Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Economic Recession Forecasting "V" or "U" Shaped?

Economics / Recession 2008 - 2010 Oct 22, 2008 - 10:47 AM GMT

By: Paul_L_Kasriel


Diamond Rated - Best Financial Markets Analysis ArticleYears ago there was an equity strategist at Bache-Halsey (I said it was years ago) who almost always got it wrong. When he finally was forced to leave "to pursue other interests," clients were furious. The guy was a near-perfect negative indicator. When he said buy, it usually paid off to sell.

You know where this is going. A certain "economist" is forecasting a "V"-shaped economic and stock-market recovery based on a forecast of a "V"-shaped recovery in monetary velocity.

The definition of monetary velocity is nominal GDP divided by the nominal supply of money. Monetary velocity is another way of describing the public's demand to hold money. Rising monetary velocity implies that the public's demand for money balances is falling and vice versa .

Chart 1 below shows the year-over-year historical behavior of monetary velocity in terms of the M2 money. The shaded areas are periods of recession. Notice that the change in velocity tends to contract in the early quarters of business recoveries. In 1992, a year after the economic recovery commenced in the second quarter of 1991, velocity did grow relatively rapidly in what was termed the "jobless recovery." In general, then, history is not on the side of a sharp rebound in monetary velocity anytime soon.

Chart 1

Economic theory also is not on the side of a quick turnaround in monetary velocity. Chart 2 shows the history of household deposits and money fund shares as a percent of household net worth (wealth). From the first quarter of 1952 through the second quarter of 2008, the median percentage of household deposits and money fund shares to household net worth has been 14.4%. In the second quarter of 2008, the percentage was 13.3, more than 100 basis points below the median. With the recent volatility and declines in the stock market, with declining home values, with slowing inflation and with the collapse in inflation expectations (see Chart 3), it would seem reasonable that households might want to increase their relative holdings of an asset that is redeemable at par (now that the amount of an FDIC-insured bank account has been increased and federal insurance of money fund balances has been authorized.)

Chart 2

Chart 3

Of course, any money and banking student knows, even if the anonymous erroneous "economist" might not, that velocity is only one component of the GDP identity. Another component is the amount of money created. And any money and banking student knows - at least any of my past students - that the supply of money depends on the growth in earning assets (loans and investments) of depository institutions. With banks suffering from "capital inadequacy" these days, it is unlikely that their earning assets will be growing rapidly anytime soon. Ergo, the supply of money is unlikely to grow rapidly anytime soon. (It has in the past couple of weeks, but this appears to be an aberration.)

I want to return to a discussion of the "jobless recovery" of 1992. Chart 4 shows the year-over-year change in M2 velocity as well as the year-over-year change in the M2 money supply itself. Notice that as M2 velocity growth picked up, M2 growth was decelerating to what was a very low rate. If you recall, the early 1990s were years when banks suffered from severe "capital inadequacy" that restricted their lending to the private sector.

Chart 4

In sum, both history and theory do not suggest a near-term surge in monetary velocity. Moreover, theory suggests very sluggish growth in the broad money supply. As a result, the odds of a "V"-shaped economic recovery are low. But even a blind pig finds an acorn once in awhile. So, there is some finite probability that the aforementioned anonymous "economist" might be right this time. It would be a shame, however, if he or she were right. Then his or her worth as a reliable negative indicator would be diminished.

As an aside, if you can guess the name of the anonymous "economist," you will win a lifetime free subscription to the "Daily Global Economic Commentary."

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2008 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules