Tuesday, October 18, 2011

Economy 2012

The big question for the economy in 2012 is the impact of QE2. That's the Fed's huge money-printing operation that ended in the middle of 2011.  How big?

The Fed's response to the 2008 meltdown was QE1.  The Fed increased the monetary base from about $0.8 trillion to $2.0 trillion, more than doubling it.  Then in QE2 the Fed increased the monetary base further from $2.0 trillion to $2.7 trillion where it now stands.

The question for ordinary Americans is what happened to the actual money supply.  Back in 2008 the M2 monetary aggregate stood at about $7.7 trillion.  The first monetary burst took M2 up to $8.5 trillion, a 10 percent increase.  Then M2 flatlined for about six months before resuming "normal" growth.  In the last three months it has ballooned from $9.0 trillion to about $9.6 trillion in response to QE2.

Of course, M2 has not increased in proportion to the increase in the monetary base.  This shows that people really are "deleveraging" and reducing their debt load.  But in the end the increase in the monetary base will feed into M2.

Generally speaking the nominal GDP growth (i.e. GDP growth including inflation) is reckoned to parallel  M2 growth, with a lag.  Thus, the M2 pulse at the end of 2008 yielded a bounce by mid 2009.  And so we should expect the QE2 money pulse to boost GDP starting about now.

But the question is whether the monetary pulse will result in real GDP growth or just a pulse in inflation.  If it results in real growth, it will lead to a hangover a year later, just when the next administration is inaugurated.  If the pulse just feeds into inflation then we will not see any real growth next year but just price increases, particularly in food and fuel.

President Obama is clearly setting up his campaign to run against economic villains.  We have had millionaires and billionaires and Wall Street thus far.  Can Wal-Mart and Exxon be far behind, as food and gas prices balloon?

The ugly truth about the economy is that it is never the fault of corporations.  The government sets the rules for commerce, from Wall Street to Main Street.  The government controls the money supply; the government makes the regulations; the government awards the market-distorting subsidies; the government hands out entitlements to its supporters.

Then the government blames Wall Street, banks, and corporations when things go wrong.

What a world!

1 comment:

  1. the Government is not the one blaming the bankers, it is the people. This Government is owned by the moneychangers. Why would they be blaming themselves?

    Besides the Fed is a private bank. They issue the money and falsely set a value to it. The losers in this scam are the actual value creators, namely labor and industry.

    The question of 2012 is how long can they hold the tsunami of Dollars outside the US from repatriating? We could be at the point where we find that out. The US has very few friends left.