WSJ features CFS monetary analysis and data…

This morning’s Wall Street Journal features CFS views and data in “Shadow-Credit Rise Is Good Sign” by Michael Casey on page C3.

The article highlights how CFS data on market finance or “shadow banking” can measure the durability of the recovery and help frame the policy debate in a balanced way.

A few highlights include:

“Seven years after the financial crisis, lending in the so-called shadow-banking system finally appears to have bottomed out, a reversal that could presage a long-awaited uptick in U.S. economic growth.”

“Extrapolations from CFS data show that the level of market finance is significantly below where its post-1967 trend would predict. In other words, a great deal of expansion is needed to bring this market back even to a level projected by its prebubble state. Until then, shadow banking will continue to do far less of the heavy lifting in credit creation than it used to.”

For the full article “Shadow-Credit Rise Is Good Sign,” please see page C3 of this morning’s paper or view

State of the International Financial System: House Committee on Financial Services Hearing

The U.S. House Committee on Financial Services announced a full committee hearing titled “The Annual Testimony of the Secretary of the Treasury on the State of the International Financial System.” The hearing is scheduled for March 17, 2015.

It will be informative to see how Secretary Lew assesses backdoor currency wars (see pages 2, 9, and 10 of the New York Society of Security Analysts presentation).

New! Hyperinflation Book by CFS…

Despite the recent slip in inflation, many ponder a future of unexpectedly higher or more volatile inflation in the wake of extraordinary monetary measures over the last six years. While the Center for Financial Stability (CFS) is clearly NOT anticipating a return to runaway inflation, analysis of hyperinflation reveals lessons worth active study for public officials, investors, and the interested public.

CFS is delighted to release “Studies in Hyperinflation & Stabilization” by Professor Gail Makinen with a foreward by Thomas J. Sargent, co-recipient of the 2011 Nobel Prize in Economics.

Hyperinflation imposes heavy economic costs and undermines political and social stability – especially in emerging and frontier markets. Similarly, study of the evolution and stabilization of hyperinflation offers lessons to strengthen monetary and financial stability in advanced economies (For specific lessons)

Despite fears over the last few years regarding a surprise increase of inflation, CFS has warned against these concerns – based on the results of our Divisia monetary and financial data developed under the leadership of Professor William A. Barnett.

Best wishes into the holiday season and 2015.

Lawrence Goodman

The Economist on “The 70-Year Itch”

In The Economist this week, there is a terrific article The Bretton Woods agreements: The 70-year itch.  Highlights include:

– America learned the benefits of economic co-operation the hard way. Its failure to create institutions to help steer the world economy after the first world war exacerbated the Great Depression and paved the way for the next conflagration.

– Yet today’s pre-eminent powers seem to have forgotten this lesson.

– If John Maynard Keynes were alive, he would sigh not just at the risks in all this economic nationalism but also the huge missed opportunity. Perhaps it is time to send another group of dignitaries to New Hampshire.

The full article is at

The piece is similar to my Forbes column Lessons from the Summer of 1944.

The full column can be viewed at

Taylor on Divisia and Monetary Policy Rules…

Stanford economist John Taylor discusses new approaches to monetary policy rules, highlighting the Divisia index of the money supply in “Policy Rules When Money Still Matters.”

He cites “Interest Rates and Money in the Measurement of Monetary Policy” by Mike Belongia and Peter Ireland – which uses CFS Divisia monetary aggregates.

“Don’t be Fooled by Taper Talk” by Steve H. Hanke

In this article by Professor Steve H. Hanke from Johns Hopkins University, Professor Hanke uses CFS Divisia measures to throw light on the economy. From January 2003 until the collapse of Lehman, the exponential annual trend growth rate for Divisia M4 was 8.79%. Since the Lehman collapse in September 2008, the exponential annual trend growth rate for Divisia M4 has been 0.77%. The decline can be attributed to a drop in bank money. Based on the anemic annual Divisia M4 growth rate of 2.6%, Hanke forecasts that the Fed will be forced to keep interest rates at the lower bound for longer than expected – and perhaps even into 2016.

For those looking to gain an intuitive understanding of Divisia measures and how they differ from the Fed’s simple sum measures, this article is well worth reading.

Read “Don’t Be Fooled by Taper Talk” by Steve H. Hanke.

Interest Rates and Money in the Measurement of Monetary Policy

There is a very interesting, new study by Michael T. Belongia and Peter N. Ireland on interest rates and Divisia aggregates in the measurement of monetary policy.

Peter Ireland is a professor of economics at Boston College; a research associate at the National Bureau of Economic Research; and a member of the Shadow Open Market Committee. Michael Belongia is a professor of economics at the University of Mississippi and prior to that was a research economist and economic adviser at the Federal Reserve Bank of St. Louis.


Over the last twenty-five years, a set of influential studies has placed interest rates at the heart of analyses that interpret and evaluate monetary policies. In light of this work, the Federal Reserve’s recent policy of “quantitative easing,” with its goal of affecting the supply of liquid assets, appears to be a radical break from standard practice. Alternatively, one could posit that the monetary aggregates, when measured properly, never lost their ability to explain aggregate fluctuations and, for this reason, represent an important omission from standard models and policy discussions. In this context, the new policy initiatives can be characterized simply as conventional attempts to increase money growth. This view is supported by evidence that superlative (Divisia) measures of money often help in forecasting movements in key macroeconomic variables. Moreover, the statistical fit of a structural vector autoregression deteriorates significantly if such measures of money are excluded when identifying monetary policy shocks. These results cast doubt on the adequacy of conventional models that focus on interest rates alone. They also highlight that all monetary disturbances have an important “quantitative” component, which is captured by movements in a properly measured monetary aggregate.

CFS Comment: In a well known paper, Bernanke and Blinder (1988) argued that central bank policy targeting credit supply is more stabilizing than monetary policy targeting money supply, if credit demand is more stable than money demand, and visa versa. But the large shocks to credit demand that have occurred since 2007 have caused credit markets to become conspicuously unstable, suggesting that we now are in an environment in which focus on money supply has become more important than focus on credit supply.

Click here to read “Interest Rates and Money in the Measurement of Monetary Policy.”