Wendy,I believe the focus on M1 is too narrow. Rather why we missed the 2007-on credit crisis was that there was no focus on the growth in the private shadow banking system that generated moneyness through collateralization (and rehypothecation etc.) The wonderful ATM machine known as the HELOC is a perfect example.When that system contracted (starting with the subprime fiasco and escalating from there) from 2007 through 2009 -- the effective public shadow money had to be created to offset the disinflationary forces of the moneyness contraction in the private sector.I think that is what you are seeing, ie the expansion, but not the contraction in the private credit system that it is offsetting. Therefore, focus on the private credit system is key. And the housing market is clearly the hot spot given that home equity has been the previous driver of the private credit machine.The following is some thoughts from Paul Kasriel (previous head economist at Northern Trust) who I follow some given his focus on the private institutional credit. This is a more conventional look at what I am saying about my argument that M1 is too narrow and focus on the credit system as a whole is more important. While he isn't focused on the collateralization aspect of our current financial system I still think it is worth checking in on periodically including this snippet on June 24th.Since the onset of the financial crisis in late 2008, the Fed’s contribution to the SUM of Fed and depository institution credit has increased significantly, as shown in Chart 2. The rebound in the credit SUM beginning in 2010 has been dominated by Fed credit creation. If Fed were to begin tapering its securities purchases later this year, as Fed Chairman Bernanke indicated at his June 19 news conference is the current conditional plan (conditional on economic activity unfolding according to the Fed’s current forecast) and if depository institutions did not add to their holdings of loans and securities commensurately, then growth in the credit SUM would slow, which, in my view, would represent a “tightening” in monetary policy.Commercial bank credit, the dominant source of depository institution credit, contracted in May at an annualized rate of 1.8%. The June weekly data, however, suggest a resumption of growth in commercial bank credit. The latest Federal Reserve survey of bank lending terms showed that there was a significant increase in the percentage of survey respondents stating that their institutions had eased their lending terms. With house prices again on the rise, future home mortgage write-offs by depository institutions will continue to diminish. This will enhance the already high (in general) capital ratios of these institutions, thus enabling them to increase their loans and securities. So, it is likely that depository institutions will be stepping up their credit creation as the Fed begins to moderate the pace of its credit creation.Let’s contemplate some numerical scenarios for the behavior of the SUM of Fed and depository institution credit in 2013. Given 2013:Q1 actual (until revised) data and assuming that Fed credit increases by $85 billion per month over the remainder of the year (i.e., no tapering) while depository institution credit remains frozen at its 2013:Q1 level, then the credit SUM will have grown by 7.1% Q4-over-Q4 in 2013. Call this Scenario I.This compares with 2012 growth of 2.8% and 1953 – 2012 median annual growth of 7.25%. In Scenario II, assume that the Fed begins to taper it securities purchases at the beginning of 2013:Q4, cutting its current purchase rate of $85 billion-per-month in half. Further assume that depository institution credit remains frozen at its 2013:Q1 level. Under Scenario II, the credit SUM will have grown by 6.2% Q4-over-Q4 in 2013.In Scenario III, assume that the Fed tapers its securities purchases as it did in Scenario II, but that depository institution credit increases by the amount that the Fed cuts. Thus, under Scenario III, the credit SUM will have grown by 7.1% Q4-over-Q4 in 2013, the same as in Scenario I. Is Scenario III farfetched in terms of the growth in depository institution credit? Hardly. Scenario III would imply 2013 Q4-over-Q4 growth in depository institution credit of only 0.9%. This compares with 2012 growth in depository institution credit of 3.5% and 1953 – 2012 median annual growth of 7.5%.So this commentary again focuses on some normalizing of the economic and financial system. So this has a cyclical focus with an underlying theme that the private sector is normalizing behind a positive cyclical backdrop which allows the public sector financing to be pulled back given that the private sector is healthy again. (Remember that the decline in the private sector credit system was largely disinflationary and why QE was an offsetting force)However -- it still doesn't get after one of my major points which is that we are stuck in a large debt overhang -- which is more in line with your alternative scenario of Japan. Again -- time will tell, but the 1940s scenario for the US looks like a reasonable example of what to expect (which doesn't mean rates won't rise but that its largely based on inflation, not real rates, which were largely negative.) I guess as jack previously eluded to -- wage growth has to appear to make most folks argument work through positive GDP growth and some level of healthy inflation. To do that -- we will likely have to see the capital:labor mix shift. (And that has its own implications for corporate profit margins etc but that's another story.)Matthew
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