Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed Money Supply and Aggregate Credit Not Fueling US Inflation

Interest-Rates / Money Supply Jun 28, 2008 - 05:00 PM GMT

By: Paul_L_Kasriel

Interest-Rates Best Financial Markets Analysis ArticleOne of the tenets of that now allegedly defunct economic schools, monetarism, is that you cannot judge the stance of monetary policy by the level of the policy interest rate. Sometimes a 2% fed funds rate might be accommodative; sometimes restrictive. Right now, the 2% fed funds rate is not the catalyst for excessive growth in the money and credit aggregates. Let's start with the credit directly created out of thin air (similar to counterfeit money) by the Federal Reserve - the monetary base.


The monetary base is the sum of bank reserves and currency. Chart 1 shows that year-over-year growth in the monetary base as of June 18 was an anemic 1.4%. Since the Fed started slashing the federal funds rate last September and creating all of these new credit facilities, growth in the monetary base has trended lower , not higher. So, the Fed, directly, is not currently fueling the inflationary fires.

Chart 1

What about the banking system? As Chart 2 shows, in the 13 weeks ended June 11, the annualized rate of growth in commercial bank credit - loans and investments on the books of commercial banks - has contracted at an annualized rate of 5.4%. The other side of banks and thrifts balance sheet - their deposits - along with currency held by the nonbank public is not exactly exhibiting hyperinflationary growth. Chart 3 shows that the M2 money supply minus retail money funds has slowed to an annualized growth rate of only 1.9% in the 13 weeks ended June 16. So, don't judge a book by its cover or a central bank's policy stance by the level of its policy rate.

Chart 2

Chart 3

2008 Fiscal Stimulus - One Trick Pony?

No question about it - if the U.S. Treasury cuts you a check, your income will go up and you will spend more. This is what happened in May. Personal income soared - up 1.9% month-to-month. The rate of increase in disposable personal income - personal income less taxes - was even more impressive, jumping 5.7% (see Chart 4). Of course, the 2008 fiscal stimulus program both temporarily depressed federal personal tax payments and temporarily boosted federal transfer payments (see Chart 5). If you look at total compensation of employees, you will notice that the May increase in nominal terms was much less spectacular -- up 0.3% -- and adjusted for consumer prices, it contracted for the second month in a row (see Chart 6).

Chart 4

Chart 5

Chart 6

The fiscal stimulus program, no doubt, stimulated consumer spending. Adjusted for prices, personal consumption expenditures (PCE) jumped 0.4% -- their fastest monthly increase since August 2007. As Chart 7 shows, services and durable goods registered larger percentage increases in May relative to April, whereas nondurable goods posted the same percentage increase in May as in April. Perusing some of the detail, households seemed to want to escape from reality in May by stepping up their purchases of alcoholic beverages to consume in the privacy of their own (or bank-owned) homes (+1.29%), by going to the movies (+24.9%), by investing their tax rebates at blackjack tables (+2.3%) or simply boarding an airplane to get out of town (+2.7%). Come the third quarter, when the fiscal stimulus has dissipated, so will personal income and consumer spending increases.

Chart 7

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

Copyright © 2007 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

© 2005-2022 http://www.MarketOracle.co.uk - 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