Wednesday, 20 of June of 2018

Economics. Explained.  


May 8, 2018

Growth in the M-2 measure of the money supply  has been steadily slowing and is now growing at a 4.0-% 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 4.0% pace, then the Fed might expect nominal GDP to grow at that same 4.0% pace.

Unfortunately, it cannot determine how much of that growth rate will represent real GDP growth and how much will be inflation.  Currently, economists think that our economic speed limit, i.e., how fast the economy can grow without giving rise to inflation is about 1.8%.  If real GDP grows by 1.8%, then the Fed might end up with an inflation rate of about 2.2%.  You will recall that the Fed’s target for inflation is 2.0%.  But the economic speed limit appears to be accelerating because of more rapid growth in productivity.  If the speed limit has climbed to 2.0%, for example, then inflation would end up on target at 2.0%.  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 currently growing at a pace adequate to support a vigorous recovery, but probably not fast enough to trigger any significant upswing in inflation.

Stephen Slifer


Charleston, SC

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