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10/30/2005
Money Supply Rates Decelerate

A real estate Spec inquires: Has anyone else noticed the rapid deceleration in the rate of growth of real money supply this year? There seems to be no discussion of it in the financial press and fed funds futures appears to be oblivious to it while indicating a Taylor rule implied fed funds target rate of 5-5.5% within a year. Am I missing something here? Is this an indication of market entropy or a market reflection of newtons first law of motion? The financial press is abuzz with expectations of helicopter money coming from Bernanke but this is not reflected in fed funds futures. Does anyone else find this to be an anomaly? Or am I just confused?

George Zachar replies:

One of the oddities of the current monetary policy regime is that money supply itself is absent from ongoing discussion.

FOMCers, when asked about the role of money supply in their analysis, uniformly say it rarely comes up. I am unaware of evidence to the contrary.

The stated reasons for money supply's demotion are pretty simple: The definition of "money" has become blurry, and its global circulation has made its counting/tracking problematic.

Mushrooming leverage, and the use of derivatives to unbundle exposures, render past relationships between "money" and the economy moot.

The few economists still fixated on money have been marginalized, and I've not seen much useful/predictive from them. Counter examples would be appreciated.

It's likely that some relationships can be teased out of the various monetary aggregates and economic/financial variables, but I fear such work will be only retrospective/descriptive.

George Zachar is principal of Greensward Capital, a money management and trading firm in New York. He focuses on U.S. and European debt futures and options thereon.  "I try to integrate market directional and volatility trades, with 'living to fight another day' as my central guiding philosophy," Zachar says. "When I was a child, I remember watching a cheesy spy movie, where one spook says to his opposite number, 'The object of the game is to stay in the game.'"