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Could It Turn Out to Be the Fed's 'Operation Twist of Fate'?


Oddly, given the convergence of many significant factors, it's quite possible -- completely contrary to prevailing viewpoints -- that the Fed's actions may have been too restrictive.

Then one day the man who is sharing my byline with me today asked me if I look at the numbers the Fed releases on Thursday afternoons, the money supply numbers. My not completely flippant response was that I normally do not, for the following reasons: (1) everyone knows money stock is growing rapidly and that fact is priced into the markets (2) the Fed doesn't target money supply; it targets interest rates, especially as that relates to the carry trade designed to keep the large money center banks-Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC), who still hold about half the total value of the nation's outstanding home loans-well liquidity nourished. That was my then under-informed mindset.

"That's not what I'm talking about," Bob Eramo continued. "What I'm saying is that if you look at the important measures of money stock, the growth rate is not as alarming as the Austrians would have you believe, and it has slowed dramatically more recently." So I proposed that we do some research downloading data from the Fed's website, and that I would assemble it in spreadsheets, make some calculations and then we could take a look at the results. Bob is one of those great guys-a math whiz, a licensed top-notch actuary and even a physicist (Bob received his B.S. degree in physics and mathematics from Brooklyn College in 1970)-who proves why it's always a wonderful experience to work with smart people: They tell you everything you need to know in order to conduct the analysis. The other side of that coin, however, is that you have to do all the work. Just kidding, Bob. And thank you for your penetrating insights.

[Author's note: Minyanville readers with a desire to delve into the weighty topics of money theory, inflation, central banking-along with a fascinating historical context and explanation of the math involved-have a golden opportunity to enhance their understanding by reading my friend Bob Eramo's piece analyzing the dramatic changes that occurred during the Carter Administration in the late 1970s, when Paul Volcker was appointed Fed Chairman during a period of serious inflation and the Fed literally turned the financial system upside-down by switching from interest-rate to money-supply targeting. Bob presented this paper to the Casualty Actuarial Society-"Money, Credit and Federal Reserve Policy Changes"-where it remains archived on their site. Bob is also a member of the American Academy of Actuaries. He currently serves on the American Academy's Task Force on Emerging Issues. He has been Chief Actuary at a west coast insurer and also the Chief Actuary at a major insurance broker. Currently he is providing input on the effect of the European economic crisis on the property casualty insurance industry.]

As the Obama Administration likes to say, Forward! Here's what we were able to glean from data off the Fed's site:

The Money Data

M1 and M2 are the principal measures of money in our economy. We are looking at almost six years of data in the following:

Since the beginning of 2007, the growth rates for these two measures, both seasonally adjusted and not seasonally adjusted, are shown below, in successively shortening periodicities:

As can be seen from the above, in every measure, the growth rates for 2012 are down significantly 2012 vs. 2011. The "big bulge" rates evident in the periodicities since 2010-2011 are clearly in the past, and all of the current rates of growth are below since-2007-2009 levels too.
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