Milton Friedman Says Slow M2 Growth Might Cause Recession

Nobel Prize-winning economist Milton Friedman said Wednesday that the economy is very likely to fall into a recession within months if U.S. money growth continues at a sluggish pace.

Friedman said at a seminar here that expansion in the U.S. money supply, as measured by the M2 monetary aggregate, has fallen to 2.5% or 3% in 1987 from around 8% in 1986. If money growth remains at that level, he said, “I believe the odds of a recession in the beginning of next year get very high indeed.”

M2, one of several measures used by economists and government officials to gauge the amount of money in circulation, is composed of cash, readily accessible consumer assets such as checking and money market accounts, certificates of deposit, and some short-term accounts used only by institutions.

Friedman, a monetarist economist who believes that a nation’s money supply is the main influence on its economy, expects the inflation rate to rise to 5% to 7% in 1988 because of high money growth last year. Inflation is now running at 4% to 5% a year.