Net Monetary Base vs Inflation (spread)
The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has increased even further with an April reading of 536. This is an increase from last month's reading of 529. Despite the high reading of 2011 Q1 over the average, GDP growth for this period was only moderate (confounding my own predictions of substantial growth).
Inflation readings in April continue to grow. The index reading of 224.433 implies annual inflation of 3.1% but the annualised monthly figure was 5.1%. Prices since December (220.186) have increased by 1.9%, which implies an annualised inflation rate of 4.6%, still uncomfortably high. As 2011 continues the momentum of these high monthly figures will translate into higher annual inflation.
Since the introduction of QE2 in November 2010, the net monetary base has increased faster than inflation. This unconventional policy by the Fed continues to provide the conditions for good economic growth.
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)
Note: A Decline in annual Real GDP per Capita is my definition of a "recession"
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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 April spread comes in at 336 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 four months has picked up considerably, which means that Real Interest Rates in April dropped further to -3.0% - well below the historical average of 1.6%. This is now the 18th negative month in a row.
Since 1955 there have been five long periods of negative Real Interest Rates:
- 1957-12 to 1958-10: 11 months (average -1.4%)
- 1974-09 to 1977-09: 37 months (average -1.9%)
- 2002-10 to 2005-04: 31 months (average -1.1%)
- 2008-01 to 2008-11: 11 months (average -2.1%)
- 2009-11 to 2011-04: 18 months (average -1.7%)
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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