1 free money supply in current prices (not deflated) and the real GDP growth for 50 last years in the United States and the same results in the euro zone, in Thailand and everywhere else.


The reactions of Americans are very fast and very elastic. The Fed publishes Thursday evening the data of M1 and M2 which makes it possible to know with only 10 days of delay their behavior. Thus, it is possible to know almost in live the trend of the GDP and thus to correctly anticipate the markets, before the investors who do not know this law of free money supply... from where its interest because the speculation is then winning!


The FOMC members raised too late and too slowly their basic rate in 2004, leading to a too strong GDP growth in 2005 and 2006, above its optimum potential, and therefore inflationary. To bring down underlying inflation in the ideal range from 1 to 1.5%, the Fed was obliged to create a decline in growth and, ultimately a recession. However, as American economy is very strong, the decline is slow and weak, but certain. As stock markets badly anticipated this slower growth, there is a collapse.


This law of the free money supply is verified for more than 50 years in the United States, but a new paradigm is being set up.
On the one hand, the behavior of Americans is changing: now their level of wealth allows them to consume and save.
On the other hand, the optimal rate of GDP growth in the future will be lower than it was in the past because the participation rate tends to drop, inactive (retired) will be more numerous than in the past .
This new paradigm is beginning. 

Chart 3:
  20080125US2FRM0708-copie-1.gif

(Click here to enlarge the graph)


Part 4: M3 Free Money supply in euro zone

In the euro zone, the increase in the free money supply is too strong. Thus, GDP growth is below its optimal potential: M3 increased at 4.5% year-on-year in May 2004 and now at 12%!

Chart 4:
20080128EZ3FRM-copie-1.gif
(Click here to enlarge the graph)


The increase in the money supply come from sound money and unearned money because of the provisions for retirement are not accounted. So, there is monetary creation.

To boost real GDP growth, the monetary creation (which was far too high, especially in France and in the Club Med) have to stop. 
To do so, it would have had to restrict the mass distribution of so-called social aid and grants, and force companies and the government to comply with the accounting rules which give an accurate picture of reality, by accounting retirement commitments in funds pension.

M3 free money supply in Thailand
Chart 5: 
2007.02.05.7.THAI99.gif
(Click here to enlarge the graph)


I studied these monetary problems in collaboration with Fred Rabeman, technical analyst, whom I thank: http://www.maestrade.com/

Originally published on January 11, 2007 and on this blog on August 12, 2007 and reviewed on January 28, 2008.

***

Par Jean-Pierre Chevallier
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Vendredi 25 janvier 5 25 /01 /Jan 15:30

Americans continue to well react!


Americans continue to well react, as demonstrated by the developments in monetary aggregates figures on January, 14: they increase less savings because their economic situation is good and they anticipate an improvement.

The increase in M2-M1, which was at 8.5% (year on year) in late August 2007… decreases: it is now much lower than 7% for 3 weeks,
Chart 1:
2008.01.25.US.1.M2M1.gif
(Click here to enlarge the graph)

As real GDP growth is inversely proportional to the variation of the free money supply M2-M1 (decreasing), growth is picking up spontaneously (because Americans spend their incomes, which boosts the GDP growth),
Chart 2:
2008.01.25.US.2.FRM.0708.gif
(Click here to enlarge the graph)

Here, the rate of real GDP growth in the fourth quarter 2007 is at 2.5% year-on-year, or 0.7% over the previous quarter to an annualized rate, and in the first quarter 2008, the figures are respectively 3.5% and 4.5%..

Real GDP growth varies with the inverse of the variation of the free money supply, what is clear in this graph…
Chart 3:
2008.01.25.US.3.FRM.0508.gif
(Click here to enlarge the graph)

The current situation is as 2006 during the 6 first months.

The increase in M2 has fallen sharply: it is now at 5.1% as in 2006,
Chart 4:
2008.01.25.US.4.M2.gif
(Click here to enlarge the graph)

The money is sound in the United States.

Under these conditions, a decrease in base rate of the Fed is a mistake.
By lowering their rates below the neutrality (which is at 4.25%), the FOMC members will create too strong growth from next August, which will force them thereafter to rise too high their rate, thus perpetuating unnecessarily cycles of the past.

The observation of changes in monetary aggregates is really the best indicator of future economic activity over 50 years…

Chart 5:
2007.02.05.2.M2M160.gif
(Click here to enlarge the graph)
***

Par Jean-Pierre Chevallier
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