Tuesday, 26 of September of 2017

Economics. Explained.  


May 4, 2017

Growth in the M-2 measure of the money supply  has slowed slightly to a 6.3% pace.

To know whether that rate is too fast or two slow, the Fed needs to look at the relationship between growth in the money supply and growth in nominal GDP.  Over the past 50 years the two have grown at almost exactly the same rate.  Or, to put that in econospeak, M-2 velocity is 0.0%.  Thus, if the money supply is growing at a 6.3% pace, then the Fed might expect nominal GDP to grow at that same 6.3% pace.

Unfortunately, it cannot determine how much of that growth rate will represent real GDP growth and how much will be inflation.  Typically, economists think that our economic speed limit, i.e., how fast the economy can grow without giving rise to inflation is about 2.0%.  So if real GDP grows by 2.0%, then the Fed might end up with an inflation rate of about 4.3%.  You will recall that their target for inflation is 2.0%.  Thus, the current pace of money expansion is  faster than the Fed would like over the longer term.   Having said that, all these numbers can be a little bit squishy and relationships change.  The point is that at the moment money growth is more than ample to support a vigorous recovery and may be pointing towards faster GDP growth, higher inflation, or both.

Stephen Slifer


Charleston, SC

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