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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.

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