US money pick-up argues against QE2
Simon Ward
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US monetary trends continue to strengthen on a variety of measures* – see chart. The broader M2 aggregate has risen at a 5.7% annualised pace over the last six months, the fastest growth rate since June 2009. Money supply weakness late last year and in early 2010 foreshadowed the current "soft patch" in activity so the recent pick-up suggests improving economic prospects for early 2011.
The Federal Reserve, of course, ignores monetary trends – there was no mention of money in Chairman Bernanke's latest speech setting out the case for "QE2". Its actions, therefore, tend to be destabilising – it ceased asset purchases in April 2010 when the money supply was worryingly weak and now plans to resume buying even as monetary expansion picks up. Since the economy is not suffering from a deficiency of money, a further QE2 injection may simply lead to an artificial rise in asset prices or higher goods and services inflation.
* Definitions:
M1 = currency and checkable deposits
M2 = M1 plus savings deposits, small time deposits and retail money funds
MZM = money of zero maturity = M1 plus savings deposits and all money funds
M2+ = M2 plus large time deposits at banks and institutional money funds (author's definition and calculation)
Note: M3 = M2+ plus repurchase agreements and Eurodollar deposits (no longer published)
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