LANDY INVESTMENT MANAGEMENT BLOG

AUSTERITY OR STIMULUS: THE RECENT EVIDENCE

The 2009 Obama stimulus package had a positive effect on our economy, although  there is no telling exactly  how much.  Obama's economists argued that Congress needed to enact it in order to prevent the unemployment rate from soaring above 8%.  Of course, after enactment the rate actually rose above 10%, at its peak.  We just do not know what the rate would have been in the absence of stimulus.  At this point, the stimulus package has run its course and we are left with its $800 billion cost added to our national debt.  And one can argue that an economic recovery already was in the cards in 2009, stimulus package or not, since the recession officially ended in June, 2009, just four months after passage of the stimlus package and well before much of the stimulus money had been spent.  While we can presume that the stimulus muted our economic decline, we must now ask the follow-up question:  How much better off are we today, compared to the counterfactual?  Nobody knows the answer.
 

One reason that I supported Obama's stimulus package was that the country was in a panic and we needed something positive to believe in.  The stimulus package stemmed the panic and raised the economy's animal spirits, somewhat.   In addition to actually saving some jobs (especially through direct aid to the states),  it helped the economy because the public  believed it would.  The placebo effect.   But will it work the next time?  The public seems to think that we are still in recession and that our government's efforts have failed to turn around the economy.  I recall hearing of a poll that found that more people believe that Elvis is alive than believe that deficit spending boosted our economy.  So, next time we have a financial crisis, or even a recession, there likely will be little support for Keynesian stimulus.  And, lacking widespread faith that stimulus actually works, its enactment during future recessions may have little positive effect on animal spirits in our economy.
  
 Regarding Europe, austerity (raising taxes while cutting public spending) seems to be contributing to an economic slowdown.   But, it is hard to separate out the effect of austerity alone, since it has been accompanied by a dimunition and, possibly, reversal of capital flows as countries are unable to borrow as much from outside their borders as previously.  Loan money is no longer flowing into Ireland and Spain to finance their real estate bubbles.  Likewise, capital flows into Greece are diminishing as the government curtails its spending and indivduals and businesses become motivated to send their capital beyond its borders.  So, Greece's decline is unavoidable, but it is hard to say how much is due to tax increases and government cuts, as opposed to the severe tightening of its capital infusions.   The German economy, too,  is slowing, even with no sudden changes in fiscal policy, tied as it is to the Eurozone.
 

     The best test of the impact of austerity lies in a comparison of the US with the UK.  Both countries control their own currency, both dealt with their credit contractions, but the UK switched to austerity after its last election, while the US has put off tax increases and meaningful spending cuts until at least 2013.  So far, growth in the US is marginally higher and is starting to accelerate, while the economy in the UK remains moribund.  Austerity or stimulus?  So far, the US appears to be on the preferred course.  Let's see what 2012 brings.  The jury is still out.

 

THE FED ACTS TO HEAD OFF DEFLATION

This week's (July 8, 2010)  "U S Financial Data" from the Federal Reserve Bank of St. Louis shows that the two-month growth rate of M2 money supply is 9.5%, up from 9.2% last week.  Likewise, the year - over - year growth rate has moved up to 1.8% (still sluggish)  from 1.7%,   The trend toward acceleration in this broad measure of the money supply is very recent, but unmistakeable.  Over the first four months of 2010, M2  actually had fallen at a 2% rate.  The sudden reversal from shrinkage to robust growth in M2  is likely the result of a purposeful effort by the Federal Reserve to head off deflation.

Gold advocates have critcized the Fed for printing too much money, but the slow growth in M2 belies this.  Bank reserves have increased many-fold, but that new money remains bottled up within the Federal Reserve system, maintained there to bolster banks' balance sheets.  The near zero rate for Federal Funds has not unleashed any flood of money into the economy, as banks have hoarded reserves, while reducing their net lending.  The trend of bank lending does seem to have flattened out, recently, and may be on the cusp of expansion.

Robust growth in the money supply, if it continues, will boost the rate of inflation and squelch fears of deflation.  The increased liquidity will likely be a boon for stock prices, while putting upward pressure on interest rates.  This is bearish for holders of long term bonds, which have benefited in recent years from the declining rate of inflation.

Too much inflation is to be avoided, of course.  But, a little more inflation than we have now (under 2% and falling)  can be a good thing, given our sluggish economy and moribund credit markets.

BANK RESERVES SOAR WHILE BANK LENDING SHRINKS & INFLATION STAYS TAME

The public is mad as hell at the banking industry for cutting back on lending after receiving government funds from the TARP and direct loans from the Federal Reserve .  Banks' fear of losses has led them to tighten lending terms and standards.  At the same time, demand for loans also has declined as employment, consumer spending and business inventories have all fallen.  So, despite public outrage, there is no sign yet of any revival in bank lending.  Indeed, the Fed reported on December 10 that net bank lending has contracted by nearly $1.5 trillion since the start of 2009, with $854 million of that decline coming in the third quarter. 

 Meanwhile, bank reserves  (banks' deposits at the Fed plus their vault cash) have exploded upward during the financial crisis, as the Fed has pumped money into the banking industry.  Banks used to maintain reserves, on average, that were just slightly higher than the Fed's minimum reserve requirements .  If they lacked sufficient reserves, they would borrow in the Fed Funds market.  If they held unneeded reserves, they would lend them overnight to other banks in the Fed Funds market, where they would earn interest.   But, in October, 2008, the Federal Reserve, itself,  began paying interest on excess reserves  for the first time. This gave the banks an incentive, based on the interest rate offered, to have some excess reserves accumulate beyond the minimum amount required by the Fed, and keep them on deposit at the Fed without making them available to other banks in the Fed funds market.  This change in Fed policy enabled the Fed to pump up bank capital through direct loans and Tarp injections, without having to worry about so much money getting out into the real economy via loans, where it would cause inflation.

      The Fed now uses the rate on excess reserves, as well as the Fed Funds rate  to influence both bank lending and growth of the money supply.  To date, the Fed has been content to see the banks retain excess reserves so as to bolster banks’ capital and improve their financial stability. 

 The Fed has not put any direct pressure on banks to lend out more funds.  To do so, the banks would have to either cut their interest rates, lend to less creditworthy customers, or ease their terms by accepting less collateral or collateral of lower quality as a basis for their lending.  Or, they could increase their financial leverage by borrowing more.  Any of these courses would put the banking system at greater risk, so an ease in credit will probably have to await an improvement in economic conditions and a resurgence in business confidence.

     Observers as diverse as the prominent economist Allan Meltzer   and gold advocate Peter Shiff   have expressed fears that the Fed will keep rates too low for too long while the expansion of excess bank reserves will be maintained and will stoke inflation. Economist Paul Krugman   counters that inflation will not necessarily take off, arguing that Japan’s quantitative easing caused rapid growth in bank reserves there, without boosting inflation.  

Data on the growth of bank reserves are startling  (from the Fed’s H.3 publication: Aggregate Reserves  of Depository Institutions and the Monetary Base ,” 11/28/2008 and 12/10/2009).  The figures show that in August, 2008, a quiet month in America - just weeks before Lehman's bankruptcy - total bank reserves were $45 billion, of which $2 billion were excess reserves.  As of November 18, 2009, total bank reserves stood at $1.1 trillion.   That’s up nearly 25-fold.  As Paul Kasriel of Northern Trust  has pointed out previously, the bulk of this year’s increase in bank reserves has been accounted for by the increase in excess reserves beyond what the Fed requires the banks to hold.  The recent Fed data goes on to show that excess reserves rocketed from $2 billion in August, 2008 to over $1 trillion, up 500-fold, as of November 18, 2009.

     How serious is the danger that banks will draw on the more than $1 trillion in newly created excess reserves and lend the money out into the real economy, wreaking inflationary havoc?  The answer is: no chance at all, as long as the Fed has the will to prevent it.  The Fed will use the Fed Funds rate as well as the interest rate it pays banks for excess reserves as levers to control any expansion of credit.  

     The provision of credit though the banking system remains a demand-driven system. Borrowers apply for loans, depending on their desire for money and the prevailing interest rates.   Banks consider their requests, setting the rates and terms of any loans granted.  As credit expands, borrowers borrow more, with banks first using their own funds, then borrowing excess reserves from other banks in the Fed Funds market, as needed.  If increased borrowing puts upward pressure on rates in the Fed Funds market, the Fed, through its Open Market Committee, pumps new money into the Fed Funds market if it wishes to expand credit while holding interest rates stable.  Alternatively, if the Fed wants to rein in bank lending, it raises the Fed Funds target rate, which raises rates to borrowers and limits their demand for loans.   In this way, the Fed controls the expansion of credit.

  The recent piling up of excess bank reserves does nothing to diminish this role of the Fed because the Fed still sets the Fed Funds target rate, while its setting of the rate on excess reserves influences the amount of excess reserves the banks wish to retain.

     If banks, for some reason, failed to respond to the Fed’s strong interest rate incentives in favor of going wild with lending irresponsibly (would banks ever do that?) , the Fed could simply call in its loans to the banks, which would drain excess reserves from the system while impairing banks’ liquidity.  That would put a damper on excessive lending, wouldn’t it?  Furthermore, the Fed has the ability to "lock down" lending in the Fed Funds market by raising the rate it pays on excess reserves to a level that is higher than the Fed Funds rate.  Banks would prefer to lend risk-free to the Fed, rather than lend at a lower rate to other banks.  This would effectively freeze excess reserves and banks would find it difficult to secure additional funds in the Fed Funds market in order to lend amounts beyond their other sources of capital and their own surplus reserves. 

     The Fed’s challenge remains to get credit flowing in the economy again, without going overboard.  The accumulation of excess bank reserves has strengthened banks’ financial stability and it poses no special risk of an outbreak of runaway inflation.  As in the twentieth century, prospects for future inflation continue to reside in the Fed’s setting of the Fed Funds target rate, as it influences the flow of credit and money in the U. S. economy. 

Review of "Globalizing Capital" by Barry Eichengreen

Economist Barry Eichengreen offers great insights into the workings of the international monetary system from 1850-2008 in the second edition of Globalizing Capital, published 2008 by the Princeton University Press . While it does not exactly read like a great novel, it is well worth the effort to uncover the great influence that the monetary system has had on the world economy at various points in history. For example, beginning in 1929, nations’ rigid reliance on the gold standard facilitated the spread of the Great Depression from country to country. Under the gold standard, the major countries of the world were linked by a common policy whereby nations pledged to convert their currency into gold at a fixed price upon demand by anyone who would present it for such an exchange. This system maintained the value of paper money relative to gold and relative to the currency of other countries. Countries saw that maintaining fixed currency values facilitated trade with other countries, as importers and exporters were freed from the risk of financial ruin that might otherwise result from fluctuations in currency values between the time of an order and the receipt of payment. The rigid link of currencies to gold was thought to prevent trade imbalances among countries. If a country imported much more than it exported, the flow of money outward would cause the general price level to drop, which would make additional importing less attractive and make one’s exports more competitive. Another benefit of the gold standard was that the promise to exchange for gold gave the public confidence in paper currency printed by central banks. Unfortunately, this became a double-edged sword.

Here is the Eichengreen script (simplified) of the Great Depression. In 1927, the U.S. Federal Reserve began to raise interest rates in order to curb stock market speculation. The increased rates attracted savings from overseas, which caused declines in economic activity in Europe, which had previously been awash in loan capital from the U.S. This, in turn, caused other countries to raise their own interest rates in order to keep their capital and their gold (gold was money) from fleeing to the U.S and to the other countries that had already raised their rates. Rising interest rates spread from country to country and depressed economic activity. The economic decline led to bank failures which shrank the money supply and led to deflation, which further suppressed the economy. Nations hesitated to step in as lender of last resort to banks because that required them to print quantities of money, which would detract from their ability to maintain the link between their currency and gold (there’s that pesky gold standard, again). In fact, rescuing banks might have been counterproductive, as the printing of money not backed by gold would lead to fears of devaluation and cause investors to withdraw their national currency - denominated bank deposits, which would worsen the crisis further. In other words, reliance on the gold standard threw the world into what would now be called a negative feedback loop.

Eichengreen finds confirmation of the gold standard’s role in transmitting the Depression among countries, as he ties the eventual recoveries by various countries to their abandonment of the gold standard, together with reflation and their embrace of flexible exchange rates: first the U.K., then the U.S., then France.

Later chapters in the book cover the Bretton Woods Agreement (1944-1973, the subsequent breakdown of pegged exchange rates, and the various currency crises through 2008. Bretton Woods was an attempt to peg currency exchange rates within a 1% range, while providing mechanisms for cooperation and policy coordination among the member countries. Its purpose was to facilitate trade. It broke down for the same reason that all such rigid systems break down - it failed to accommodate the changing economic experiences and political needs of its members. The Asian currency crisis of the late 90s was similar to earlier crises in that it consisted of the cracking of a framework of pegged exchange rates. This book also provides brief, but instructive treatment of countries that have used currency boards to peg their exchange rate to the dollar (like Argentina, which did it until pressures caused them to devalue and abandon the peg, and Hong Kong). There is also some discussion of our ongoing trade imbalance with China, wherein China exports goods to the U.S. and keeps its currency exchange rate low by investing in U.S. government debt.

Eichengreen summarizes the factors surrounding the creation of the Euro currency, whose purpose (which has succeeded) was to promote trade and economic growth among its members. He provides an insightful case for its continued survival, even as individual members may find themselves under strain from time to time, unable to accelerate the printing of money to prime the national economy. His point is that any country that seriously considers pulling out of the Euro family in order to engage in monetary stimulus will experience an outflow of funds from its banking system as investors will want to avoid having their Euro bank deposits converted to a new national currency that will almost certainly lose value. The decline of bank deposits would depress that nation’s economy even further. This scenario will likely keep the Euro family together for the foreseeable future.

Globalizing Capital presents a comprehensive story. Eichengreen’s insights on the mechanisms by which the Great Depression traveled from country to country have been quoted extensively by such experts on the Great Depression as Christina Romer and Ben Bernanke. Overall, reading this book requires some effort, but it gives the reader a good understanding of how evolving changes in the international monetary system have directly affected the course of economic history.

    Review by Arnold Landy   

 

IS EMPLOYMENT A LAGGING INDICATOR ?

Employment is NOT a lagging indicator, although duration of unemployment IS.  The Conference Board, a not-for-profit economic study organization, publishes three popular indexes: 1) the Leading Economic Index (LEI), which foretells turning points in the economy before we move into or out of recessions, 2) the Coincident Economic Index, which measures current economic conditions, and 3) the Lagging Economic Index, which changes direction following the others.

There are two employment indicators that are incorporated into the LEI, namely Initial Claims for Unemployment Insurance (inverted), and Average Weekly Manufacturing Hours.  Like other leading indicators, we do not normally recognize these things as obvious improvements in the economy.  After all, if over 500,000 workers file claims for unemployment insurance, as was the case this week, this is still a relatively large number and the fact that it is much lower than was the case a few weeks and months ago does not mean that the economy is improving.  But it DOES mean (with history as our guide), along with improvement in the other leading indicators, that the economy is going to improve soon.

What about total employment - the actual number of workers on payrolls?  That is the figure most people relate to as a measure of the health of the economy.  That is not a lagging indicator, either.  In fact, it is a Coincident Indicator. The first Friday of every month the Bureau of Labor Statistics of the U.S, Department of Labor releases monthly data showing nonfarm payrolls.  This figure is one measure of how the economy is doing right now.  It is one of the Coincident Indicators tracked by the Conference Board.  In addition, it is one of the four indicators examined by the National Bureau of Economic Research (NBER), which is widely recognized as the group responsible for determining the dates of the beginning and end of recessions.  The other three indicators that the NBER considers are sales,income and industrial production.  Employment typically rises when recessions end.  However, in our most recent recovery from recession, 2001, employment did not rise until over a year after the NBER called the end of that recesssion based on improvement in the other three indicators.  Indeed, that period of time was dubbed, "The Jobless Recovery."  That lag in employment was unusual and it did not knock Nonfarm Payroll Employment off its perch as one of the Conference Board's Coincident Indicators.  And Employment remains one of the four indicators considered by the NBER in fixing the ending date for the current recession. 

The Unemployment Rate has no official status as part of any broad index of economic conditions.  Observers have pointed out problems in drawing conclusions from changes in the employment rate.  For one, as labor market conditions worsen, unemployed workers may become discouraged and stop seeking jobs.  Their dropping out of the labor force makes the unemployment rate fall, disguising worsening conditions.  Conversely, as the economy improves, discouraged workers tend to become optimistic as they hear reports of hiring, then enter the labor force where they add to the unemployment rate while they actively seek work.  These leakages plus changes in the calculation of unemployment over time have brought much criticism to the use of the Unemployment Rate as an economic indicator.  The Unemployment Rate does tend to lag the ups and downs of the economy cycle.

There is one additional measure of unemployment that is a Lagging Indicator, as defined by the Conference Board: Average Duration of Unemployment (inverted).  This measure looks at people who have recently found jobs and tells us the average length of time they had been unemployed.

What are the labor market indicators telling us now?  Of the Leading Indicators, Initial Claims for Unemployment Insurance peaked in March and the four week moving average of claims has fallen steadily since April.  Average Hours Worked in Manufacturing began a small improvement in June.  These indicators and the overall LEI point to an early end to the recession, and the recovery may well be underway, already.  Nonfarm Payrolls, a Coincident Indicator, has continued to deteriorate in recent months, but we are well past the peak in net job losses.  This year's massive declines in manufacturing inventories argues for a pick-up in factory hiring, as has recently occured in the auto and steel industries.  Thus, the outlook is becoming more positive for gains in Average Weekly Manufacturing Hours this month and next, soon to be followed by gains in nonfarm payrolls during the fourth quarter.

The Unemployment Rate and the Average Duration of Unemployment have continued to worsen, and they can be expected to improve only after the economic recovery is well underway.  To summarize: Average Duration of Unemployment and the unemployment rate are lagging indicators, Nonfarm Payrolls is a coincident indicator and Initial Claims for Unemployment Insurance and Average Manufacturing Workweek are leading indicators.  The last two of these have already turned for the better.  The next one to improve, as the economy recovers, likely will be Nonfarm Payroll Employment.

A CHICKEN IN EVERY POT, AS THE ECONOMY GETS HOT

It is time to smash the myth that the U.S. financial crisis will cause any recovery from the current recession to be slow and unimpressive.  In fact, history tells us the opposite.

It may surprise readers to learn that during the  Great Depression, after collapsing from 1929-1933, our economy actually expanded sharply from 1934-1937 (industrial production regained its prior peak), declined during 1937- early 1938, then began another robust recovery that lasted beyond the end of World War II.   

As  summarized by Christina Romer, Chairperson of the Obama administration's Council of Economic Advisers, the early 1930s saw the failure of nearly half the nation's financial institutions, yet the recovery years of 1934-1936 displayed increases in real GDP of 11%, 9% and 13%, respectively and the unemployment rate fell from 25% to about 15% during that period.  Clearly, that financial crisis, which was far worse than that of today, did not prevent our economy from recovering rapidly.

During 1937- early 1938, our economy fell into another decline.  Most monetary economists, like  Milton Friedman,  Anna J. Schwartz and Allan Meltzer, placed blame for this on the Federal Reserve Board, which tightened money by raising banks' reserve requirements in late 1936.   Keynesian economists, like  Paul Krugman, tend to blame the federal government's cutting back on fiscal stimulus, which also occured.  Christina  Romer sides with the monetarists in crediting the subsequent expansion of the money supply with pulling us out of the Depression, while stating recently that the New Deal was too small a program to have been effective.  She points out that the current stimulus package's fiscal effect is about twice the size of FDR's New Deal, as a percentage of GDP, and will last twice as long.

By 1938-1939, fiscal and monetary policy had turned expansionary, again, and the economy expanded rapidly through and beyond the Second World War.  Examination of economic data from the Great Depression and its aftermath shows that a financial crisis can cause an economic calamity, but there is no evidence that recovery from such a debacle is necessarily sluggish, indeed the evidence is to the contrary.  Due to the cloud of pessimism overhanging our national outlook as expressed by most observers, I look for the nascent economic recovery to surprise on the upside.  In other words, a chicken in every pot, as the economy moves from cold to hot.

It may surprise readers to learn that during the  Great Depression, after collapsing from 1929-1933, our economy actually expanded sharply from 1934-1937 (industrial production regained its prior peak), declined during 1937- early 1938, then began another robust recovery that lasted beyond the end of World War II.   

As  summarized by Christina Romer, Chairperson of the Obama administration's Council of Economic Advisers, the early 1930s saw the failure of nearly half the nation's financial institutions, yet the recovery years of 1934-1936 displayed increases in real GDP of 11%, 9% and 13%, respectively and the unemployment rate fell from 25% to about 15% during that period.  Clearly, that financial crisis, which was far worse than that of today, did not prevent our economy from recovering rapidly.

During 1937- early 1938, our economy fell into another decline.  Most monetary economists, like  Milton Friedman,  Anna J. Schwartz and Allan Meltzer, placed blame for this on the Federal Reserve Board, which tightened money by raising banks' reserve requirements in late 1936.   Keynesian economists, like  Paul Krugman, tend to blame the federal government's cutting back on fiscal stimulus, which also occured.  Christina  Romer sides with the monetarists in crediting the subsequent expansion of the money supply with pulling us out of the Depression, while stating recently that the New Deal was too small a program to have been effective.  She points out that the current stimulus package's fiscal effect is about twice the size of FDR's New Deal, as a percentage of GDP, and will last twice as long.

By 1938-1939, fiscal and monetary policy had turned expansionary, again, and the economy expanded rapidly through and beyond the Second World War.  Examination of economic data from the Great Depression and its aftermath shows that a financial crisis can cause an economic calamity, but there is no evidence that recovery from such a debacle is necessarily sluggish, indeed the evidence is to the contrary.  Due to the cloud of pessimism overhanging our national outlook as expressed by most observers, I look for the nascent economic recovery to surprise on the upside.  In other words, a chicken in every pot, as the economy moves from cold to hot.

MORE THAN JUST GREEN SHOOTS

Several recent economic reports showed real growth in some areas of the economy.  The green shoots famously noted by Ben Bernanke were mostly signs of optimism for the future, but lacked immediate realtime impact on our economic wellbeing.  Or they were a slowing in the rate of decline (such as for auto sales), instead of actual increases.  So, here is a list of signs of real growth reported within the past thirty days:

1)  Housing Industry: 

    (A) Housing starts rose, both single-family and multi-family

    (B)  Sales of existing homes rose

2)  The Consumer:

     (A)  Consumer spending rose (although retail sales,within that, continued to fall)

     (B)  Personal income rose

3)  Manufacturing:

     (A) Durable goods orders rose

     (B)  The factory production component of the ISM survey rose above 50, implying expanded production (although the overall index is merely contracting more slowly).

     (C)  Average manufacturing workweek hours rose (even as average workweek for the overall economy fell).  This manufacturing component of the monthly employment report is one of the two employment indicators within the Index of Leading Econmic Indicators.  The other one is initial claims for unemployment insurance, which has been improving since April.

As these and other indicators continue to strengthen, the economic recovery, which has already begun, will become more apparent.

EMPLOYMENT DATA BULLISH FOR STOCKS

Recent employment data supports optimism regarding both stock prices and the economy.  While the U.S. shed over 400,000 jobs in June, job losses typically continue for several months after recessions end.  Job figures like employment and  the unemployment rate do describe current conditions, but tell us nothing about the future course of the economy. 

For guidance on when the economy will turn up, we look to the Leading Economic Index (LEI).  This predictor of economic turning points is comprised of ten indicators, two of which are stock prices (we can see these every day) and initial claims for unemployment insurance (announced weekly at 8:30 every Thursday morning).  Here, we find our basis for optimism.  The LEI has risen sharply two months in a row.  And the major employment indicator within the LEI has also performed positively.  Initial claims for unemployment insurance (four-week moving average) peaked in early April at 660,000.  They have declined choppily ever since, and last week recorded a recent low at 615,000.  The other labor market indicator within the LEI, average weekly hours worked in manufacturing, improved slightly in June, as well.

So, here is the stock market/recession/employment  sequence:  1) stock prices rise, the LEI rises and intial claims for unemployment insurance decline,  2) the recession ends, then, a few months later... 3) employment starts to increase and the unemployment rate falls.  Stock prices likely will rise as unemployment claims continue to fall and the economy pulls out of recession.  When employment losses turn into gains and the unemployment rate begins to fall, the March low in the stock market and the end of the recession will be distant images in the economy's rear view mirror.

Hyperinflation Not on the Horizon

The Federal Reserve has headed off a deflationary depression for the U.S. economy.  It did so by printing money and pumping it into the banks and the credit markets.  Now, signs of an impending upturn in the economy are increasing and even economists Nouriel Roubini and Paul Krugman have said that the recession is likely to end this year.  However, the vigorous creation of money has aroused fears among many that inflation will arise and quickly get out of control and turn into hyperinflation.
Analysis of the money supply data shows that such fears are premature.  The record-breaking expansion of bank reserves (about 900%) simply has not leaked out in a meaningful way into M2, which is the broad money supply used by businesses and consumers.  This measure of money, M2, has increased by 9% in the past year, but the rate of increase is decelerating: 6% (annual rate) since the end of last year and only 4% over the last three months.  This is way lower than in the early 1980s, when all measures of money were growing at more than 10% and their rates of growth were accelerating.  Then, double digit money growth led to double-digit inflation.  It is possible that the fear-mongers of inflation will be right in the long run, but it is way, way too early to jump to that conclusion at this point. 
Critics of the Fed believe that as the economy recovers, the Fed will be afraid of angering the administration and the public by raising interest rates too soon, which could torpedo the upturn (the Fed made that error in 1937 and turned a recovery into Chapter 2 of the Depression).   They claim that keeping rates low for too long will allow inflation to gain traction.  They overlook the fact that Bernanke can first head off inflation by undoing quantitative easing (sell into the market those securities that had been purchased with the newly printed money, and then retire the moneys received for those securities).  This can be done quietly, without generating criticism since no interest rates need be increased.  Rates will remain stable as private capital from a growing economy replaces that of the Fed.  The Fed’s next step will then be to raise rates, but they are at such a low level now (0 - 0.25 %) that it is hard to see how raising the Fed Funds rate sharply to 1% or even 2% can be feared as providing much of a brake on a growing economy.
Once the economy gets rolling, it will likely gain momentum for three reasons: (1) there is much unused capacity and production can be increased quickly and easily, (2) inventories are very low and have been dropping for months.  Production will have to increase just to match the present low level of sales in many industries.  As sales increase, production will have to increase even more to bring inventories to a higher level.  (3) Employers who have cut employment to the bone will have to hire early in the business cycle to meet demand for their products and services.
As the economic recovery takes hold, the Fed will sop up much of the newly printed money, then gradually raise interest rates.  Those concerned that inflation will get out of hand would do well to monitor the M2 money supply as a necessary precursor of inflation.

RECESSION'S END IS NEAR AS JOBLESS CLAIMS DECLINE

Initial Claims for Unemployment Insurance for the week ending May 16 were 631,000, down 12,000 for the week. Importantly, the four-week moving average of Initial Claims has resumed its downward course.

After a tick upward last week, it has now fallen five of the past six weeks, giving support to the likelihood that the recession will end very soon.

The four-week moving average peaked April 4 at 660,000, then declined over the next four weeks.

That marked the first time since the summer of 2007 (before the recession even began) that the moving average had fallen four weeks in a row. Based on past economic cycles, four consecutive weekly declines usually presage the recession's end within two months.

Surprisingly, last week's figure broke the string of four declines. That was unexpected; once the initial claims figures start to drop, they usually keep going down, steadily.

Today's data revealed that the four-week moving average has now dropped to 628,500, confirming the fact that we have passed the peak in initial claims and our economy is likely to come out of this recession soon.