Thursday, November 4, 2010

M2, GDP, Inflation Q3 2010

M2 continues to grow but not at a great rate. The FED as we have shown is throwing money into the system but it is recirculating on Treasuries.

The M2 rate of change is remaining positive as funds leak out slowly into the economy. As we have shown last month the Reserves at the banks remain high and loans are still at an all time low.

Inflation and its components are shown above. We see the low inflation rate driven by the low leakage of M2 and of course the excess capacity in the existing economy. The concern is that those with jobs may keep them, less a slight more shedding, but that we will see a bifurcation of those with and those without jobs and this may very well continue into 2010.

The above is the calculated inflation rate and the yearly running average. We are at about 2% and slightly increasing and this is well above the dip at the beginning of the year. The FED is concerned as to the 2% which is why they are doing QE2. We disagree and believe that 2% should be on top of a potential 4% growth. Thus the FED is not only giving free money but free money plus a profit.