Saturday, 1 November 2014

Economic Growth in the U.S.? Nah, It's The Money Supply.

I'm bemused every time the "all-important GDP figures" are released by the attention they attract. Like they represent real economic growth. I'm even more bemused that most people pay little or no attention to the money supply. To be fair, I didn't use to either even though I would have a look at it from time to time after hearing Abby Joseph Cohen of Goldman Sachs explain once at the end of the 1990s sometime that she monitored the M2 as a key economic indicator.

Anyway, most indexes and transactions are quoted in currencies. GDP is no different. All else remaining the same, the larger the quantity of money the higher GDP will be, not only in nominal terms, but also in real terms (as money supply growth is consistently higher than price inflation as measured by the CPI).

Of course, not all growth in the money supply affects GDP directly. GDP only makes up about 30% of the economy according to some estimates, have a look at the work of Mark Skousen for more on this. But let's assume it does or at least that the ratio of GDP to money supply remains largely unchanged through time for the purposes of this exercise.

So, removing the growth in the quantity of money, the adjusted GDP for the U.S. looks as follows as of Q3 2014...


...and on a year on year percentage change basis it looks like this...


...and on a 10-year annualised percentage change basis GDP growth looks like this...


...and per capita, GDP adjusted for the inflated money supply looks like this....


...and year on year percentage change on the same basis...


...and finally, on a 10-year annualised percentage change basis the adjusted GDP growth looks like this on a per capita basis...


...fool me once, shame on you. Fool me twice, shame on me.