2023-07-27 19:18:45 ET
Summary
- The Federal Reserve has been gradually increasing its policy rate of interest since March 2022, while reducing the size of its securities portfolio.
- This is looked on as a period of monetary tightening.
- However, looking at the buildup in the M2 money stock since the beginning of 2020, it looks as if a big bubble in monetary growth was created, and still exists.
- This "bubble" is what is keeping the U.S. economy growing, the unemployment rate low, and the stock market rising.
- It is hard to see how the Fed can remove all the funds it pumped into the economy during this time, so the question really is about how the economic growth will continue from here.
The Federal Reserve has been raising its policy rate of interest since the middle of March 2022.
The Fed just raised its policy rate again this past Wednesday.
The Federal Reserve has also been reducing the size of its securities portfolio since the middle of March 2022, an effort of quantitative tightening.
The Fed continues to do this and has reduced the size of its securities portfolio by more than $900.0 billion since the middle of March 2022.
The Federal Reserve has also seen the size of its M2 money stock decline since the spring of 2022. See chart.
Historically, when the Federal Reserve has overseen a decline in the M2 money stock of this nature, an economic recession has followed.
The question is, why has there not been an economic recession in the 2022-2023 period?
The recent data on the rate of growth of the economy indicates that, year-over-year, real GDP has risen 2.6 percent, and shows that the U.S. economy may actually be skimming along nicely with a rate of growth very similar to the compound annual rate of growth achieved by the U.S. economy in the decade of the 2010s.
And, note that, for the last couple of quarters, the rate of growth has increased.
What's going on here...16 months of quantitative tightening and higher interest rates...and the economy is still rising?
And, for the last eight months, the stock market has been rising.
The economic results of this time period do not seem to represent a time when monetary policy is tightening.
My argument is that monetary policy is not really tightening up.
My argument is that what we are now going through is just the partial unwinding of a major asset bubble created by the Federal Reserve and the Fed, through its "tightening" efforts, is just trying to "walk back" the economy from the major bubble the Fed pumped it into.
What is the picture that captures this "asset bubble"?
It is this one.
Or, even better, this picture.
The M2 money stock rose from $15.5 trillion on March 2, 2020, to 21.8 trillion on March 7, 2022.
This is an increase in the M2 money stock of more than one-third within the space of two years.
Can this be classified as a "bubble?"
Sure looks like one to me.
Is the Federal Reserve Loose or Tight?
And, so I go back to my original question, is the monetary policy of the Federal Reserve loose or tight?
The M2 money stock was $20.8 trillion on July 3, 2023, down $1.0 trillion from March 7, 2022.
The M2 Money stock was $20.8 trillion on July 3, 2023, up $5.3 trillion from March 2, 2020.
Take your choice.
It seems as if the U.S. economy has plenty of money moving around inside it to keep the economy growing, keep employment at its current high level, and to keep the stock market moving ahead.
As mentioned in an earlier post of mine, it appears as if the economy is, more or less, back where it was in the decade of the 2010s...the period of credit inflation.
As far as the Federal Reserve is concerned, to me, it created a major asset bubble in its attempt to combat the spread of the Covid-19 pandemic and the subsequent recession.
The Fed is now faced with the other side of the bubble.
In effect, there is too much money around.
However, these monies, as in the 2010s, will not lead to excessive consumer price inflation. Investors learned how to avoid this during that decade.
What it will lead to is "credit inflation" as I have defined it, which means that all the upside of the massive amount of money available in the economy will primarily go to the wealthy. Watch rising prices for stocks, commodities, and cryptocurrencies(?).
Note the rise in the price of cryptocurrencies and the stock markets began to rise in price in the fall of 2022.
As we saw in the 2010s, this is a perfect narrative for showing why the income/wealth inequality in the U.S. rose so much during that decade.
Bottom line...the Federal Reserve has already put all the money into the economy, and is not in the process of removing all of the bubble it created.
For further details see:
Is The Federal Reserve Loose Or Tight?