It's been quite some time since I have commented on this blog.

Now something important has happened.

For the first time since 2006 the growth in Corrected Money Supply (my measure of money) has dipped below 0%.

It first went below 0% in June 2018 (using the latest figures from the St Louis Federal Bank web site. The data keep getting revised for several months which is why my previous post did not capture the fall below zero.) though it was above 0% in June 2019, the latest I am able to calculate.

In September 2006 CMS growth fell below 0% and continued to stay below until August 2007. The Great Recession began in December 2007.

It is to be seen if this time is any different.

Lest the headline surprise some readers I must clarify that I am referring to the US, not India.

Last week, in a column in the Washington Post Matt O'Brien wrote:

"This is the kind of economy that central bankers dream about.

"No, really, they had to dream about it. That's because, other than the late 1990s, we've never seen the confluence of so much positive economic news like we are now. Unemployment, after all, has just fallen to an almost-50-year low of 3.7 percent, and wages are still rising at a more respectable rate of 2.8 percent -- but despite all that, prices have only gone up a restrained 2.3 percent the past year."

In response to the good news, the Fed raised its benchmark interest rate in September 2018 and hinted at one more this year and three in 2019.

How long will these good times last?

The figure below shows the growth rate of Corrected Money Supply (CMS, my measure) since 1961. A month ago the US Bureau of Economic Analysis radically reworked data for a host of measures such as personal consumption expenditure and the personal saving rate. The chart for CMS growth uses the new data. As can be seen, whenever CMS growth falls to zero, it is usually the cue for a crash in one or more asset markets and a coming recession or mini-recession.

In 2015, when CMS growth came close to zero and stayed there for some time there was a mini recession. After that, the CMS growth rate again rose much above 10%.

Since the beginning of 2017, however, CMS growth has been falling steadily and it is now hovering around 2.5% (the figure is for August 1, 2018). The rate hike in September has probably pushed the growth rate of money supply further down.

At the moment, one can safely say that the Fed's plan for three more rate hikes in 2019 will not materialise. The US economy will go into a tailspin much before that.

This blog, which focuses mainly on money supply (using my own measure) has been silent for more than a year.

The reason was that there was little to write about. Money supply growth which had fallen steadily from a high of 22.4% YoY in February 2014 to 0.9% in October 2015 went into reverse gear and rose rapidly.

Since July 2017, however, money supply growth has been again falling. At the end of January this year it stood at 11% and seems poised to fall further when the Fed Funds Rate is raised again. As the graph below shows, when money supply growth draws close to the 0% mark, nasty things begin to happen. We are a long way above that right now.

Since my previous blog post three of my economics papers have been published in Real World Economics Review. Their titles and links are as below:

1. The mathematical equivalence of Marshallian analysis and "general equilibrium" theory
2. A diagrammatic derivation of involuntary unemployment from Keynesian micro-foundations
3. Does the maximization principle break down during recessions?

The graph below shows growth in Corrected Money Supply (my version of money supply) from January 2005 to October 2016.

From January 2014 it fell continuously and showed every sign of falling below the zero mark. But the plunge stabilised in January 2016 and has been mostly growing steadily since April. In October, the latest for which data can be calculated, the growth rate stood at 7.8%.

The reversal looks similar to that which took place in 2013 but that was owing to the Fed's QE. This time there is no QE and in fact the Fed is slowly winding down its balance sheet.

The proper comparison may be with the reversal in growth that took place from the start of 2007 and went on until the recession began. In that episode the growth in money supply may have been because of money exiting the housing market and waiting to be invested in other asset markets. This time too the growth of money supply may be caused by money exiting some asset market (possibly bonds) and being invested elsewhere. Will a crash follow soon?

Attacks on New Classical Economics, Dynamic Stochastic General Equilibrium (DSGE) or Real Business Cycle theory usually focus on their poor record in forecasting or on issues like identification and parameterization. Here, we take a different tack, choosing instead to study the root of New Classical Economics which is General Equilibrium (GE) theory.

We show that (a) Marshallian demand analysis is not any less general than GE theory, and (b) that the unstated assumption of GE theory is that aggregate demand is constant. Together, these two results amount to saying that, shorn of the complicated math, GE theory is equivalent to Marshallian demand analysis. It also explains why the two arrive at identical results on subjects like involuntary unemployment.

Read more at The mathematical equivalence of Marshallian analysis and General Equilibrium theory

A revised version of this paper is available in the December 2016 issue of Real-World Economics Review. See The mathematical equivalence of Marshallian analysis and "General Equilibrium" theory