Two entries ago I talked about money supply and the election cycle, last entry  I showed money  supply (M3) growth over a June-June period.  How are the two related? Changes in money supply affect the economy with a lag, usually 6-18 months.  So the money supply growth--or contraction--6 to 12 months before the election will affect the state of the economy during voting time. 

How did M3 change prior to the election under Bernanke? Prior to the 2008 election, it grew rapidly.  Prior to the 2010 election it shrank at the fastest rate since the great depression.  And prior to the 2012 electioin it grew at a very slow rate. Hmmm.

Slow growth in money supply (M3) has been a problem in this slow-paced recovery, and likely a significant cause of the slow
pace of the recovery.   For  the first year +/- of the recession M3 grew robustly year-over-year (YoY),  continuing this growth through June 2009.   For the twelve months ending in June 2010 M3 contracted by nearly 10%, a  contraction unheard of since the depths of the Great Depression. Since the Great  Depression YoY money supply growth has turned negative only for a few weeks, and  even then in the magnitude of a percentage point or smaller contraction. In the past two years M3 growth has
returned to positive numbers, but only about 4%, which is too slow to support a  robust recovery.

But we finally have good news.  For the past two weeks, M3 has exceeded $15 trillion, for the first time in years. We are still below the  peak levels, but there is hope for continued M3 growth that would help economic growth hopefully by the first quarter of  2013.

Today's financial headlines include speculation that the Fed will loosen monetary policy--because of the situation in Europe and the economic doldrums in the US.  I also believe that the Fed will begin to loosen monetary policy.  Not because of the situation in Europe, that has been openly precarious for at least the past year.  Not because of the US economic doldrums, we have been living with a best-case scenario of bumpy growth since 2009.  But because of the election cycle.  With less than six months before the 2012 election, it is time to pump up the money supply.  Stay tune for the actual data on elections and short-term monetary cycles in Bernanke's Fed.