Two Opposing Takes: Are We Out of the Woods Yet?

Oct. 4.09 | About: SPDR S&P (KBE)

Wow, Jon Markman is very bullish and thinks money is flowing freely. His 'argument' is based on watching news wires and closing his eyes:

I know it's hard to imagine this after last year's calamities. But just keep an open mind. Just read the international news wires for a few minutes, then close your eyes and use your imagination. Can you not see dollars, yen and euros flooding the global financial arteries in the greatest acceleration of deal making, corporate expansion and infrastructure construction in a decade?

Money is on the march -- and money in motion makes everything better.

On the other hand, Jim Jubak, also of MSN, notes that money supply has been falling. Jubak's argument - based on actual M2 data - makes sense that we're not out of the woods yet. I think Markman needs to rely less on anecdotal evidence and should do his homework. From Jubak:

Despite everything the Federal Reserve has done to pump money into the economy (and don't forget the $787 billion stimulus package passed by Congress), money supply as measured by M2 actually declined in the four weeks ending Sept. 14.

And that's because what's called the velocity of money, the speed with which a dollar moves through the economy, has fallen.
That's not unexpected. During the Great Depression, the velocity of money fell 22%. In tough times, people from consumers to bankers sit on more money longer.
But this isn't good, folks. It's a problem big enough to jeopardize the recovery that the economy seems to be building.

Look at what's happened to M2 since it hit $8.39 trillion on June 22:

  • By July 20, M2 had dropped to $8.34 trillion, down $50 billion.

  • By Aug. 24, it was down to $8.28 trillion, down $110 billion.

  • By Sept. 14, the latest data point from the St. Louis Fed, M2 recovered slightly to $8.30 trillion, still down $90 billion from June 22.

Economists who study this data use a four-week moving average to eliminate some of the week-to-week noise. At the worst point in the decline, the four weeks ending Aug. 24, M2 was dropping at an annualized rate of 12%. That's the kind of contraction you get in a financial panic. Not the kind of growth you want to see as you're trying to guide an economy to recovery.