My favourite economics metric -- what I call Corrected Money Supply Growth (CMS) -- has fallen below the 0% mark. This has never augured well for the US economy and, since what happens in the US affects the rest of us, for the world economy.

The last time CMS growth turned negative was during the Covid pandemic. But large infusions of cash into the wallets of American consumers meant that the US economy not only did not go into recession except briefly, but emerged better than before the pandemic.

CMS growth has been negative since August 2023. My impression is that we are seeing a replay of the Reagan years. Monetary policy is tight but fiscal policy is loose, mainly in the form of large military expenditures. The first effect will probably be rising inflation with a recession following later.

A new paper of mine has been published in "real world economics review".

Title: Why is yield-curve inversion such a good predictor of recessions?

Abstract: Yield curve inversion has traditionally been ascribed to investor expectations. This paper shows instead that it is the result of changes in real variables like investment and consumption, and that these changes are set in motion by central bank actions.

Why is yield-curve inversion such a good predictor of recessions?

Peter Radford has commented on my recent paper The Giant Blunder at the Heart of General Equilibrium Theory.

The comment can be read at We Need our Hutton

Until a couple of years ago I used to regularly post graphs of the monetary measure that I called Corrected Money Supply (CMS). An important part of this measure was that it estimated the amount of precautionary savings held in M1 deposits and subtracted that to arrive at an accurate measure of money. The logic was that such precautionary holdings are not intended to be spent and hence do not qualify as money.

Then in May 2020 the Federal Reserve Board merged savings and other deposits into M1, after which my old measure ceased to work. Recently I discovered that the Fed has a new series for savings deposits (https://fred.stlouisfed.org/series/MDLNM) beginning from June 2020, the month after which it changed its definition of M1.

Using the new series, I subtracted savings deposits from the new M1 to achieve continuity with the old M1 series. The results were quite surprising. In August YoY growth in Corrected Money Supply was running at 40%, suggesting that another rate increase would probably not push the US economy into recession. The graph below shows the figures. It also underlines why monetary aggregates are very important.

I do not believe that increasing interest rates will help reduce inflation. But reducing interest rates to near-zero levels merely inflates asset bubbles without boosting the real economy. Increasing interest rates now will prevent bubbles which then have to be punctured. Nevertheless, the Fed would be advised to moderate the quantum of its rate increases.

My new paper The giant blunder at the heart of General Equilibrium Theory has been published in real-world economics review.

Abstract: Proofs of general equilibrium crucially hinge on establishing the existence of an equilibrium price vector that makes excess demand in all markets equal to zero. This paper shows that the so-called price vector does not meet the definition of vector, and that all proofs of general equilibrium are therefore invalid.