Thursday, January 07, 2010

M2 Growth Falls Below 3%, Lowest Rate Since 1995

M2 growth (data here) fell to 2.65% (on an annual basis) in the week ending December 28, 2009 (updated at 9 p.m.), the first time since the summer of 1995 that annual M2 growth was below 3%, and the lowest growth rate since a 2.4% reading in late July 1995 (see chart above).

The growth rate of the monetary base (
data here) has also been falling, and is now below 20% for the first time since early October 2008 (see graph below):

MP: For those worried about inflation, I think you better tell the money supply to start growing a little faster for your fears to be realized, because deflation looks more likely now than inflation, based on the monetary aggregates? Doesn't it?


At 1/07/2010 4:47 PM, Blogger Scott Grannis said...

If you accept that M2 is a better measure of money demand than of money supply, then any large decline in M2 growth that comes on the heels of very fast growth is a clear portent of rising inflation. Because it means that M2 velocity is rising rapidly; all the money that was accumulated during the panic of '08 is now being released into the economy and that is what can and most probably will support a higher price level.

At 1/07/2010 5:08 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

I work in several industries, and talk to people about rents--industrial, retail, office. All soft and are going to stay soft for years. The recover in the office market just seems years and years off.
House prices will be soft for years (generally).
Wages are dead.
Equipment gets cheaper every year.
Utilities are flat.
Food gets cheaper all the time.
Health care and military hardware and services do get more expensive all the time--there is some inflation there.
Bernanke could unload supertankers of money into this economy, and there would be little or no inflation.
We are skittering along the edge of deflation, and I contend it is cheaper to start a business now than five years ago by almost all measures.
Cheaper rent, and better tech means fewer employees. The secretary is history. Phones are cheap. Information is cheap (internet).
The "problem" is that there is so much effing competition for everything that it is hard to make money!

At 1/07/2010 5:16 PM, Blogger Matt Postiff said...


How do you explain a contrary analysis like John Hussman in the sixth paragraph of Later in the same article he argues that the inflation scenario is several years out.


At 1/07/2010 6:00 PM, Anonymous Benny "Tell It LIke It Is Man" Cole said...

"Inflation is several years out"

Well, okay. Anyone can make a prediction like that, and it is impossible to contest such a statement.

The terrorists could get a nuke within the next several years if we do not prevail in Afghanistan. Obama's man Richard Holbrooke is making this argument now.

There is no way to respond to such arguments, as they are possibly true.

We could also have another recession, leading to deflation and a Japan-style economy without the civility of the Japanese. And our military involvements will bankrupt the United States, leading us to become a No. 2 behind and under China. This could also be true.

But, on a practical level, there ain't no inflation out there.

At 1/07/2010 6:02 PM, Anonymous morganovich said...

scott is right.

we've been building up exceptional amounts of water behind the liquidity dam. if it starts to flow quickly, that's when you see inflation.

money doesn't enter the system immediately, especially in recessions.

At 1/07/2010 9:45 PM, Blogger Scott Grannis said...

I've just posted some extended comments on this issue, including a chart, here:

At 1/07/2010 10:37 PM, Blogger PeakTrader said...

Scott Grannis, every period is different. So, it's difficult to compare. For example, from 1995-00, there was accommodative monetary policy, because the Greenspan Fed knew the economy could expand at a faster rate without accelerating inflation. The Fed was correct. M2 increased with disinflation.

Currently, much potential output is being displaced by government, which is inflationary. However, unemployment remains too high to fuel much inflation. Falling M2 may mean money balances are being depleted to maintain autonomous consumption.

At 1/07/2010 10:46 PM, Anonymous Anonymous said...

The adjusted St Louis Monetary Base has surged since 2008 because of the Fed. The link is here:[1][id]=BASE&s[1][range]=5yrs

What the Fed, Congress, Bush and Obama did and are doing is paying off fat cat bankers and government employees with your life savings. They more than doubled the paper money base reducing the future purchasing power of your savings. They executed a 50% tax without any debate or law on every American's savings.

We will continue to have soft prices until the economy speeds up. This does not negate the fact the our government has hugely expanded our monetary base. Your paper dollars are already worth about half of what they were in early 2008. You might want to buy something real and useful now with them like real estate, gold, foreign stocks etc. If they sit "safely" in the FDIC insured bank for 2-5 years they might not purchase much.

When a currency collapses, lifetime savings become worthless very quickly. Dump your dollars now. Let the banks hold them or send them home to the Fed and the Treasury. Don't be a sucker for politicians and please vote out all of the incumbents. We need a fresh bunch to clean up this mess.

At 1/07/2010 11:29 PM, Anonymous Commo said...

Uh, it's the AREA under that curve that matters with respect to potential inflation. As some have put it, "water behind the dam."

The same is true with your initial unemployment claims chart.

There seems to be a continuing problem here with levels and trends.

At 1/08/2010 1:10 AM, Blogger KO said...

I don't know what the St. Louis Adjusted Monetary Base graph represents, but adjust the graph scale to 5 years or a longer period and there's a massive spike in late 2008. The recent change in rate is meaningless in light of the actual level.

It takes 24 years to go from $200 Billion in 1984 to under $900 billion in late 2008.

Then in just over a year period it jumps to $1,800 Billion and now $2,000 Billion.


At 1/08/2010 1:26 AM, Blogger bobble said...

MP:" . . . deflation looks more likely now than inflation, based on the monetary aggregates? Doesn't it?"

amen, bro!

there's an interesting article in barron's about [the no longer published] M3 aggregate.

a reconstruction of M3 by john williams shows that it is shrinking in real terms.

williams notes: "That's happened only four times before last November, and each time it signaled either the onset of a major recession or a sharp deterioration in a contraction already underway . . . When the year-on-year change in real M3 turned negative, non-farm payrolls turned down on average six months later. In 1970, the lag was nine months; in 1974, seven months; 1981, two months, and 1991, six months"


At 1/08/2010 2:23 AM, Anonymous Anonymous said...

Dr. Hussman has the inflation/deflation analysis wrong. The proof is his fund's poor performance.

At 1/08/2010 2:53 AM, Anonymous GregL said...

Mark, don't you think that that huge hump in the curve was excessive? I do and we need to lower M2 growth to bring M2 back to a reasonable level.

At 1/08/2010 11:28 AM, Anonymous morganovich said...


not worth rehashing this whole argument about CPI measurement again, but i still suspect that the "low inflation" of 1995-2006 had far more to do with altering the CPI calculation to a geometrically weighted hedonically adjusted number. that shift would move even a change in slightly trended noise down. (i know because we tried it)


don't know if you have seen this, but this site may be of interest to you -

it calculates CPI using the old methods and also tracks M3 etc. and has some detailed descriptions of how the methodology around calculating a number of these figures has been altered.

makes for an interesting counterpoint to currently published BLS numbers etc.


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