Calafia Beach Pundit

I’m heading to leave it to others to rip apart the Q3 GDP number (that was a bit disappointing) and concentrate instead on where GDP is headed, from a top-down perspective. Quarterly GDP numbers aren’t very useful, in any event, since they are old news by the time the first estimation comes out, and they are at the mercy of multiple revisions then. The point of watching the economy is to know where it’s likely to go in the foreseeable future, not where it has been. Let’s start with money.

This first chart shows M2 velocity, which is nominal GDP divided by M2. The inverse of the measure is money demand: how much of a year’s spending the overall economy wants to carry, on average, by means of currency, checking accounts, retail money market funds, small time deposits, and savings debris.

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Note that, as the graph above shows, for the past 50 years M2 velocity has been practically unchanged on balance, though they have oscillated up and down in the intervening years. The best story behind the economy’s collapse in 2008 was a huge surge in money demand (i.e., an enormous decrease in money velocity). People thought the ultimate end of the world was nearing, and they also stopped began and spending hoarding cash; the demand for money surged, and money velocity collapsed. The velocity of M2 fell almost 13% from the finish of 2007 through mid-2009, the largest decline in speed on record.

This process has been partially reversed since the economy began growing in mid-2009, as M2 speed has risen 1.9%. Confidence is slowly returning, and folks are starting to un-hoard some of their cash. Nevertheless, the revival of M2 velocity continues to be in its infancy. M2 velocity only fell modestly in Q3/10, as nominal GDP grew at a 4.4% annualized rate and M2 grew at a 5.0% annualized rate.

I suspect that it will be trending higher over the next several quarters as confidence continues to build, but let`s say that velocity is unchanged in today’s one fourth. With M2 currently growing at a 7% annualized rate within the last six months, and at a 8% rate within the last 3 months, we could reasonably expect M2 to rise at least 6% (annualized) in today’s quarter.

If it does, and velocity remains stable, that could imply a 6% nominal rate of development for GDP in Q4/10. Of course, if velocity up picks, nominal GDP could grow even more then. Furthermore, if inflation in today’s quarter remains at the 2% pace of Q3, then we’re able to see real GDP growth in Q4/10 of 4% or more.

In this last graph I’ve plotted the amount of real GDP against a 3% pattern. I think it is possible for development to surpass 3%, especially in the wake of next week’s elections. Bush tax cuts. This will lead to a much-needed business confidence boost, which in turn should unleash at least a mini-surge in new investment and new careers, not forgetting a lift to M2 velocity.

Thanks for departing your comment. I have bought some magic cash, actually, but only from an area coin shop. They sell at current market price as well as buy at market price back again. Also, I’m glad you didn’t get taken for a ride! This is precious. – Deni Edwards rails against silver buzz and Goldline and sponsors on this article?