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)
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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).
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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.
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