Tuesday, May 18, 2010

Ex-Dallas Fed President is a Fellow Inflation Skeptic

From Bob McTeer (former Dallas Fed president):

"What am I missing? I keep hearing people on financial TV say things like “The Fed keeps pumping out the dollars,” “The Fed keeps monetizing the debt.”

Then I go look up money-growth charts. I can’t find all this excessive money creation that is monetizing the debt and is about to create a breakout in inflation. Not M1; not M2. Where is all this money we keep hearing about?"

MP: This is actually a point that I have been making for awhile now, see CD posts
here, here and here. Along with Bob, I too remain an "inflation skeptic," and the chart above (data here) provides empirical evidence to suggest that money growth is very low and there is just no convincing evidence to suggest that there is any inflationary pressure building in the economy.


At 5/18/2010 11:33 PM, Blogger Scott Grannis said...

The one explanation that fits the concerns of the inflation worriers and the facts of M2 growth is this: perhaps M2 is not, as is commonly believed, a measure of money supply; rather, it is a measure of money demand. Slow M2 growth could therefore reflect a significant decline in money demand, and by inference a significant rise in money velocity. Rising M2 velocity could, despite very slow M2 growth, fuel a rise in the general price level.

At 5/19/2010 8:18 AM, Anonymous morganovich said...

the dollar has rallied nearly 11% since the beginning of the year.

this will help reduce inflation for the time being.

however, this shrinking money supply is going to stress (or is, as scott argues a sign of stress) the economy and the and securities market.

it is quite possible for the fed to be growing its balance sheet aggressively while the whole rest of the economy backs off resulting in little net money supply growth, but with dire implications for the broader system as the fed takes on piles and pile of leverage that private actors (who are more informed) will not. if you are the only buyer in a market, you better be right about its direction or you are really going to get soaked.

a great deal of the previous M2 growth cam from the fed. the fact that without them, demand for money is dropping a great deal is a very bad sign for the economy and for the markets.

At 5/19/2010 8:31 AM, Blogger Junkyard_hawg1985 said...

I don't think money supply is a great predictor of inflation. If I look back at Russia after the fall of the Soviet Union, they didn't correlate well. From 1993-1998, consumer prices went up by a factor of 200 while money supply "only" expanded by a factor of 15. Inflation was far worse than the expansion in money. Conversely, from 1998-2004 prices rose 4X while money supply rose by 8X. Source: http://www.sjsu.edu/faculty/watkins/russianinfl.htm

A bigger factor is people's trust in money. One of the key functions of money is to serve as a store of value. If people lose that trust, inflation will soon follow. With the fed monetizing $300B and now the fear of the ECB monetizing debt with the Greek bailout, people are losing trust in our money as a store of value. That is why gold/silver demand is so high righ now.

At 5/19/2010 8:43 AM, Anonymous morganovich said...

oh, btw - did not mean to imply that m2 is shrinking (yet) but m3 is already contracting at around 5%.

At 5/19/2010 10:42 AM, Anonymous Eric H said...

"A bigger factor is people's trust in money."

Agreed. And when all the bright-and-rosy data continues to be provided by the cartel that has our Congress refusing to audit them and continuing to appoint the cartel's employees/shareholders to oversee said cartel....my trust isn't growing.

At 5/19/2010 11:06 AM, Blogger Benjamin Cole said...



Where? Huge deflationary shockwaves have been sent through the economy by the Great Bush jr. Recession.

Property values whacked in half, office rents down, industrial rents down, retail rents down etc, etc, etc.

Unions make up only a sliver of the US labor force, and wages are squishy soft, and unit labor costs are going down. Unit labor costs have been going down for two years.

Some people waa-waa about rare metal prices, but it is the Chinese who are buying rare metals, and their money supply and economy is booming. The Fed has little influence on gold prices anymore.

The St. Louis Fed has numbers showing a contraction in the money supply. I don't know what they mean, but it certainly doesn't sound like runaway money growth to me.

The Fed is still concerned abut deflation, and rightfully so.

This is good news for the economy and the stock market. I think.

At 5/19/2010 11:07 AM, Blogger Benjamin Cole said...

Oh, and core PPI is running at below 1 percent. There are things to worry about, but inflation is not one of them.

At 5/19/2010 11:38 AM, Anonymous gettingrational said...

I have to agree very much with Scott Grannis. Mr. Grannis has written very compelling articles on his blog on the Velocity of Money. Some economists write that VOM is simply part of an equation on M2 growth. Grannis writes from tbe private market perspective of money being put to work. Thus, inflation will grow as velocity increases because of increased demand.

At 5/19/2010 4:53 PM, Blogger bob wright said...

Is the Fed's balance sheet included in M2?

At 5/19/2010 5:17 PM, Anonymous sprewell said...

McTeer is being intellectually dishonest by only looking at M1 growth over the last year, when it was 1.5 years ago that M0 doubled in a huge spike. Let me make this simple for you and Scott, this is the inflationist theory: the Fed has created more money and put it into exploding bank reserves, which are currently not being lent out. That high-powered money can be used to create more private bank-issued money, such as checking and savings deposits. However, it has not happened yet because the demand for money has gone down. However, as soon as demand comes back, the banks will be tempted to ask the Fed to print the money in reserves and lend it out, which could lead to a M2 spike. The fear is that Bernanke will do what they want and print the money for them, rather than potentially crushing an economic rally. I don't think Bernanke is that stupid, but it is a possibility that cannot be waved away.

At 5/19/2010 7:38 PM, Anonymous andy weintraub said...

Also, the monetary base has risen quite a bit since last year at this time. That could set the stage for a sharp expansion in M2 as the economy revives - assuming it does. Higher taxes next year could dampen that effect.

At 5/20/2010 9:44 PM, Anonymous Anonymous said...

Can someone explain how the movement in M2 (over the years shown) is the opposite of
Fed Debt as % of GDP charted in The Big Picture
citation? Could it be that lots on money is
definitely being printed but because so much capital (stock market etc.) has been lost, it
only Appears that there is no money growth. In the meantime, the supplier(s) of the printed money has the ability to control the economy.


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