When we first started publishing the Money Forecast Letter back in the 1970s, there were very few who ever stopped to consider the importance of the Federal Reserve. Back then, most investors – and most economists – believed that money did not matter.
Today, of course, everyone understands that the health of the economy depends largely on how well the Federal Reserve does in managing money, inflation and interest rates. Yet, despite this newfound interest in the Fed, most investors still fail to understand how the Fed’s actions impact the economy, and by extension, their investments.
The Money Forecast Letter has been without peer when it comes to correctly predicting just how the Fed’s policies will translate into real world events.
Take for example the various rounds of Quantitative Easing that have taken place since the Financial Panic of 2008. As you can see from the left chart below, the Fed’s efforts to buy bonds and lower interest rates led to an explosion in Monetary Base. Most Fed watchers, politicians, and investment advisors immediately began warning that the Fed’s efforts to “print money” would inevitably lead to a surge of new inflation.
Because we understand money, we were able to inform our readers that talk of hyperinflation was both reckless and wrong. We told our readers to ignore the growth in Monetary Base and instead concentrate on M2 Money Supply. As the right chart below shows, the M2 money supply – the only money supply that matters when it comes to predicting both economic growth and inflation – was never growing fast enough to spark inflation. In fact, we warned our readers that deflation was the number one worry of our time.
This insight allowed them to anticipate the low levels of growth, inflation and interest rates that so surprised most others.