The Case for an M2 Growth Rate of 10%

William Carlson, Conway Lackman

School of Business, Duquesne University, Pittsburgh, USA.

DOI: 10.4236/me.2013.43021                

Abstract

The recovery from the 2008-2009 recession has been much slower than the average recovery since the 1924 recession. As analysts who believe that the St. Louis model created by Leonall Andersen and Jerry Jordan still has relevance we believe that the slow rate of M2 growth since 2Q2009 is a major reason why GDP growth has been so slow. At the 9th Annual Missouri Economics Conference on March 27, 2009 we presented a paper, “Interwar Hoarding, Liquidity Traps, and the 2008 Solvency Trap” in which we recommended that the Federal Reserve attempt to maintain a 10% growth rate for M2 (or a growth rate of 6.80% on an inflation adjusted basis similar to the 1960, 1970, 1982 recoveries) with the hope that the plan would lead to a real GDP growth rate of 7% with an inflation rate of 3%.The title of that paper indicates two other factors hindering both M2 and GDP growth. Bank hoarding of excess reserves far in excess of ratios seen in the 1930s put the US into a liquidity trap. But in 2008 this was not an ordinary trap. We tried to coin the term “solvency trap” to indicate our belief that, using mark to market accounting, the financial system was insolvent. As Reinhart and Rogoff have noted, recoveries from financial crises tend to be slower than those from ordinary recessions. Analyses of each downturn since 1922 are conducted along with what has happened after the economy bottomed in 2Q09 including money supply analysis. Three years have passed. We continue to believe our original recommendation was correct.

Keywords

Monetary Policy

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	L. C. Andersen and J. L. Jordan, “Monetary and Fiscal Actions: A Test of Their Relative Importance in Economic Stabilization,” Federal Reserve Bank of St. Louis Review, 1968.
[2]	M, W. Keran, “Monetary and Fiscal Influences on Economic Activity: The Historical Evidence,” Federal Reserve Bank of St. Louis Review, 1969.
[3]	A. B. Laffer and R. D. Ranson, “A Formal Model of the Economy,” Journal of Business, Vol. 44, No. 3, 1971, pp. 247-270. doi:10.1086/295375
[4]	N. S. Balke and R. J. Gordon, “Appendix B—Historical Data in Gordon. The American Business Cycle: Continuity and Change,” National Bureau of Economic Research Book Series: Studies in Business Cycles, New York 1986.
[5]	M. Friedman and A. J. Schwartz, “Monetary Statistics of the United States: Estimates, Sources, Methods,” National Bureau of Economic Research, New York, 1970.
[6]	C. Reinhart and K. Rogoff, “This Time is Different: Eight Centuries of Financial Folly,” Princeton University Press, Princeton, 2011.
[7]	W. H. Carlson and C. L. Lackman, “Interwar Hoarding, Liquidity Traps, and the 2008 Solvency Trap,” 9th Annual Missouri Economics Conference, 27 March 2009.
[8]	K. Rogoff in Floyd Norris, “Sometimes Inflation Is Not Evil,” New York Times, 11 August 2011.