Net Monetary Base vs Inflation (spread)
The growth of the Net Monetary base (M0 minus excess reserves) over inflation is safely in positive territory with a reading of 409. This is a decrease from last month's reading of 478 but is still way above the historical average of 255. The increase in the past six months has been substantial, which is likely to mean that US GDP growth will continue strongly in Q1 2011. However the January results saw an annualised increase in inflation of 4.8% which, compared with an annualised decrease in the Net Monetary Base of -1.6%, sees the spread in negative territory (-642). Nevertheless an occasional monthly decline is common and is not indicative of an oncoming recession.
Note: A negative result implies that inflation is growing faster than the money supply, an event which indicates that a recession will occur within 1 to 36 months (with an average of 12 months)
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Federal Funds Rate vs 10 Year Bond Rate (spread)
The 10 Year Bond Rate has increased over the past few months while the Federal Funds rate remains at near zero. The December spread comes in at 322 basis points, well above the historical average and safely in positive territory.
Note: A negative result implies a highly restrictive monetary environment, an event which indicates that a recession will occur within 4 to 39 months (with an average of 22 months).
Note: If both the first and second graphs are negative at the same time it indicates that a recession will occur within 1 to 21 months (with an average of 11 months).
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Real Interest Rates
Inflation in the past two months has picked up considerably. Index figures and summaries are as follows:
November 2009: 216.956
December 2009: 217.158
January 2010: 217.458
October 2010: 218.970
November 2010: 219.240, 1.1% yearly, 0.1% monthly, 1.5% monthly annualised
December 2010: 220.186, 1.4% yearly, 0.4% monthly, 5.2% monthly annualised
January 2011: 221.062, 1.7% yearly, 0.4% monthly, 4.8% monthly annualised
The Federal Funds Rate remains at rock bottom at 0.17%, which means that real interest rates are still negative at -1.5%. Last month was -1.2%.
Inflation has picked up due to a combination of higher oil prices, higher food prices, and the effects of QE2. It remains to be seen whether these inflationary conditions will continue, and/or have a negative economic impact.
Note: Real Interest Rates are another way of measuring monetary conditions. While inflation implies that cash by itself is losing its value, a negative real interest rate implies that cash accounts in banks are losing value as well (even while earning interest). The IMF strongly recommends that economies keep real interest rates positive to preserve the value of money and to prevent investment bubbles from occurring.
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