2. M2-M1 free supply money

Publié le par Jean-Pierre Chevallier

Free supply money and growth: II

 

II. M2-M1 free supply money

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 saving of the households (placed on savings accounts) which must drop so that the real GDP increases. Indeed, by saving less, the households consume more: the demand increases and the supply answers it (so, the real GDP increases).

A recovery by consumption must be made this way, and not by the welfare or wage increases independent of the gains of productivity (the leftist Keynes revival).

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Conversely, American authorities currently seek to slow down the growth of the real GDP because it is higher than its optimal potential, which is not bearable in the long term (because this situation is inflationary). 
The FOMC members thought that by raising basic rate, they would quickly cause a deceleration of the GDP growth and an increase in the saving of the households (i.e. an increase in the free money supply in M2-M1) thanks to a relatively weak increase in consumption.

The financial and monetary standing of the United States is overall healthy: Americans funded mainly the foreseeable loads of retirement (thanks to pension funds), the deficit of the State is contained in the standards, the cash-flows were never also high, the debt of the companies is generally weak.

The Fed waits until the GDP growth drops so that inflation returns in the acceptable zone (the PCE: PILFE should range between 1 and 1.5 percent).

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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 saving of the households which must drop so that the real GDP increases:

Figure 2 : http://s3.archive-host.com/membres/up/2107676425/200702052M2M160.gif

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On the previous graphs, the growth rate of the real GDP was adjusted with the PCE:PILFE, on this one, it is it by the deflator, the observations are the same ones:

Figure 3 : http://s3.archive-host.com/membres/up/2107676425/200702053M2M190.gif

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A zoom shows the simultaneous increase in the real GDP and the free money supply to the fourth quarter 2006 never occurred since 1990!

Figure 4 : http://s3.archive-host.com/membres/up/2107676425/200702054M2M190ZOOM.gif

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