It’s the Money, Stupid! Economists Weigh in on Recovery
The debate on 24-hour cable television rages over the merits of government spending versus credit creation, but some economists are crystal clear about what will lead any U.S. recovery. To amend a phrase from the Clinton era, “It’s the Money, Stupid!”
Morgan Stanley economists Joachim Fels and Manoj Pradham write that the focus on whether banks are lending enough is, to put it bluntly, wrong. Surging money supply in recent months will have the desired effect on asset prices, with or without credit growth, they argue.
Credit crunches tend to lead recessions, but they lag recoveries. Right now, money supply growth is accelerating while credit is slowing. We continue to believe that the acceleration in money supply growth and excess liquidity foreshadows an economic recovery later this year.
Likewise, Paul Kasriel, Northern Trust Co.’s director of economic research, writes that the powerful one-two punch of accelerating money growth and impending government fiscal stimulus has a long history of being a powerful economic elixir — all the way back to the Great Depression.
Never underestimate the initial positive impact on aggregate demand of that powerful combination of increased federal government spending/tax cuts and a central bank running the monetary printing press at high speed.
Kasriel concludes that the same pundits who missed this economic downturn will also miss the onset of recovery. His advice: Watch the index of leading economic indicators for hints of a rebound.
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