Aug

14

The Fed has the most control over the Monetary Base, less control over MZM and even less over M2.  Interestingly the Base has doubled with the Fed’s activities, but those activities have had a much reduced effect on MZM and almost negligible effect on M2.  This means that the extra money is being held on deposit by the banks (helping their bottom lines).  With no bank-lending-created expansion of money, any inflationary or bubble argument is diminished.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Steve Ellison recalls:

I feel like I have seen this movie before. In the early 1990s the banking system was in trouble, and the Fed's actions were considered ineffective — "pushing on a string". The next phase was the jobless recovery, in which Bill Clinton was elected on the platform of "it's the economy, stupid" 18 months after GDP growth turned positive. As late as the fall of 1993, Barron's ran a cover story on efforts to rescue homeowners with negative equity. This entire period was a great time to own stocks. It wasn't until the economy was unmistakably strong that the stock market ran into trouble in 1994.

Bill Rafter adds a picture to his comment:

I refer you to this graphic that will illustrate the point.

As you will see, M2 is below its target rate of growth. That’s contraction from a monetary policy standpoint. That means no inflation.

What would happen if there was an increase in bank-lending-created money? Well, what do you get when you increase a fiat money stock without an increase in goods and services? Increases in prices; loss of confidence in the currency.
 


Comments

Name

Email

Website

Speak your mind

Archives

Resources & Links

Search