Forecasts and variations of the monetary aggregates

Publié le par Jean-Pierre Chevallier

Forecasts and variations of the monetary aggregates
The variations of monetary aggregates are the best indicators for forecasts because they very well synthesize the reactions of the markets.
On September 3, M2-M1 (much) increased by year-on-year: +8.3%.
The increase in M2-M1 returns perfectly in the trend…
Figure 1: http://s3.archive-host.com/membres/up/2107676425/20070921US1M2M1.gif

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… what means that real GDP growth is and will be weak: around 0.1 to 0.2% (from one quarter to another in annualized rate), i.e. 1.7% year-on-year (see my previous papers),
Figure 2: http://s3.archive-host.com/membres/up/2107676425/20070921US2FRM.gif

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This law of the free money supply is not always exactly checked, like all laws in economy.
The growth can weaker, still negative, or on contrary a little stronger than be even envisaged as in the second quarter.
However, this law is always checked in its broad outline: over the year 2007, the growth is very weak, it is a certainty.
The cause is not the sub-prime crisis, but it is the maintenance of the Fed target on a too high level which creates large deceleration of the activity and which causes important reactions on sensitive markets like the real estate.

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Since September 3, Americans emptied their bank accounts of $48.7 billion to spend about it a part and to save $31.4 billion,
Figure 3: http://s3.archive-host.com/membres/up/2107676425/20070921US3M1M2M1.gif

The variations from one week to another are still very important.

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The inflation decreases because of the slowdown of the growth: the CPI-LFE dropped to 2.1%. It is nearly in the normal band: the PCE-LFE will be below 2%,

Figure 4: http://s3.archive-host.com/membres/up/2107676425/20070921US4CPI.gif

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This weakness of the growth does not mean that United States are in crisis!
All the fundamentals are good.
As the Fed still will decrease its basic rate, the growth will reach its optimal potential without inflation.
The drop of the US dollar compared to strong currencies like euro and Canadian dollar does not correspond to a weakness of the American economy.
A weak USD is the best means to instigate the economy in the United States.

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The USD was weak (compared to these currencies) at the end of the Seventies, which allowed the rectification of the United States during Reagan years.
It was in the same way with a weak USD at the beginning of the Nineties which allowed the strong growth of the Nineties.
Figure 5: http://s3.archive-host.com/membres/up/2107676425/20070921US5EURCADUSD.gif

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The USD is strong in some periods because American economy is strong, but this force weakens American companies (in 1984, in 2000).
It is an aspect of the paradoxical logic (which is a concept of soldiers): to be strong, it is necessary to admit (even to cause!) weakness.
The force of the United States is a voluntarily weak USD.
The weakness of the zone euro is the force of the euro.

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It is the same with China and Japan which draw their force from the weakness of their currency.
To continue to be strong, the authorities of United States must cause a drop in the value of the USD compared to currencies of their competitors.
They succeed in achieving their goals, except with the Chinese who are experts in strategy for thousand years.

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