# Growth and American free money supply

**Growth and American free money supply**

USA are not in recession!

The careful observation of changes in monetary aggregates, in particular M2-M1 since 2005 shows that real GDP growth returns in its average of 3.5% (from one year to another),

Chart 1:

(Click here to enlarge the graph)

In fact, Americans grew increasingly their savings since the end of May 2005 (M2-M1 increased by 4%) until the end of March 2007 when the increase in M2-M1 was at 8%, which means that GDP growth was slowing down more and more,

Chart 2:

(Click here to enlarge the graph)

Then, since the beginning of March 2007, the trend was reversed: the slope of the increase in M2-M1 began to descend and to move towards 7%, which means that GDP growth trends towards its historical average of 3.5%…

Chart 3:

(Click here to enlarge the graph)

And this trend increased since September when it was clear that the Fed finally preparing to cut its rates,

Chart 4:

(Click here to enlarge the graph)

As real GDP growth is inversely proportional to the variation in the free money supply, **an increase of M2-M1 at 7% corresponds to a real GDP growth at 3.5%**Figure 5:

(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%.

The results of these analyses are valid if the current behavior of Americans not changed compared to what it was during the past 50 years…

In addition, short-term variations can occur in lengthy trends.

A little reminder is needed on

**the free money supply**…

**The change in real GDP growth is inversely proportional to that of the free money supply that is the difference between the increase in current M2-M1 and (less) the growth rate of real GDP.**

This is the variation of the free money supply that is important: when it rises, GDP growth declines, and vice versa.

M1 is cash in wallets and on the current accounts of consumers, M2-M1 their savings.

Changes in these aggregates produce those of the free money supply.

Thus, in normal conditions, in the United States, real GDP and free money supply growth at 3.5%.

The increase in M2-M1, at 7% in current data, integrates overall inflation and a wealth effect.

**When the variation in the free money supply accelerates (increasingly above 3.5%), real GDP growth slows increasingly below its optimal potential of 3.5%**, and vice versa: when the free money supply decreases (increasingly below 3.5%), real GDP growth is increasing more and more, above its optimum potential of 3.5%.

Read all the posts on the **free money supply**:

Part 1, **M3**: http://chevallier.over-blog.net/article-12570264.html

Part 2, **M2-M1**: http://chevallier.over-blog.net/article-12570139.html

Part 3, **the behaviorism**: http://chevallier.over-blog.net/article-12569940.html

My previous analyses are therefore to change in the direction given here…

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