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Welcome to the World of Volatility

October 31, 2014 in Economics

By Steve H. Hanke

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Steve H. Hanke

My last column “Regime Uncertainty Weighs on Growth” (October 2014) stressed that market participants do not know what the Big Players (Read: governments and central banks) will do next. This regime uncertainty is creating an economic undertow. No wonder there have been so many recovery false dawns.

In the past month, markets have become very volatile. Equity and oil markets are the most notable. Why? Well, regime uncertainty continues to be ramped up. Indeed, Berlin-bashing by Paris and Rome over fiscal austerity has become the latest political rage. On top of that, weak economic data from the Continent and a spat of surprisingly weak U.S. data moved the world’s stock markets. If that wasn’t enough, there were some so-called mixed economic signals emitted from China. We must not forget the International Monetary Fund’s (IMF) World Economic Outlook report that was unveiled at the World Bank — IMF meetings in Washington, D.C. The report contained a major policy flip-flop, switching mantras from fiscal austerity to fiscal stimulus. The volatility mixer was stirred further when the Saudis clarified that they would not cut back on oil production to prop up crude prices. The Kingdom wants to retain, or increase, its market share. To top it off, Ebola has reared its ugly head. All of this confirms what I call the School Boy’s Theory of History: it’s just one damn thing after another.

Let’s examine some of these factors to see just how they contribute to the world of volatility. The relatively weak U.S. economic data are no surprise. The best proxy for nominal aggregate demand is measured by final sales to domestic purchasers (FSDP). Nominal FSDP has never recovered to its longrun trend of 5% since the crisis of 2009. Indeed, aggregate demand is growing at an anemic year-over-year rate of only 3.9%.

Anyone who is properly informed about the economics of money and banking knows why nominal aggregate demand has not bounced back to a trend rate of growth. The money supply, correctly measured by Prof. William A. Barnett’s Divisia M4, is only growing at a year-over-year rate of 2.0%. Money fuels the economy and without fuel, the economy eventually stalls.

In the U.S., bank regulations since the collapse of Lehman Brothers have been ill-conceived, draconian, and pro-cyclical. In consequence, bank money has shrunk in both relative and absolute terms since 2009 (see the accompanying chart). This has forced the Federal Reserve to …read more

Source: OP-EDS

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