US Recession Indicators - March 2011

Net Monetary Base vs Inflation (spread)

The growth of the Net Monetary base (M0 minus excess reserves) over inflation is safely in positive territory with a reading of 424. This is an increase from last month's reading of 409 but is still way above the historical average of 255. The last six months have seen the spread nearly double in size, which indicates that 2011-Q1 GDP growth is likely to be substantial.

Inflation, however, is increasingly evident in numbers just released. Although February saw an annual inflation increase of 2.2%, the annualised monthly figure was 6.6%. I predicted recently that February inflation was going to be be "big" and it was. This was because early M0 figures showed an annualised monthly growth of over 97%. Once excess reserves were taken into account, the net monetary base increased by an annualised 15.4%.

Note: A negative result implies that inflation is growing faster than the money supply, an event which indicates that a recession will occur within 1 to 36 months (with an average of 12 months)

Data Series:
St Louis Fed

AMBNS
EXCRESNS
CPIAUCSL
GDPC1
POP

--------------------------------------------------------------------------------------------------------------------------------------------------------------------

Federal Funds Rate vs 10 Year Bond Rate (spread)

The 10 Year Bond Rate has increased over the past few months while the Federal Funds rate remains at near zero. The December spread comes in at 342 basis points, well above the historical average and safely in positive territory.

Note: A negative result implies a highly restrictive monetary environment, an event which indicates that a recession will occur within 4 to 39 months (with an average of 22 months).

Note: If both the first and second graphs are negative at the same time it indicates that a recession will occur within 1 to 21 months (with an average of 11 months).

Data Series:
St Louis Fed

FEDFUNDS
GS10
GDPC1
POP

--------------------------------------------------------------------------------------------------------------------------------------------------------------------

Real Interest Rates

Inflation in the past three months has picked up considerably, which means that Real Interest Rates have dropped to -2.0%

Note: Real Interest Rates are another way of measuring monetary conditions. While inflation implies that cash by itself is losing its value, a negative real interest rate implies that cash accounts in banks are losing value as well (even while earning interest). The IMF strongly recommends that economies keep real interest rates positive to preserve the value of money and to prevent investment bubbles from occurring.

Data Series:
St Louis Fed

FEDFUNDS
CPIAUCSL
GDPC1
POP

--------------------------------------------------------------------------------------------------------------------------------------------------------------------

Archive of Historical graphs.

--------------------------------------------------------------------------------------------------------------------------------------------------------------------

Hello all

US Inflation for February will be big

Here's a screencap of my spreadsheet.

Monthly M0 grew in February by 8.1%, which means an annualised increase of 97.24%.

There are only three other monthly results since 1954 (where my M0 figures begin) when M0 increased faster than this, and that was October 2008, November 2008 and December 2008 during the market panic of that period. Those three months were also beset with some very severe deflation. It was this huge increase in liquidity by the Fed which helped prevent a deflationary collapse. Put simply, the inflationary pressure caused by the increase in M0 was able to balance out the deflationary effect of the crisis.

Since we're not in a similar situation (ie not in an imminent credit crisis), February's sizable M0 increase (the fourth largest in history) would have a large inflationary effect.

On the surface, annual inflation is still benign:

• November 1.1%
• December 1.4%
• January 1.7%

Yet these annual figures hide the monthly results which, annualised, are:

• November 1.5%
• December 5.2%
• January 4.8%

All these figures you can see on the screencap link to my spreadsheet I've given. And if you have checked that out you will also see the notation "QE2" to the far right of the November row. QE2 is, of course, the announcement by Ben Bernanke that the Fed will create $600 billion of money by fiat and use it to buy back government bonds.

Oil prices have popped up, partly due to Libya but mainly due to supply issues (ie Peak Oil), which means that the inflationary effect of QE2 will run straight into the inflationary effect of high oil prices. Bad news for the recovery.