Friday, March 07, 2008

Monetary Mystery?

The top chart above shows the annual percentage changes in the monthly monetary base from 2002-2008. The bottom chart shows M1 (red) and the monetary base (blue) from 2002-2008.

Clearly, the growth rate of the monetary base ("high-powered money") has been slowing, and both M1 and the monetary base have been flat for three years.

Q: How can inflation be a problem when M1 has been flat for three years, and the growth rate of the monetary base has been declining for six years?

9 Comments:

At 3/07/2008 12:51 PM, Blogger spencer said...

money velocity.

By the way it is inversely related to real interest rates. Since they have been falling recently it would be normal to expect velocity to rise.

 
At 3/07/2008 1:03 PM, Anonymous Anonymous said...

Employers Slash Jobs by Most in 5 Years 63,000 to be exact.

Unemployment is down to 4.8 percent as hundreds of thousands of people - perhaps discouraged by their prospects - left the civilian labor force. The jobless rate was 4.9 percent in January.

 
At 3/07/2008 2:15 PM, Blogger bobble said...

m1? does anyone pay attention to M1 anymore. i think M3 is the number to look at.

if only the fed didn't stop publishing M3. i wonder why they did that?

http://tinyurl.com/3bhh8b

 
At 3/07/2008 2:19 PM, Blogger LowTax said...

Dr. Perry, I thought Milton Friedman changed his mind about the usefulness of using the money supply to predict inflationary pressures. I seem to remember that this was his original intent during the 70's but that it didn't work out in practice... but my memory fails me.

 
At 3/07/2008 3:11 PM, Anonymous Machiavelli999 said...

I do not understand today's unemployment numbers and they seem like a statistical outlier. How do hundreds of thousands people leave the workforce yet jobless claims over the past month, although not great, are far from catastrophic. How can 644k people just stop looking for work and we do not see a big spike in jobless claims. Perhaps there is something I am missing. Or maybe the Labor Department is clueless?

 
At 3/07/2008 6:13 PM, Blogger Jack Miller said...

Does the deleveraging of derivatives show up in the money base?

 
At 3/07/2008 9:03 PM, Anonymous Anonymous said...

.


M3 is manipulated by the amount of derivatives traded in the financial sector .... you can trade the same contract 5000 times with no change in value , but M3 goes up , that's why it's been dropped as an indicator , it makes no sense

 
At 3/08/2008 3:25 AM, Blogger juandos said...

"How do hundreds of thousands people leave the workforce yet jobless claims over the past month"...

So just how credible was the reporting on thess supposed job losses? It is an AP story after all...

BTW maybe just maybe better worker efficiency has something to do with it assuming the job losses story is factual...

 
At 3/08/2008 8:10 PM, Anonymous Anonymous said...

Slowing HPM growth could be because of substitution of euros for dollars in cash transactions outside the US -- the Brazilian model effect. But slowing M1 growth points to slowing inflation only if velocity is constant. M1 velocity began to rise at an above-trend rate in 2005 and by 2007 was well above it. The slow M1 growth is consistent with accelerating inflation if velocity is rising.

 

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