Investors Should Beware of Tepid U.S. Money Supply Growth

Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Investors would be wise to take notice that the U.S. money supply (M2) is growing only at a tepid 3% rate, compared to double-digit percentage rates last year. That situation suggests an economic slowdown here in the United States — good news for the Republicans, but not for investors or for the stock market.

In addition, the markets have been hit hard by the growing fear of another painful recession in Europe and the United States, as well as a slowdown in China. The slow growth in the U.S. money supply means that the Federal Reserve is not as willing to stimulate the economy had it had been in recent months.

One important economic factor that may be causing Fed officials to slow the money supply growth is increased prices in the United States. The consumer price index (CPI) is up 3-4% a year and could rise further with excessive monetary policy loosening. The situation shows the delicate balancing act that Federal Reserve Chairman Ben Beranke and the other Fed governors face in trying to stimulate the economy without triggering price inflation.

Although opinions vary among economists about whether to use M1 or M2 to track money supply, Milton Friedman liked using M2 because it includes money market funds and offers what could be regarded as a more consistent measure of monetary policy than M1. He argued that since the introduction of money market funds in the late 1970s, M1 has become a misleading and narrow indicator of the money supply. M2 does not show the increasing volatility of monetary policy, although it does confirm the inflationary bias of the Fed. That inflationary basis of the Fed is worth monitoring closely in times such as now when the economy is sluggish and monetary policy is manipulated to stimulate growth at the risk of price hikes.

Regardless, the U.S. economy is slowing, much of Europe is in recession, China’s economic growth is slipping and prices are rising in the United States.

None of these developments are good news for investors. For that reason, I actually have recommended some short positions in my Hot Commodities Alert and Hedge Fund Trader trading services to help my subscribers take advantage of the market’s recent pullback. I also have used stop-loss positions in my monthly investment newsletter Forecasts & Strategies to help protect my subscribers from certain investments that I viewed as especially vulnerable to the market’s retreat.

An old investment saw is to “sell in May and go away.” The advice seems to be holding true to form so far this year. However, investors can be fickle and follow swings in momentum, so we always need to be vigilant about changing conditions and sentiments.

Finally, we are heading into a presidential election season, so the incumbent president has every reason to want to stimulate the economy and job growth. It should be an interesting six months as we approach the presidential election this November. I will be watching monetary and fiscal policy changes closely. Keep reading my e-letter each week and encourage your friends and family members to sign up to receive it, too.

You Blew It!: Whatever Happened to Life, Liberty and…

“My commitments to peace, to workers’ rights and to social and economic justice are constant.”
— Congressman Dennis Kucinich (D-Ohio)

Last week, Congressman Dennis Kucinich announced he was not running for office again, but would continue to champion “workers’ rights, and social and economic justice.”

Pity he won’t be working for liberty, the premier virtue of the founders. What ever happened to Jefferson’s refrain, “life, liberty and the pursuit of happiness” found in the Declaration of Independence?

Freedom no longer seems a priority for the social democrats.

Milton Friedman once said, “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

I suspect the same principles would apply to social and economic justice.

Be sure to read my feature “You Blew It!” I’ll plan to have a new one for you every week. The purpose is to point out a bad decision, a foolish action or an ill-fated statement by a public official, business leader or investment guru. I have used the phrase within my family for years and they once printed t-shirts for a reunion with those exact words on each one. They learned to take my constructive criticism with a sense of humor and I hope you do, too. My intent is not to ridicule anyone but to point out a mistake that could be corrected, much as advice from a trainer or a coach can turn a faltering athlete into a world champion.

Yours for peace, prosperity, and liberty, AEIOU,

Mark Skousen, Ph.D.
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Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

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