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By New_Deal_democrat March 14, 2018 8:44 am
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On the deceleration of real M1 and M2
As we now have the data for consumer prices in February, this is a good time to look at real money supply, both M1 and M2.

As readers of my "Weekly Indicators" columns now, I have voiced increasing concern over the deceleration in both of these series for close to a year. First it was M2, and then deceleration spread to M1.

Real M2 briefly turned negative in 2010, sparking some concern of a "double dip" recession. But that wasn't confirmed by real M1 (which while decelerating, remained positive YoY), or a host of other leading indicators. Next, both really surged during an episode of "Europanic" during 2011-12, and except for another period of deceleration, particularly in M1 in late 2015, both were relentlessly positive since -- until March of last year:

Here is a close-up since the end of 2016:

 
Real M2 peaked last June and has been declining in the 8 months since. Real M1 last peaked two months ago. However, on a six-month average, real M1 is now unchanged.

Next, here is the YoY calculation for real M1 and M2 since the Great Recession:

Note that for real M2, a value of less than 2.5% is consistent with a subsequent recession. Thus the above graph subtracts that amount.

The peak value of YoY M1 in the last 12 months was 6.9%. To show enough deceleration to make me change the rating on real M1 to neutral, YoY growth would have to slow to less than half of that amount, or 3.4%.  It's not there now.

Although one or the other of each of the real money supply measures has fallen into negative territory previously since 2008, with the exception of 2010 this is the only time that both have decelerated so close in tandem.  Together with the increase in interest rates, with one exception -- the continuation of loose credit by the banks -- the financial background conditions for the economy are closer to turning negative than at any time since 2010, and before that, the Great Recession.

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