U.S. Recovery Regaining Strength

Includes: SPY, UDN, UUP
by: Lok Sang Ho

Based on my work on the effective Monetary Conditions Index, which is estimated using econometric tools relating investment, savings, exports, and imports functions to such variables as interest rate, the effective exchange rate index, stock market performance, inflation expectation, and economic growth of OECD countries we can see that the US was indeed caught in the historically most serious contractionary mode within a short space of time but that this was quickly reversed, thanks to very aggressive and innovative monetary easing policies.

This chart represents an improvement over an earlier chart that was posted in an instablog before and uses more updated data, but is subject to a shortcoming in that it did not incorporate housing prices. But the movements as indicated appear quite reasonable.

By design, the preferred value for the MCI is unity. Values greater than unity suggests expansionary monetary conditions that potentially can cause inflation if fiscal policy is also expansionary. Because of stock market declines early in the year and a strong dollar, the MCI equation suggested a quick decline of the MCI in first half of the year. Return of stock market strength and decline in the value of the US dollar in the second half of the year suggest a strong surge in monetary conditions in recent months. This has dispelled any chance for a return to recession in the coming year.

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