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The Slow Recovery, Simplified and Rounded

Apr 2 2014, 1:56pm CDT | by

Not everybody waits like me every morning for the latest stat on how the economy is doing or every straw in the wind. Most people are more likely than I am to have a life. When I speak to such...

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17 weeks ago

The Slow Recovery, Simplified and Rounded

Apr 2 2014, 1:56pm CDT | by

Not everybody waits like me every morning for the latest stat on how the economy is doing or every straw in the wind. Most people are more likely than I am to have a life.

When I speak to such people in audiences, I have the uneasy feeling that sharing the detailed results of my activities along those lines does them no favors. You need a broad skeleton, or outline in your head, to stick new information to, even if the need for simplicity and memorability must overcome precise accuracy in framing that outline.

Here is one way I like to describe the economy in recent years in an idealized way to make it easy to remember. Using the equation of exchange for a framework, I point out that the money supply (I use the M2 version) has been growing around 7 percent per year in recent years, but that the velocity of money has been declining around 3 percent, for a net increase in total spending of 4 percent, which is the same as the growth in nominal GDP.

(Note to readers: you probably realize that the growth of M1 has been considerably faster than the growth of M2, but that doesn’t matter much since, given that nominal GDP is what it is, it just means that the M1 velocity is proportionately lower than M2 velocity.)

The approximate and rounded 4 percent number for total spending or nominal GDP may be off a little depending on the year, but I like to use it anyway because it enables me to say that that 4 percent nominal GDP growth is split about evenly between 2 percent real growth and two percent inflation. One reason that is important is that most people have heard that we have a “2 percent economy,” meaning, 2 percent real growth. That number anchors all my arithmetic to a number they already know, sort of.

(The actual real growth number in the recovery years is closer to 2 ¼ than 2, but that makes the inflation number or the nominal GDP number, or both, much more difficult to remember.)

I don’t feel too bad rounding a 2 ¼ percent real growth rate down to 2 percent, because it’s been closer to 2 percent recently (and the inflation rate has come down as well). In fact, the 3 different estimates of fourth quarter 2013 real GDP have all rounded to 1.9 percent growth for the year 2013—sometimes we got to 1.9 percent by rounded down, sometimes by being rounded up.)

One reason for using the equation of exchange as the framework for discussing the broad macro economy is that most audiences, given my background, expect me to discuss the Fed’s quantitative easing, and why it hasn’t done more harm and why it hasn’t done more good. I have to acknowledge that a 7 percent money growth rate sounds pretty high, and it is for normal circumstances, but not if it has to be netted against a 3 percent decline in the velocity of money (7 – 3 = 4). People generally understand, intuitively, that money numbers must be adjusted for velocity.

(What I usually try to avoid, unless pressed by a smart aleck in Q&A, is acknowledgement that since the velocity number is derived by dividing the nominal GDP growth number by the money supply growth number, it always works out perfectly. More sophisticated audiences—by that I mean more smart alecks—might  jump to the conclusion that if the velocity number jumps around a lot, then maybe money isn’t the right focus. Maybe animal spirits are more dependable.)

Since I’m up to that point in the narrative, I might as well state for the umpteenth time in this forum that the Fed’s quantitative easing didn’t create a booming economy and/or roaring inflation is that for all the asset purchases, 7 percent money growth in an environment of an average 3 percent decline in velocity just isn’t much money growth given the tremendous slack in the economy. Most commentators have just assumed, wrongly, that massive bond purchases have created boatloads of new money. “If we haven’t had the inflation yet, we will soon.”

This is a good place to acknowledge that this is not the way Janet Yellen thinks about the economy, yet she reaches the same conclusion that inflation is not a clear and present danger. She gets there, not by considering the money growth numbers, but by focusing on the slack in the economy in terms of unemployment and capacity utilization and focusing on the “output gap,” the difference between the economy’s actual production and its potential production. One minor problem she’s had recently is that, as we approached 6.5 percent unemployment, which the FOMC had set forth as a key threshold for considering higher interest rates, she had to acknowledge, at least implicitly, that unemployment has fallen largely for the wrong reason—labor force dropouts.  As for me, I’ll keep watching the money supply numbers, with one eye on velocity, or which is the same thing, nominal GDP.

Source: Forbes Business

 
Update
10

7 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Rakyat was ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

7 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was broken ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

7 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was rejected by the Dewan Rakyat ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
7

7 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Ministe ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
6

7 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Selatan’ in the ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

8 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM2.78 million i ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

8 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Minis ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

8 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year inv ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

8 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramadan Bazaar S ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
1

8 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Kinr ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

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