A recent bobbing-down in demand may be attributed to mortgage refinancing. Refis have been drying up, which may be pulling down individual cash balances. If this is the case, the so-called money supply would also drop. Retail sales bobbed up this spring and early summer, but they now may be returning to a more sustainable trend line. This, too, could be a negative on money demand.
Still, liquidity-sensitive prices that trade in the open market are much better measures of money supplied by the Fed and money demanded by the economy. Market-price indicators like gold, commodities and foreign currencies -- because of the declining value of the dollar relative to each -- strongly suggest an excess liquidity position generated by the central bank. That's exactly the right solution to the prior shortage of liquidity that drove the deflationary economic slump.
Far more important than short-term swings in money measures like MZM is the recent and honest statement by Treasury Secretary John Snow that rising economic growth will bring higher interest rates during the next year or two. Not only did he seize the political high ground by linking an expected interest-rate rise to stronger capital formation -- rather than budget deficits -- he is also signaling acceptance of a stable or even stronger U.S. dollar as part of economic recovery.
This bow to dollar stability is far more constructive than a confrontational battle with Japan and China over artificially manipulating and repegging their currencies, a move that could lead to worldwide financial instability. Fortunately, that ill-conceived idea appears to have died at the just-completed Asia-Pacific Economic Cooperation summit.
Actually, a combination of accelerated domestic economic growth (on the back of lower tax rates and easier money), and the unbelievable rise in U.S. business profits and productivity, suggests the strong likelihood that both the dollar and real interest rates will in fact rise next year. This will all be part of the recovery process.
Hopefully, the Federal Reserve will let fast-forward real-time market-price indicators guide their future liquidity-setting and interest-rate-targeting policies. If the central bank keeps its eye on the right ball, it will remain accommodative to economic expansion, even while real interest rates rise in tandem with the coming investment boom.