Americans continue to well react!

Publié le par Jean-Pierre Chevallier

Americans continue to well react!


Americans continue to well react, as demonstrated by the developments in monetary aggregates figures on January, 14: they increase less savings because their economic situation is good and they anticipate an improvement.

The increase in M2-M1, which was at 8.5% (year on year) in late August 2007… decreases: it is now much lower than 7% for 3 weeks,
Chart 1:
2008.01.25.US.1.M2M1.gif
(Click here to enlarge the graph)

As real GDP growth is inversely proportional to the variation of the free money supply M2-M1 (decreasing), growth is picking up spontaneously (because Americans spend their incomes, which boosts the GDP growth),
Chart 2:
2008.01.25.US.2.FRM.0708.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%..

Real GDP growth varies with the inverse of the variation of the free money supply, what is clear in this graph…
Chart 3:
2008.01.25.US.3.FRM.0508.gif
(Click here to enlarge the graph)

The current situation is as 2006 during the 6 first months.

The increase in M2 has fallen sharply: it is now at 5.1% as in 2006,
Chart 4:
2008.01.25.US.4.M2.gif
(Click here to enlarge the graph)

The money is sound in the United States.

Under these conditions, a decrease in base rate of the Fed is a mistake.
By lowering their rates below the neutrality (which is at 4.25%), the FOMC members will create too strong growth from next August, which will force them thereafter to rise too high their rate, thus perpetuating unnecessarily cycles of the past.

The observation of changes in monetary aggregates is really the best indicator of future economic activity over 50 years…

Chart 5:
2007.02.05.2.M2M160.gif
(Click here to enlarge the graph)
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