Bullish On Money Supply?

Key Concepts

• M2 Money Supply: A measure of the money supply that includes cash, checking deposits, and easily convertible near-money (savings accounts, money market securities).
• CPI (Consumer Price Index): A measure that examines the weighted average of prices of a basket of consumer goods and services, used to track inflation.
• Rolling Recession: An economic phenomenon where different sectors of the economy experience downturns at different times, rather than a synchronized collapse across all sectors.
• Monetary Growth vs. Inflation: The relationship between the rate at which the money supply expands and the rate of increase in consumer prices.

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Historical Context of Money Growth and Inflation

The speaker analyzes the historical relationship between money supply growth and the Consumer Price Index (CPI). The data indicates that money growth frequently exceeds CPI during the early stages of economic recovery and expansion. Notable historical periods cited include:

• The 1980s: Following the back-to-back recessions of the early 1980s, money growth significantly outpaced inflation.
• Tech/Telecom Bubble: Both before and after the dot-com bubble and subsequent bust, money growth remained well above CPI levels.
• Post-2008/2009 Financial Crisis: Similar trends of money growth exceeding inflation were observed following the Great Recession.

The "Rolling Recession" Thesis

A central argument presented is that the current economic climate is not a traditional, synchronized recession, but rather a "rolling recession" that has persisted for approximately 2.5 to 3 years. The speaker provides evidence for this by highlighting specific sectors that have been underperforming:

• Manufacturing: Identified as a sector currently in a downturn.
• Housing: Cited as a sector experiencing significant contraction.
• Consumer Sentiment: Low- and middle-income earners are experiencing economic conditions that feel more severe than a standard economic cycle, characterized by high caution and low optimism.

Analysis of Current M2 Growth

The speaker addresses concerns regarding the current M2 money supply growth rate of 4.9%. The key argument is that this growth rate should not be interpreted as a direct predictor of future inflation.

• The Argument: Just as in previous post-recessionary periods, the current elevated money growth relative to CPI is a reflection of the economic environment rather than a precursor to 5% inflation.
• Supporting Evidence: The speaker posits that because the economy is currently in a "rolling recession" state—similar to the post-recessionary environments of the 80s and the post-2008 era—the current money supply dynamics are consistent with historical patterns of recovery rather than inflationary overheating.

Synthesis and Conclusion

The speaker concludes that the current economic environment is defined by sectoral weakness and consumer caution. By framing the current situation as a "rolling recession," the speaker dismisses the notion that the current 4.9% M2 growth rate is a "harbinger" of high inflation. Instead, the data is presented as a typical feature of an economy struggling to recover, where money growth naturally outpaces CPI due to suppressed consumer activity and sectoral imbalances.