Friday, August 13, 2010

No shortage of liquidity, rather an excess of spending



As this chart demonstrates, over the past 15 years the M2 measure of money supply has grown about 6% per year annualized. That's a bit more than the 5.5% annualized growth in nominal GDP over the same period. Thus, there is more money per unit of GDP out there today than there was 15 years ago, and if you'll recall, the economy boomed from the end of 1995 through early 2000 when M2 growth averaged 6% per year.

Note also that the relatively slow M2 growth that we've seen since March of last year has been almost entirely a "payback" for very rapid growth during the depths of the 2008-09 recession.

I think the cause of today's relatively slow M2 growth (up 2.5% in the past year, and up at an annualized rate of 3.4% in the past six months and 5.5% in the past three months) is that the demand for money has declined (and money velocity has therefore increased). Slow M2 growth does not reflect tight monetary policy, it reflects a drop in the demand for money. So M2 is saying very little, if anything, about the economy's ability to grow or about whether the Fed is not being accommodative enough to allow the economy to expand.

It is much more likely that today's disappointing economic growth is the result of anti-growth fiscal policy, rather than restrictive monetary policy. It may seem paradoxical, but $1 trillion of government "stimulus" spending only harms the economy because a) government spends money less efficiently than the private sector (i.e., it would have been better to not borrow all that money and instead to cut marginal tax rates), and b) the huge increase in government spending that has occurred creates expectations (and fears) of huge increases in future tax burdens. Moreover, a larger public sector inevitably brings with it more regulations that help smother private sector initiative.

17 comments:

Bill said...

Scott,

At what point does all the pessimism about the economy become a self-fulfilling prophesy resulting in another recession? Or are the forces of recovery too strong to throw us into a double-dip? It almost seems like the analysts are happier when we're in a recession.

seekingtraceevidence said...

The media and pundits simply seem to be wrong to read May-July declines in Household Survey as threat of 2nd Dip. There is substantial evidence elsewhere, Am Staffing Assoc new high, Assoc Am Railroads traffic and employment all in good uptrends, auto sales in good uptrends, exports reasonalble, imports indicate good spending pickup and etc, etc.
Hard to come down on the side of 2nd Dip.

Benjamin said...

I am totally onboard that fiscal stimulus should have been tax cuts (though I might have encouraged tax cuts to the bottom three-quarters of taxpayers, more likely to spend the money).

But these M2 figures, and the deflation outlook, suggest money is way too tight.

Note to Bill: You might be surprised that I agree with your sentiments. BTW, there actually seems to be a wing of the R-party that wants the recovery to stall, for political reasons, and is honking about the dead recovery relentlessly.

We may yet see a Sarah Palin-Michelle Bachman ticket in 2012, and they may win.

Dr William J McKibbin said...

Could it be that Main Street citizens have no money, and all of the "liquidity" is actually money stashed away by the well to do...? Is that possible...? Is that plausable...? Is that believable...? People cannot spend money they do not have, especially when they cannot even pay their mortgage. The observation that no one on Main Street has any money to make major purchases is fundamental to why the US is now enduring a Main Street Depression...

Mark Gerber said...
This comment has been removed by the author.
Mark Gerber said...

Hi Scott,
First, thanks for that fantastic pictures and stories from your vacation. My whole family enjoyed the last set you posted on your safari.

Perhaps the November election will sweep in Republican control of the house and senate, but anything short of that is likley to continue to give us "anti-growth fiscal policy." Isn't this the reality we face? In other words, even if the economy does have the potential to fully rebound, won't continued stimulus spending and entitlement spending continue to limit our potential for the foreseeable future?
Mark

Scott Grannis said...

Mark: If the elections don't bring some positive change, then the economy is going to be sluggish for a long time.

But I think the reality is that spending and entitlements are on an unsustainable path. Therefore they are going to have to change at some point, the only question being when.

If the Repubs win big in the November elections and then squander their opportunity to put things right, then heaven help us.

Benjamin said...

Scott-

Then, I hope you have a pipeline to heaven....

雅玲張雅玲張雅玲張 said...
This comment has been removed by a blog administrator.
brodero said...

S&P 500 ttm GAAP earnings (not forward earnings not operating
earnings) is 66.68 ....for an earnings yield of 6.18....Moody's Baa
yield is 5.78% for a positive spread of 40 bps.....this is the cheapest
stocks have been to medium grade bonds in 30 years.....

brodero said...

Correction..S&P 500 ttm GAAP
earnings is 67.20

Dr William J McKibbin said...

For those counting on the Republicans to "set things right," I doubt they can any more than the Democrats can. The problems in the economy are structural and hardly political. The structure I speak of is the military-industrial complex, banking, and energy versus the rest of the economy including Main Street retail and service shops, and entitlements. But our vote on those issues is irrelevant truthfully as both parties are really up to the same agenda in the big picture of things: "big government" and "big business," which are both unsustainable in their current forms. What the Democrats and Republicans are unable to deal with is that Main Street (the masses) is revolting against both parties. I can only hope that the people will continue to have a voice in the future...

John said...

Bro,

According to Jeffery Saut at Raymond James the earnings yield (E/P) of the S&P 500 is 6.6% the highest in 15 years. Also the spread between the earnings yield and the 30 yr treasury is the highest in 30 years.

According to Bespoke, going back to 1977 when treasury futures began trading there have been only 4 periods when long bond futures rallied 10% or more and the S&P 500 has declined 10% during the same period. Over the following 12 months the S&P 500 has been higher every time with an average return of 25.9%. Treasuries during those periods were weak. One year later the treasury future was negative in each case.

Every time is different. But Pimco is reducing their treasury bond positions according to Bloomberg.

One other point. The best performing sectors of the S&P during those four one year periods were technology and consumer discretionary. Two of the most hated sectors of today's market.

The public is pouring money into bond funds. Who is selling? IBM. McDonalds. Johnson and Johnson...and Bill Gross (treasuries).

Bill said...

Scott/John,

Can you explain how some "experts" like Krugman can say that we are either in a depression or headed toward one? Isn't there also some money manager who says the DOW is going to 1,000. I must admit that I never used to pay as much attention to the pundits, but have we always had such a divergence of opinion among "experts" as to where the economy and markets are headed? Very confusing for the average economically challenged middle-aged person!

Scott Grannis said...

Bill: there certainly is a lot of pessimism out there. My money is on the "forces of recovery" to win out in the end, aided by a strong shift in the politics of the electorate.

John said...

Bill,

In my cheap opinion (you asked, right?) those who make extreme outlier predictions are attention seekers (they got yours didn't they?) and not money makers...unless its from newsletter subscriptions. Some will disagree, which is fair, but Mr. Krugman has a huge political agenda and he is sort of a torch bearer for a particular school of economic thought. The world seems to moving away from his school (see Scott's obit post below) and there is an election soon which is not expected to go well for his preferred people. Desperation? Maybe. Needing/wanting ATTENTION? You bet.

In my early years in business I attended a Dale Carnegie sales course. The most important thing I learned was that there were five steps to closing a sale, and no sale was EVER closed unless the first one was achieved: The salesman must first obtain the ATTENTION of the targeted customer. The other four would never have a chance of occuring if the first step was not achieved. It is my cheap opinion that a lot of the outlandish, extreme outlier forcasts (like a 1000 DJIA) are designed to get as much ATTENTION as possible. End-of-the-world forcasts get more ATTENTION from newsletter writers than optimistic ones. Negative, fear-inspiring headlines get more ATTENTION than good news. "Euro collapse!, Death Cross!, and now the NEW ONE I've been expecting, "Its the HINDENBERG OMEN!!!)". Sounds like a title to a Robert Ludlam novel.

Everyone has an agenda, whether its political, economic, or social, and everyone must get ATTENTION to get what they want.

I know this sounds cynical, but its what makes the world go round. There is nothing wrong with it, free speech is free speech. Just remember its not all necessarily true. Like this rant, its almost always somebody's opinion, and also like this, its also usually pretty cheap.

Hang in there. The end of the world is NOT neigh, and this too shall pass.

John said...

Hey Bro,

One other thing. I have not seen official figures but I have read from someone I respect that last week was a record for junk bond issuance. As an X bond trader you may have access to accurate info on this.

The capital markets appear to be functioning normally and companies are going to the well for cheap money.