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Money Supply and Economic Data Weekly Watch – Hold On Tight Cos I’m Afraid Of Heights!

Hold on tight cos I’m afraid of heights and it’s time for blast off. Money sup­ply is on a one way ticket to the moon and we are going along for the ride.

After 6 months of real money sup­ply shrink­age, this week’s Fed release of money sup­ply and its bal­ance sheet points to a rapid accel­er­a­tion of money sup­ply growth. For the week end­ing Sep­tem­ber 15th money sup­ply (as mea­sured by M2 on a sea­son­ally adjusted basis) rose by approx­i­mately $21 billion.

Two things should be noted about the Sep­tem­ber 15th number:

  • The Fed num­bers lag “real time data” by more than a week (which is nor­mally irrel­e­vant but since the week that fol­lowed was any­thing but “nor­mal”…). The econ­omy is liv­ing in “dog time” where every chrono­log­i­cal year is equal to 7 years of “nor­mal peo­ple” time. Let’s keep in mind it was only on Mon­day Sep­tem­ber 15th that Lehman Broth­ers filed for bank­ruptcy and Tues­day Sep­tem­ber 16th that the Trea­sury bailed out AIG. The lat­est money sup­ply num­bers are for the week that ended with the Lehman bank­ruptcy and don’t include the side effects of AIG or the sub­se­quent emer­gency Fed measures.
  • The num­ber pub­lished by the Fed is an aver­age of the 5 days end­ing Sep­tem­ber 15th which means that if they were pump­ing liq­uid­ity into the mar­ket on an accel­er­ated basis dur­ing the week (as I believe that they were doing) the pub­lished Fed num­ber is under­stat­ing the actual end­ing posi­tion of M2.

It is no sur­prise that the Fed was push­ing liq­uid­ity. The Euro mar­kets melted down because no one could find dol­lar based liq­uid­ity. LIBOR (my most hated index rate) shot up and overnight deposits in U.S. dol­lars were impos­si­ble to find.

It was hard to find any good eco­nomic num­bers last week. Unem­ploy­ment is ris­ing (ini­tial job­less claims rose to 493,000 for the week end­ing Sep­tem­ber 20th) and sec­ond quar­ter GDP was revised down­ward (to 2.8% real growth but that is with the ben­e­fit of the stim­u­lus pack­age). August durable goods orders tanked and both new and exist­ing home sales were down from already depressed levels.

It won’t be long before econ­o­mists start to ques­tion if the Fed­eral Reserve held the line on money sup­ply too long and whether Trea­sury should have been both quicker and had a bet­ter thought out emer­gency plan.  Also, the world will debate why Paul­son never laid the polit­i­cal foun­da­tion for a pop­u­lar con­sen­sus for his actions. 

The lack of effec­tive involve­ment by Pres­i­dent Bush is scary.  Like a High School Senior who has already got­ten into col­lege, our Pres­i­dent has already started the count­down to free­dom and isn’t doing any­more hard work. 

Per­haps with some mod­er­ate rise in real money sup­ply, a more grad­ual inter­ven­tion by Trea­sury and a Pres­i­dent that was engaged, the cur­rent cri­sis atmos­phere could have been avoided.  I’m sure that for gen­er­a­tions the events and poli­cies of the last month will be hotly debated. 

Any­way, the trip is only begin­ning. See you on the moon.  When you land try not to crash.

Posted in: Bush Administration, Credit Crisis, economy, Federal Reserve, Finance, M2, Paulson

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