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William Carlson, conway Lackman

Last modified: 2011-09-08


Thinking that the economy had recovered in 1936 the Roosevelt (FDR) Administration tried to balance the budget in 1937 by cutting spending and raising taxes and the Federal Reserve caused the money stock to decrease. The result was the giant Recession of 1937-8, at least three times worse than that of 2008-9. Now the U.S. is heading toward fiscal austerity and ending QE-2 (Quantitative Easing Stage 2) with a fragile economy and the banking system causing a liquidity trap. We believe that if the money stock M2 growth rate stays at 3% economic growth will not improve enough to reduce unemployment, and if the growth rate declines there should be another recession. There have been fourteen recessions and a depression since 1924.  Average money stock growth in the year after recession bottoms has been 7% and the average GDP growth rate 6%.  In the seven quarters since the 2009 bottom M2 growth rate has been only 3.06% and GDP growth only 2.79%, both far below the averages. Currently we believe that M2 growth should be at least the historic recovery average of 7%. But there is a big problem. Bank hoarding of excess reserves is blocking monetary growth, a liquidity trap. The problem of extraordinarily high excess reserves has occurred once before, in the 1933-40 recovery from the Great Depression. Here we analyze the initial 1933-36 recovery, the 1937-8 recession, the second recovery of 1938-40, the Japanese experience, and the current attempt at a recovery.