Monetary Aggregates, still

Publié le par Jean-Pierre Chevallier

Monetary Aggregates, still

Once again, the change in monetary aggregates is the best indicator of the present and future economic situation.
M2-M1 grew increasingly until March 2007: Americans increased their savings because they felt that their situation was going to deteriorate.
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Figure 1: 
2007.12.09.US.1.M2M1.gif

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Since March 2007, the increase of M2-M1 stabilized in fluctuating between 7 and 8% a year, meaning that GDP growth slows but moderately.
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Figure 2: 
2007.12.09.US.2.FRM.gif
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The American economy is very strong, companies and Americans bear interest rates and oil prices high.
Productivity gains remain high, the unit cost of labor has fallen by 2.0% in the third quarter, which means that inflation falling in a normally acceptable range.
The subprime crisis is not negligible, but it has limited consequences.
The members of the FOMC will make a mistake by lowering their target on December 11, as the neutral rate is at 4.25%, and the rate of the Fed should be slightly restrictive because inflation may increase quickly if it remains neutral, like in 1965.
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M2 is expected to grow by 5% (2.5% productivity gains + 1% increase of the population +1.5% of core inflation), which was the case before March 2007.
Since then, the increase in M2 at 6% is a little too high: it therefore causes a drop in GDP growth under the law of the free money supply.
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Figure 3:

2007.12.09.US.3.M2.gif

(Click here to enlarge graph)
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