Thursday, August 21, 2008

M1, M2, Real GDP and CPI Growth: 1970s vs. Now

The chart above shows a comparison of the percentage growth in M1, M2, Real GDP and CPI during two ten-year periods: July 1972 to July 1982, and the most recent 10-year period from July 1998 to July 2008 for M1, M2 and CPI; and 1972:QII to 1982:QII and 1998:QI to 2008:QII for real GDP.

What the data show is that:

1. The percentage growth in M1 was about 3X greater in the 1972-82 period than the 1998-2008 period.

2. The percentage growth in M2 was almost twice as high in the earlier 10-year period.

3. Real GDP growth was roughly the same during both 10-year periods, but slighly higher in the most recent 10-year period.

4. The percentage increase in prices during the 1972-1982 period (132.7%) was almost 4X greater than the increase during the last ten-years (34.8%).

Despite the burst of monetary expansion in 2001 when M2 grew slightly above 10% for three months (calculated from the same month in the previous year) in response to the recession, that monetary expansion 7 years ago wasn't anything like the monetary expansion that took place between 1975 and 1982, when M2 growth exceeded 10% in 45 different months, and exceeded 8% in 115 months between the early 1970s and 1983.

Bottom Line: We're not anywhere close to the monetary expansion and subsequent inflationary environment of the 1970s, and since it's been 7 years since the very moderate monetary expansion of 2001, we won't get there anytime soon.


4 Comments:

At 8/22/2008 2:10 AM, Blogger Omer Faruk said...

and why do we experience high inflation then?

 
At 8/22/2008 3:37 AM, Blogger juandos said...

"and why do we experience high inflation then?"...

Hmmm, we are?

So I know we are seeing some inflation, it was most notably at the gas pump but that seems to be backing off...

I keep hearing about how high the cost of food is but living in the St. Louis, Mo area I've not seen any real big jumps in the price of any sort of food bought at the local grocer chains...

In fact the I've seen the cost of milk, eggs, pork, and hamburger go down over the last few weeks...

Bread has gone up... Clothing prices locally for me haven't changed much though it has inched up a small bit...

I do see it happening in resturants though...

Could this "high inflation" be more pronounced in certain parts of the country and not in others?

 
At 8/22/2008 5:06 AM, Anonymous OBloodyhell said...

> Could this "high inflation" be more pronounced in certain parts of the country and not in others?

juandos, it's all in their heads, baby. All in their heads.

> 2. The percentage growth in M2 was almost twice as high in the earlier 10-year period.

And, unlike the 70s, the actual economic output of the country has justified that expansion during that time period, which suggest that the defacto increase in comparison to the actual wealth of the nation is much, much lower.

M2 should expand as wealth does. It's when it's out of step with wealth increases that it ties to inflation.

 
At 8/23/2008 2:12 AM, Blogger jest said...

juandos-

inflation has been seen in just about everything including:

health care
tuition
food (http://www.bloomberg.com/apps/news?pid=20601087&sid=aGZ5wqFMmUS4&refer=home)
energy
home prices (even after the drop, they are still unaffordable to most)

these are all the necessities of life.


obloodyhell-

our economic "output" was really consumption paid for with IOUs. therefore the economic "expansion" you speak of was made at the sacrifice of *future* economic growth as we pay the money back, with interest.

wealth and economic growth aren't determined by money supply, otherwise we wouldn't be at the verge of a global slowdown.

 

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