Growth and American free money supply

Publié le par Jean-Pierre Chevallier

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:
2008.01.24.US.1.M2M1.05.gif
(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:
2008.01.24.US.2.M2M1.05.07.gif
(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:
2008.01.24.US.3.M2M1.07.08.gif
(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:
2008.01.24.US.4.M2M1.08.08.gif
(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:
2008.01.24.US.5.FRM.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%.

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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Increase Penis Size 17/07/2009 20:25

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