Wednesday, September 20, 2017

What is the Supply of Money Telling Us About the Health of the Economy?

One of the Federal Reserve's key responsibility is monitoring the supply of money in the economy.  Through the mechanism of creating and destroying money, the Fed is able to impact economic growth levels.  Here's what the Fed has to say about the supply of money:

"The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply.

There are several standard measures of the money supply, including the monetary base, M1, and M2. The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve). M1 is defined as the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions). M2 is defined as M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares. Data on monetary aggregates are reported in the Federal Reserve's H.3 statistical release ("Aggregate Reserves of Depository Institutions and the Monetary Base") and H.6 statistical release ("Money Stock Measures").

Over some periods, measures of the money supply have exhibited fairly close relationships with important economic variables such as nominal gross domestic product (GDP) and the price level. Based partly on these relationships, some economists--Milton Friedman being the most famous example--have argued that the money supply provides important information about the near-term course for the economy and determines the level of prices and inflation in the long run. Central banks, including the Federal Reserve, have at times used measures of the money supply as an important guide in the conduct of monetary policy."

That said, the Fed admits that the supply of money has become a somewhat less important indicator of economic health:

"Over recent decades, however, the relationships between various measures of the money supply and variables such as GDP growth and inflation in the United States have been quite unstable. As a result, the importance of the money supply as a guide for the conduct of monetary policy in the United States has diminished over time. The Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System, still regularly reviews money supply data in conducting monetary policy, but money supply figures are just part of a wide array of financial and economic data that policymakers review." (my bold)

Here's a graph from FRED which shows how the supply of money using the M2 measure (sum of currency held by the public and transactions at depository institutions (M1) plus savings deposits, small-denomination time deposits (less than $100,00) and balances in retail money market mutual funds) has grown since late 1980:


Here is the same data showing the growth rate of the supply of money over time:


Note the rather clear connection between increased growth levels of the supply of money and recessional periods with the exception of the period after the 1990 - 1991 recession?  

Here's what has happened to the growth rate of the supply of money since the beginning of the Great Recession:


Note that the growth rate has dropped substantially over the past year from 7.9 percent in October 2016 to its current level of 5.2 percent.

Let's look at another way of measuring the supply of money.  According to the Austrian Money Supply Measure, a more accurate and broader money supply metric developed by Murray Rothbard and Joseph Salerno, a measure which is defined as follows:

Ma (a = Austrian) = total supply of cash-cash held in the banks + total demand deposits + total savings deposits in commercial and savings banks + total shares in savings and loan associations + time deposits and small CDs at current redemption rates + total policy reserves of life insurance companies—policy loans outstanding—demand deposits owned by savings banks, saving and loan associations, and life insurance companies + savings bonds, at current rates of redemption.

...the growth in the supply of money (blue line) has dropped to levels not seen since the Great Recession in August 2008:


As you can see from the graphic, during economic expansions, money supply as measured using the Austrian Money Supply Measure tends to grow at faster rates as banks loan out money to businesses and individuals.  During and prior to economic contractions, money supply tends to either contract or grow at far slower rates as banks loan less.  Therefore, it is somewhat concerning that the year-over-year change in the supply of money as measured using the Austrian method is showing its slowest growth in nine years.

We are seeing evidence of this problem in the economy.  Here is a graphic showing the year-over-year change in commercial and industrial loans going back to 1948:


Prior to or during each recession over the past 70 years, we see a decline in the growth rate of commercial and industrial loans.

Here we focus on the period since the beginning of the Great Recession:


You can quite clearly seen that the growth rate in commercial and industrial loans has dropped over the past 18 months from 10.6 percent in April 2016 to its current level of 2.2 percent.  While the reasons for this are unclear, it is quite possible that a less than robust economy is making it harder for America's commercial banks to find worthy borrowers.

While the Fed may state that all is well in the economy (with the possible exception of inflation that is well below its comfort level), this assessment shows that the Federal Reserve is walking a tightrope between further monetary tightening and creating the next recession.  At this point in the economic cycle and with the economy's addiction to cheap credit, the Fed finds itself in a very unenviable position. 


Tuesday, September 19, 2017

Who Else Does Hillary Blame For Her Loss?

Since her loss in November 2016, a loss that shocked the Democratic presidential candidate who seemed to feel that the Oval Office was her birthright, Hillary Clinton has spent substantial time and energy pointing out the external factors that caused her to lose the election.  There's James Comey, the Russians as a whole and Vladimir Putin in particular, WikiLeaks, Donald Trump and his legions of unwashed and sweaty followers and Bernie Sanders and his Bros among others.  A recent interview on NPR with Rachel Martin looks at a rather surprising group of voters who share part of the blame for Ms. Clinton's loss, at least in her own mind.

Here's the key exchange:

Rachel Martin: You mentioned, and you spent time in the book (What Happened) talking about the forces you feel were working against you. You also say sexism was one of them, but you yourself, in the book, acknowledged that a good number of young women didn't vote for you, which is presumably not a sexist choice. They just weren't inspired by your message.
  
Hillary Clinton: I think it's a lot more complicated than that. I did win the women's vote. I didn't win the vote of white women, but I got more white women votes than Barack Obama did. I think it's much more difficult to unpack all of this, and with respect specifically to young women, I do think that for a lot of young women, gender is just not the motivating force that maybe it will be in the future. But then it wasn't. The same way that being African-American was really motivating and exhilarating for black voters. But as I point out in the book — and I think that chapter I wrote on being a woman in politics really will be of interest to a lot of women and men. I talk about a conversation I had with Sheryl Sandberg, who has really helped to put into perspective a lot of research that supports common experiences. And she said, look, the research is absolutely definitive. The more professionally successful a man is, the more likable he is; the more professionally successful a woman is, the less likable she is. And that when women are serving on behalf of someone else, as I was when I was Secretary of State, for example, they are seen favorably. But when they step into the arena and say, wait a minute I think I could do the job, I would like to have that opportunity, their favorabilities goes down. And Sheryl ended this really sobering conversation by saying that women will have no empathy for you, because they will be under tremendous pressure — and I'm talking principally about white women — they will be under tremendous pressure from fathers and husbands and boyfriends and male employers not to vote for "the girl." And we saw a lot of that during the primaries from Sanders supporters, really quite vile attacks online against women who spoke out for me, as I say, one of my biggest support groups, Pantsuit Nation, literally had to become a private site because there was so much sexism directed their way."

Does Ms. Clinton give part of her key demographic, the highly educated and independent women of the new millennium, so little credit that she actually believes that their "fathers, husbands and boyfriends and male employers" have such power over them that they could prevent them from voting for Ms. Clinton in November 2016 in a secret ballot?

All of that said, she does have one point of pride in her performance as stated later in the interview:

"I won more votes for president than anybody in American history besides President Obama."

Given that the U.S. population has grown by between 0.69 percent and 1.67 percent per year since 1960 and that the voting eligible population has risen from 194.3 million in 2000 to 230.6 million in 2016, I'm not sure how much of an accomplishment that really is but if it makes Ms. Clinton feel like she accomplished something to be proud of, then spin away.

Ms. Clinton's grasp on why she lost the 2016 presidential race appears to be tenuous at best and is, perhaps, providing us with all of the evidence that we need to show us how she was not the right candidate for president, despite the fact that she got the majority of the votes.  Unfortunately for the voting public, the pickings for the POTUS were rather slim in the 2016 election cycle.


How Scientists Track North Korea's Nuclear Program

North Korea's ongoing series of nuclear tests are interesting to me, a geoscientist, because of the seismic signature that they leave behind.  Here is some background information, showing from a seismic perspective, how North Korea's ability to produce ever more powerful nuclear weapons is improving.

During the early stages of the nuclear age between 1945 to 1957, nuclear weapons testing took place in the atmosphere as shown in this video:


This led to potential issues since the tests exposed civilian populations to excessive levels of radiation.

After the signing of the Limited Test Ban Treaty in 1963, most tests took place underground with the exceptions of China which continued atmosphere testing until 1980 and France which continued atmospheric testing until 1974.  The explosions from underground testing creates a subsurface cavity which often collapses, creating a rubble-filled chimney that may go to the surface depending on the depth of the test.  Here is a graphic showing the Nevada test site and the impact of a nuclear weapons test on the subsurface:


The only certain way to track these underground tests is through seismic monitoring.  During the nuclear test ban discussions held in 1958, it was decided that there was a need for a global network of accurately calibrated and timed instruments that could measure and monitor underground nuclear explosions.  Seismologists had, for some time, recognized the need for a global network of seismographs to produce the data needed for further global studies in seismology.  This led to the creation of the World-Wide Standardized Seismic Network or WWSSN.  Construction began in 1961 and was completed at the end of 1967 with the installation of 121 WWSSN systems plus one which was given to the USSR.   

Here is a map showing the WWSSN stations in 1978:


One of the major benefits of the WWSSN was its assistance in developing the science of global plate tectonics, a key aspect of the geoscience world today.

In 1996, the Comprehensive Test Ban Treaty (CTBT) was adopted by the United Nations.  Here is a map showing the signatory, ratifying and non-signatory states (in red):


Monitoring is obviously a very important part of the CTBT Organization.  Four types of monitoring are used including seismic, hydro acoustic, radionuclide and infrasound.  We'll focus on the seismic monitoring for the purposes of this posting.  Seismic monitoring takes place at 170 seismic stations (50 primary and 120 auxiliary) in 76 nations around the world.  The primary stations operate 24 hours a day, 365 days a year and data is relayed in real time to the International Data Centre in Vienna, Austria.  Here is a video which explains how the seismic monitoring system works:

 

Now, let's look at the seismic history of North Korea's nuclear tests according to the CTBTO, focussing on the test of September 3, 2017.  The "event" was detected at 41 primary and 90 auxiliary stations along with two hydroacoustic and one infrasound stations.  The event took place at 03:30 UTC on September 3, 2017 and is consistent with a man-made explosion, however, CTBTO states that the explosion can only be classified as nuclear once airborne radioactivity is detected, a process which can take up to55 days which was the case in the 2013 test.  The initial estimate of the event's magnitude was 5.8 which was later revised to 6.1.  Here is a graphic showing how this event's seismic signature compares to North Korea's other nuclear tests:


As you can see, there was significantly greater seismic activity after the September 3, 2017 test than there was in all previous nuclear tests.  Calculations now suggest that the yield of the most recent blast is approximately 250 kilotons (one quarter of a megaton), by far North Korea's largest yield as shown here:


By way of comparison, the Little Boy weapon that destroyed Hiroshima had a yield of 15 kilotons and the Fat Man weapon that destroyed Nagasaki had a yield of 22 kilotons.

The data from the latest North Korean nuclear test suggests that the hermit kingdom has now developed a weapon that would be capable of creating significant damage to its intended target.  With a weapon of this size, accuracy becomes somewhat less important since destruction will be widespread.