MONEY, MONEY, MONEY:

Milton's on the money: Milton Friedman believes the Federal Reserve can afford to be very generous with the money these days. The brilliant economist is right again. (Larry Kudlow, 10/07/02, Town Hall)

Over the past 10 or 15 years, some supply-siders have ridiculed Friedman's brand of monetarism. But they shouldn't have. In Friedman's proven view, shifts in the money supply affect changes in national income (as measured by the gross domestic product) and prices. While the speed at which money changes hands is seldom exactly steady, the relationship between money and GDP holds up over long periods of time -- and sometimes even shorter periods of time.

Perhaps today's disappointing economic recovery and stock-market decline can be traced to a recent growth slump in the money supply.

Here are some facts. The Fed provides the raw material (or cash) to create the monetary base. The base, in turn, feeds or restrains the growth of M2 -- a conventional measure of money that includes currency, checking accounts, money-market funds and savings accounts. From the autumn of 2000 to the autumn of 2001, this measure of money roughly doubled to 12 percent from 6 percent, as the Fed sent fresh cash into the economy. This set the stage for economic recovery in 2002.

However, from the autumn of 2001 to the summer of 2002, M2 growth slipped all the way down to 4 percent. This nine-month decline in money growth parallels the devastating stock-market plunge and raises big questions about profits and the whole economic rebound.

The money slump has also released a new round of deflationary pressures. As Friedman has written throughout his career, money matters for prices as well as GDP. Inflation, or deflation, is a monetary phenomenon.

Isn't this an area where the surplus did terrific damage to the economy too, as debt was retired and money thereby removed from the economy? Posted by Orrin Judd at October 7, 2002 2:29 PM