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.
Highlights
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 with the hope that the plan would lead to a real GDP growth rate of 7% with an inflation rate of 3%
As monetarists influenced by Karl Brunner, and Allan Meltzer believe that the growth rate of the money stock can have significant effects on the economy
We do not wish to get into the Monetarist, Keynesian, Rational Expectations, and, Supply Side arguments but we note that Andersen and Jordan [1], Keran [2], Laffer and Ranson [3], etc. found that money stock explanators were very significant with t-statistics of 4 and up
Summary
As monetarists influenced by Karl Brunner, and Allan Meltzer believe that the growth rate of the money stock can have significant effects on the economy. In 1968 Leonall Andersen and Jerry Jordan [1] of the Federal Reserve Bank of St. Louis started a significant economic debate with the publication of their reduced form model of the economy. Louis started a significant economic debate with the publication of their reduced form model of the economy It was a regression of GNP versus various fiscal and monetary measures. The first is real GDP growth (Y) versus nominal M2 (X).The result is. The result is better with the regression being In both cases 2Q09-2Q10 M2 growth was substantially below the historical recovery average and so was GDP growth.
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