Has the monetary tide turned?
By Daniel M. Ryan
The last three weeks have been concern-inducing, and frightening to some. Talk of another serious recession has been plentiful recently. Supposedly, the subprime mortgage crisis will spill over into a general recession that will be long and difficult to get out of. The wealth effect has been cited as support for this forecast.
If such a disaster should come, it would certainly come through stealth. So far, there is little evidence of such a disaster in the making according to Federal Reserve statistics.
As of the most current report on bank reserves and the monetary base, the preliminary figures as of Jan. 30th show an increase in the latter. After hovering around $824-825 billion in October, November and early December of ‘07, the monetary base did take a spill down to $822.0 billion as of Dec. 19th. (This figure is not a preliminary one.) After a rebound to $824.4, as of Jan. 2nd of this year, the base took another spill in the second week of January to $820.7 billion. The latest preliminary figure, though, show a modest rebound to $821.1 billion as of Jan. 30th. This figure is the first one to take account of the 75-basis-point emergency cut, and does not take the second cut into account. (The preliminary has been revised downwards since the Jan. 31 report, but not by much: from $821.3 billion to the above-mentioned $821.1.)
So, the monetary base shows that the first cut had a partially mitigative effect on the monetary base's shrinking. The money supply is not being squeezed on this end as of now. What, then, about the money supply itself?
According to the most current Fed report on the money stock, M1 has continued to shrink slightly, but it's been relatively pat (no growth at all) for the last three years or so. If the standstill in the growth of that aggregate had harbinged trouble, we would have seen it back in '06. We didn't, although the present multiyear divergence in growth rates between M1 and M2 is unusual.
The latter aggregate, on the other hand, has grown at a steady clip. According to the above-linked-to monetary-stock report, M2 has grown by 5.8% over all of 2007. It also mentions that the annualized growth rate has slowed down slightly in the last three months of '07, to 5.2%. A pure monetarist would note that this slowdown does gibe with the current water-treading performance of the American economy.
What, though, about the most recent growth of M2 as based upon the most-recent (necessarily preliminary) money-supply data?
As of Jan. 30th of this year, according to the necessarily-preliminary figures from that date, the 12-month growth rate in M2, according to that same report, is 5.8% - exactly the same 12-month growth rate as of the end of December. The same near-term constancy applies to the annualized 13-week rate of growth: 5.2%.
Interestingly, there is a difference in the two measures with respect to the end of December and the near-end of January – for M1. The annual growth rate of M1 as of Jan. 30th is -0.5%. As of the end of December '07, it's -0.2%. The thirteen-week growth rate of M1 as of Jan. 30th is -1.2%; as of the end of December, it's been -0.5%. If there's been any shrinkage effect on the money supply, it's been on M1 but not M2.
As noted above, a lackluster growth in M1 has not had any predicative effect on the economy; nor has it had on the U.S. stock market, either. The slippage of the narrower measure versus the non-slippage of the broader M2 could be merely indicative of a shift from checking to savings deposits on the part of U.S. moneyholders.
As far as trouble from abroad is concerned, the currency front shows little sign of impending disaster. The U.S.$ has not only stopped falling against the Euro, it's gained slightly despite the two recent rate cuts. I'm not hinting that a ramp-up in inflation is not a worry at this time: the relative recent strength of the U.S.$ with respect to the Euro could be explained by the European central bank's dabbling in a little competitive devaluation, if not accommodative inflating. Instead of indicating a coming drop in inflation, it could very well indicate an internationalization of it. Gold is still near its record high (in nominal terms) despite the hint of a recovery of the U.S. dollar with respect to the euro.
The United States stock market had a major spill in mid-late January, of course, but the averages have partially recovered and have shown no signs of further cave-in. I'm not suggesting that there's a resumption of the early-‘03-to-late-‘07 bull run; far from it. The snapback right after the Fed rate cuts looks like more of a bear trap to me than a resumption of a bull trend. More to the point, some recent economic data has been less than encouraging. The recent bad times are not over yet.
But, from this vantage point, I don't see any sign that bad is going to turn into a lot of worse. From a historical perspective, the Fed reacted quite quickly. There's no sign of trouble in the usual trouble spots, monetarily speaking. The stock market has partially recovered from its earlier spookfest. So have the major world markets, even if their recent performance is more indicative of "bear trap" than North American ones has been. If there's a severe recession in the offing, it's going to be the result of a blindsiding. I don't see any sort of blindsiding from the real-estate sector creeping its way into the general economy as of now. The usual suspect (monetary deleveraging) is absent.
Those who are fond of drawing parallels to the 1920s should make a note of this one: there was a real-estate crash in the 1920s – the Florida bubble burst. Yes, it was indicative of an overall decline in real-estate values, one that went on for almost a decade. Yes, a lot of wealth was lost due to it, including at the beginning of it.
What's important to remember, though, is that the real-estate decline got rolling in 1926. 1927 was actually a slowdown year for the general economy, and 1928 was a recovery year. If this decade be the "new ‘20s," then the closest parallel to 2008 would be 1927. Assuming that such parallels have any value beyond exciting table talk, that is.