Friday, February 22, 2008

Stagflation Update: Monetary Base

Stagflation update: the chart above compares the growth of the monetary base during the peak of the stagflation period of the 1970s (the 85 month period from December 1974 to December of 1981) to the growth of the monetary base over the last 85 months, from January 2001 to January 2008. (The monetary base is set to equal an index value of 100 in the beginning month of each sample period.)

Notice that there is a significant difference between the two periods: During the 1970s, the monetary base grew by more than 70%, compared to less than a 40% growth during the last 7 years.

Bottom Line: The money supply data (M1, M2 and monetary base) don't support the position that we are entering a period of 1970s-like stagflation.

11 Comments:

At 2/22/2008 9:45 AM, Anonymous RejpalCZ said...

Mr. Perry, do you have graph with M3 as well?

I had the discussion today about correlation between CPI and M1 (I argued with one of your older article, where you presented long-term correlation between lagged M1 and CPI).

He argued, that CPI is now measured with different method than in 70s and 80s. Therefore years ago, there was strong relationship between M1 and CPI in past, but it diminished around year ~2000 and now CPI is determined by other factors than M1.
What would you say to that?

 
At 2/22/2008 10:48 AM, Anonymous Anonymous said...

RejpalCZ said...

"Mr. Perry, do you have graph with M3 as well?"

How about this one from this article.

 
At 2/22/2008 10:49 AM, Anonymous iamnorth@gmail.com said...

M1, as a percentage of MX, has been declining since the 1960's and is at an all time low.

M2, as a percentage of MX, has been fairly steady since the 1960's at approximately 45% of MX.

M3, as a percentage of MX, has been increasing since the 1960's and is now approximately 35% of MX.

The significance of M1 decline suggests less domestic spending and re-spending. M3 does not procure goods and services.

Also, discussion of M absent the velocity does not tell the whole story.

 
At 2/22/2008 10:54 AM, Anonymous Anonymous said...

"Economists today typically offer two main explanations of stagflation. First, stagflation can occur when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.[5] Second, both stagnation (recession) and inflation can be caused by inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets. The global stagflation of the 1970s is often blamed on both causes: it was largely started by a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to try to avoid the resulting recession (stagnation), causing a runaway wage-price spiral."

 
At 2/22/2008 11:40 AM, Anonymous RejpalCZ said...

anonymouse 10:48 >>> Sorry, but this graph is not comparable with Mr. Perry's graphs at all. His graphs are normalized and absolutelly clear.

This one has many flaws, one of biggest could be linear Y-axis, which makes almost impossible to compare the growth rate in different decades by eye.

Thanks anyway.

 
At 2/22/2008 11:52 AM, Blogger Jack Miller said...

So the bottom line is what?

Money growth is slow so there should be low inflation. If money growth is slow then the velocity of money must increase or the product of Price x Quantity must fall. In other words, slow money growth, without a jump in velocity will mean either dis-inflation or economic contraction. GDP growth will be low or negative if PxQ does not rise.

What force is going to keep us out of recession? Do we expect lower fed funds rates to cause a pumping up of money supply and velocity concurrent with an increase in Q?

 
At 2/22/2008 1:37 PM, Blogger Flow5 said...

Please explain why you call the "monetary base" [sic] a base for the expansion of the money supply?

 
At 2/22/2008 6:25 PM, Blogger juandos said...

Do you have faith that is NOT jerking us off?

If so consider what he said to the
Committee on Financial Services, U.S. House of Representatives

"After having run at an above-trend rate earlier in the current economic recovery, U.S. economic growth has proceeded during the past year at a pace more consistent with sustainable expansion. Despite the downshift in growth, the demand for labor has remained solid, with more than 850,000 jobs having been added to payrolls thus far in 2007 and the unemployment rate having remained at 4-1/2 percent. The combination of moderate gains in output and solid advances in employment implies that recent increases in labor productivity have been modest by the standards of the past decade. The cooling of productivity growth in recent quarters is likely the result of cyclical or other temporary factors, but the underlying pace of productivity gains may also have slowed somewhat"

 
At 2/22/2008 10:02 PM, Anonymous Anonymous said...

Good one juandos! LOL. You tell'em attaboy! LOL.

"... more than 850,000 jobs having been added to payrolls thus far in 2007 and the unemployment rate having remained at 4-1/2 percent."

ROTFLMAO, so we add 850,000 jobs to payrolls and magically the unemployment rate remains unchanged at 4-1/2%. Bwahahahahaha.

Frickin Moron.

 
At 2/23/2008 5:20 PM, Anonymous Anonymous said...

Anon. 10:02

Now, now. Surely, you can reason your way out of an argument without loosing it and reverting to an elementary school child.

"Frickin moron"

Lighten up and take a few deep breaths. Does it really matter if other people don't agree? It's time to consider an anger management seminar when such arcane subjects as monetary policy get under your skin.

 
At 2/24/2008 9:49 PM, Blogger juandos said...

"ROTFLMAO, so we add 850,000 jobs to payrolls and magically the unemployment rate remains unchanged at 4-1/2%. Bwahahahahaha"...

I'm guessing here but parasites like yourself keep the numbers about where they are...

 

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