Monday, August 18, 2008

M2 Growth Suggests 1970s Inflation Won't Return

There has been a lot of concern lately about U.S. inflation, and a lot of comparisons to the inflationary 1970s, but here's why that concern might be overblown:

The chart above shows the annual growth in money supply (M2) from 1969 to 2008, and it is easy to see that money growth in the 1970s was much different than today. Notice the three periods in the: a) early 1970s, b) mid-1970s and c) early 1980s of sustained, double-digit money growth (circled in red). Since the early 1980s, money supply growth has been in single digits, except for a brief, double-digit spike around 9-11, and has been growing at around 4-7% for the last 3 years.

To the extent that inflation is a monetary phenomenon, and to the extent that inflation is related to the growth of M2, inflation can't and won't return to the levels of the 1970s - there just hasn't been enough double-digit money growth to make it happen.

10 Comments:

At 8/18/2008 1:25 PM, Anonymous Anonymous said...

Hey frat boy hope you sold on this little sucker rally in the Dow. Hyperinflation is about 3 years off as the US government has to start printing to pay for the unfunded liabilities of SS and Medicare along with the up and coming GSE and insolvent bank bailouts. We are going into deflation as leverage unwinds over the next couple of years. Look out below.

 
At 8/18/2008 1:45 PM, Anonymous Anonymous said...

From the FRB San Francisco:

Our results for the U.S....suggest that there is no predictive power [emphasis mine] to monetary aggregates when forecasting inflation: whatever information monetary aggregates have seems to be already contained in measures of past inflation, economic activity, and interest rates.

 
At 8/18/2008 2:30 PM, Blogger Thomas Blair said...

Professor,

Why is it that M2 is more commonly cited when M3 is a more complete picture of the money supply?

 
At 8/18/2008 2:37 PM, Blogger Thomas Blair said...

I'm sure you'll say the reason is because M3 is no longer published by the Fed, but it can be pieced together from its constituent pieces, all of which are publicly available.

If one wishes not to do the aggregation oneself, sites like shadowstats.com and nowandfutures.com do the legwork.

 
At 8/18/2008 3:57 PM, Anonymous Anonymous said...

mmmmm, i dunno 'bout that. you're basing your 'no stagflation' theory on published gummint stats, yes? problem is, i'm convinced all government stats are being massaged to reflect whatever makes the bureaucrats running them look good.

this started during the bubba years, and when it was noted that bogus stats could be published with no real consequences to the fudgers, it took off for real under gwb.

as previously noted, the usg doesn't deign to publish m3 anymore. after publishing it for....what? 70 years?...they just decided it was "no longer important". inflation numbers now no longer include the small details of food & fuel. etc.

 
At 8/18/2008 6:03 PM, Anonymous Anonymous said...

The real concern is NOT inflation. It's deflation

The people concerned about inflation are the ones who have no understand of what inflation actually is: the net increase in money and credit.

Go study some real economics (Austrian economics)

 
At 8/18/2008 8:33 PM, Blogger OBloodyHell said...

> Hey frat boy hope you sold ...

Ah, yes, start with an open insult and then proceed from there.

What are your eeeeexcellent qualifications for knowledge and understanding, Mr. "I won't reveal myself lest you find me out to be a congenital idiot who has learned to type correctly... with some help looking over my shoulders, at least".

LOL.

 
At 8/19/2008 8:03 AM, Anonymous Jason said...

This is a great blog article but my boss, Mark Sunshine, has been saying for months that deflation rather than inflation should be the real concern of the Federal Reserve. He has been telling us at company meetings that the real effect of the credit crisis is shrinking money supply and that the Federal Reserve emergency lending facilities were designed to stop an uncontrolled fall in money supply similar to the great depression. And since March he has been arguing that the lack of growth in M2 is a deflationary indicator and that the dollar will rally.

Mr. Sunshine has been public in his predictions and analysis. He is a regular guest on FOX Business Network as well as has his own blog. Some of his blog articles relating to money supply are:

INFLATION, FED POLICY AND THE LIQUIDITY TRAP – THERE’S STILL TIME! – 7/13 (which includes a link to a February, 2008 appearance on FOX) http://www.firstcapital.com/blogs/mark_sunshine/?p=56

MONEY SUPPLY AND ECONOMIC DATA WEEKLY WATCH – 7/20 http://www.firstcapital.com/blogs/mark_sunshine/?p=70

MONEY SUPPLY AND ECONOMIC DATA WEEKLY WATCH – 7/26 http://www.firstcapital.com/blogs/mark_sunshine/?p=73

MONEY SUPPLY AND ECONOMIC DATA WEEKLY WATCH (Part 1 – Money Supply and Federal Reserve Action) – 8/3 http://www.firstcapital.com/blogs/mark_sunshine/?p=79

ECONOMISTS NEED TO CHECK FACTS BEFORE SPEAKING OUT - THE FED IS DOING A GREAT JOB – 8/9 http://www.firstcapital.com/blogs/mark_sunshine/?p=82

YODA AND MILTON FRIEDMAN – TWO TIMELESS CRUSADERS AGAINST THE DARK SIDE – 8/17 http://www.firstcapital.com/blogs/mark_sunshine/?p=86

MONEY SUPPLY AND ECONOMIC DATA WEEKLY WATCH – ANOTHER WEEK OF HAWKISH MONETARY POLICY -8/17 http://www.firstcapital.com/blogs/mark_sunshine/?p=81

 
At 8/19/2008 2:56 PM, Anonymous Curtis said...

M3 Money supply growth has been around 17% all year. I'd say that's pretty inflationary. It mirrored M2 up until 2005, then mysterious started climbing like crazy away from M2. Then the Fed decided it was no longer worth reporting. Sounds fishy and convenient to me.

http://www.shadowstats.com/alternate_data

 
At 8/19/2008 9:42 PM, Anonymous Anonymous said...

To those posting that a stagnant or contracting domestic MS is deflationary, please explain how it is that the GLOBAL supply of USDs can be overlooked as a potent factor in price inflation? Nearly half of the world's population is living with double digit inflation rates! Yes, assets are imploding in the US, but looking only at domestic variables will give you a woefully incomplete picture of monetary dynamics. There's only one closed economy--remember?

 

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