Tuesday, June 10, 2008

Inflation With NO Growth in M1 For 3 Yrs. in a Row?

There's been a lot of talk and discussion recently about inflation and fears of future inflation, but not a lot of focus on the main and necessary ingredient for inflation: the supply of money.

The top chart above shows that the growth in M1 has been close to 0% for about the last 30 months, since early 2006 (percent change from a year ago). The bottom chart shows M1 growth for the last 50 years.

Bottom Line: Maybe I am missing something, or maybe inflation is no longer a "monetary phenomenon," but if we do have rising inflation in 2008, it would be the first time in at least half a century, and maybe ever, that we had problems with inflation accompanied by NO growth in M1 for three years in a row.


At 6/10/2008 12:11 PM, Anonymous Anonymous said...

Doesn't inflation also have something to do with M3? (Which is no longer officially tracked.)

At 6/10/2008 12:18 PM, Anonymous Anonymous said...

M1 is flat, but M2 is not. I don't know how to interpret this.

At 6/10/2008 12:30 PM, Anonymous Anonymous said...

M1 only includes physical cash and demand deposits like chequing accounts. It does not include investment savings, money market funds, CD's and a variety of other money saving tools that have become popular in the last decade.
How many people do you know that keeps piles of cash in their chequing accounts or under their mattress?

At 6/10/2008 1:50 PM, Anonymous Anonymous said...

Inflation is NO longer a monetary phenomenon and it will not be for a while because you have a globalized economy and rising demand for commodities. So inflation comes from demand for raw materials primarily, not from increased supply of money.

CRB index is what you ought to be looking at.

American and EU inflation is a spillover effects from Asian boom. The flat money supply attemts to mitigate the effect, but eventually it will fail unless it is accompanied by higher rates and appropriate fiscal policy.

This is early 80's reply in faster mode. Inflation is ready to explode.

At 6/10/2008 2:08 PM, Blogger Matt said...

I feel that correlating a lack of M1 growth to a lack of inflation is disingenuous in today's economy. What percentage of total money supply is M1 money? This link shows around 15% as of 2005. Historically, M1 money was always a much larger component of total money supply.

M2 is a much bigger component of total money supply, and as per the link provided by the 2nd commenter, M2 is steadily increasing.

Finally, to comment on the 1st poster, the fed has stopped reporting on M3 money. Here is a link claiming to accurately track M3 in a post-fed reporing world. That chart shows M3 money skyrocketing - 16% year-on-year growth in M3 money. These stats are, of course, not official, and dubious to say the least, but I think they make for good talking points.

I think the most accurate conclusion shown from these figures is solely that liquid money - M1 money - is not contributing to an expansion of money supply. The ultimate question of whether or not money supply is a driving factor of inflation is not addressed here.

At 6/10/2008 4:43 PM, Anonymous Anonymous said...

I don't pretend to know the answers or want to find the data, but these questions immediately pop into my mind?
1) Why not use M2? 2) What about the demand for money? Are we not seeing a greater demand for money (M2)given the volatility in the financial markets? 3) What about the velocity of money? 4) Milton Friedman, a personal hero, and someone I hate to question, said: 'inflation is always and everywhere a monetary phenomenon.' Is that to say he believed boneheaded policies like Smoot Hawley could not contribute to inflation? Barring trade would be akin to prohibiting productivity growth (or slowing it) and thus the reduced supply of goods could produce inflation. But, I believe on second thought that he ended the thought with something like: assuming all else equal such as the supply of goods. Could the expectation of a Democratic presidency, Senate, and House fearful of trade be contributing to rising inflation expectations?

I don't know. I'm just wondering if someone might have any ideas?

At 6/10/2008 4:48 PM, Anonymous Anonymous said...

Inflation is a decline in the value of a currency. The value of a currency is the intersection of the supply and the demand for the currency. it could very well be that the demand for money has decreased.

At 6/10/2008 5:11 PM, Anonymous Anonymous said...

I don't know what the numbers say or where to find them, but I do know that Mises distinguished in his first book, The Theory of Money and Credit, between what he called "Fiduciary Media" and normally regarded hard money. Fiduciary media would be anything not covered by some sort of guarentee that it can be, in Mises' time, redeemed against gold or silver. So perhaps the fiduciary media realm of money has risen relative to what is regarded as M1. Though I am no expert on money and this is my layman impression of what is going on.

At 6/11/2008 1:21 AM, Blogger thomasblair said...

This argument is disingenuous. M1 accounts for little more than 9% of the total money supply. M2 is currently growing at 6-7%/yr. M3, although no longer officially reported, is not difficult to calculate and is currently estimated at 16% year-to-year growth.



At 6/11/2008 8:21 PM, Anonymous Anonymous said...

"Inflation is NO longer a monetary phenomenon and it will not be for a while because you have a globalized economy and rising demand for commodities."

So perhaps we'd be better off if the dollar was backed by a commodity to match the rising price of commodities - perhaps...GOLD?

[Heh, I hate it when the gold bugs might be right]

At 6/11/2008 11:04 PM, Anonymous Anonymous said...

As Chairman Bernanke has testified physical cash from Europe has been coming back into the US. This puts downward pressure on M1 since this money tends to end up in non-cash bank accounts which are a part of M2. Further, most banks now sweep checking account money into savings type accounts (which again are a part of M2) since there is no reserve requirement as there is with demand deposits.

Three month not-seasonally adjusted (Why would you seasonally adjust money? It either exists or it doesn't)is growing at an annualized rate of 14.7%.


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