Have you seen M3 lately?
For all the talk about inflation appearing sometime in our not-too-distant future and, according to Milton Friedman, rising prices still being a monetary phenomenon, you sure don’t hear too many people talking about the broadest measure of the money supply – M3.
Reconstructed over at nowandfutures for about the last three years after the Federal Reserve discontinued it, much to the chagrin (or, maybe, delight) of those conspiracy minded individuals who viewed the move as a cover-up on the grandest of scales, it’s hard to see how consumer prices are going to be bid higher anytime soon, given a chart like the one above.
Of course, if banks ever start lending some of their massive reserves, an entirely different dynamic could quickly develop and the recent trend could quickly reverse, but, fortunately, our central bank leaders have assured us that they’re on top of that particular situation.
ooo
Tim Iacono is a retired software engineer who writes the blog “The Mess That Greenspan Made”. He is also the founder of “Iacono Research” , a subscriber-based investment website focusing on natural resources.
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December 17th, 2009 at 3:33 pm
Have we ever had declining money supply and rising GDP at the same time?
December 17th, 2009 at 3:40 pm
There are two things: Money supply and money velocity. If the velocity is high, the supply can decline and still be expansionary. But the supply and velocity are positively correlated. If you get more of one, you usually get more of the other.
The real question is whether there can be GDP expansion without it all being attributable to expansion in the money supply. The answer is yes. Need only look back to the eighties and nineties. The obverse is true as well. There can be expanding money supply and contracting GDP. Check the seventies.
Money is just a measure. It is a means of accounting for activity. The real truth to learn is that expansions or contractions do not depend on variations in the money supply. Look elsewhere to explain those.
December 17th, 2009 at 4:29 pm
Tangential, but equally interesting is their chart comparing M2 to inflation–both with and without the shadowstats inflation corrections:
http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png
Interesting because if you go with shadowstats, post-correction M2 growth dropped below inflation for the first time in a hundred years.
I give a lot of credence to this kind of long-term data, and this leads me to question the shadowstats methodology.
Yes, maybe things are different now. But maybe the official CPI figures are more accurate, and we can expect them to turn up over coming years and maintain the general pattern of the last century.
December 17th, 2009 at 4:39 pm
That chart is scary. Zero growth and a downward trend in money supply coupled with very low velocity is not the set up for roaring economic growth.
December 17th, 2009 at 5:01 pm
so . . .uh . . .money contraction in a deflationary contraction-
good news- right? lol
December 17th, 2009 at 5:05 pm
> Zero growth and a downward trend in money supply coupled with very low velocity is not the set up for roaring economic growth
What you get with a dysfunctional economic system dependent on increasing debt, faux GDP growth, ponzi schemes and bubbles with politicians kicking the can down the road.
Unless this changes over next few yrs here comes biggest banana republic in the world !
December 17th, 2009 at 5:54 pm
What you get with a dysfunctional economic system dependent on increasing debt, faux GDP growth, ponzi schemes and bubbles with politicians kicking the can down the road.
Well thank goodness it isn’t anything to worry about…..
December 17th, 2009 at 6:53 pm
This M3, and the delinquency rate for Prime mortgages, is the chart to keep your eye on, not “The Dow”.
D-Train™, baby.
December 17th, 2009 at 7:48 pm
14 billion… Billion? How can you take a chart seriously that doesn’t get the unit right?
December 17th, 2009 at 7:53 pm
If the supply of money goes down, and the supply of goods and services goes down a lot more, you can still have increases in prices.
I assume that an increase in prices is what you mean by inflation.
December 17th, 2009 at 8:44 pm
“Unless this changes over next few yrs here comes biggest banana republic in the world !”
And the worst thing is – we don’t grow a lot of bananas.
December 17th, 2009 at 8:57 pm
God And I was all ready to gawk at some fancy motor and youse were just talking about money!
December 18th, 2009 at 9:08 am
You don’t really need M3. Since at least 1960, the annual rates of change for M3 and M2 have correlated quite closely. But more importantly, neither has correlated with the annual CPI change for all products. The single closest inflation correlating factor I’ve found is energy prices. [See: http://rodgermmitchell.wordpress.com/2009/09/24/is-inflation-too-much-money-chasing-too-few-goods/ ]
In short, don’t fixate on money supply. To predict inflation, try to predict the price of oil.
Rodger Malcolm Mitchell
December 18th, 2009 at 11:13 am
You cannot get inflation without a mechanism for increased wages. Inflation is a ping-pong game between increased prices and increased wages – you cannot play ping-pong without a pong. The majority of what people spend money on is not pure survival products. If producers increase prices and people don’t have the money to purchase things, they don’t. And then the producers lower the prices again to get rid of the product.
December 18th, 2009 at 12:18 pm
“Of course, if banks ever start lending some of their massive reserves, an entirely different dynamic could quickly develop and the recent trend could quickly reverse, but, fortunately, our central bank leaders have assured us that they’re on top of that particular situation.”
There’s the key. All the money is tied up in reserves right now. Whether you trust the central bankers to know when/how to stymie the potential for massive inflation once banks start lending again is what really matters. My bet is on them getting it wrong to some degree, and with the massive money pumping they’ve been doing, “to some degree” is leveraged quite a bit. I just don’t see how they can seriously control the problem if all the banks start lending again and we now have twice as much money out there. It seems any measure they would take to stop such inflation would in itself cause more inflation.
December 18th, 2009 at 1:11 pm
The value of money is a function of supply and demand. The government can influence supply by taxing and spending. Some economists suggest increasing taxes or reducing spending, to calm inflation, though both are difficult politically, slow and cumbersome to enact.
Demand for money is a function of risk and reward. Risk is some variant of inflation. The reward for owning money is interest. Raising interest rates increases the reward which increases the value. Some economists suggest controlling inflation by controlling interest rates, though there is a school that claims raising rates actually exacerbates inflation by increasing production costs.
Money is a barter instrument, so it cannot be evaluated in a vacuum, but rather in comparison with what it buys. The value of goods and services also is a function of supply and demand. Thus, we may have the situation where there is no change in either the supply or demand for money, yet have inflation, because there is a change in the supply or demand for goods and services.
In the past few decades, the key “good” seems to be oil, changes in the price of which correlate closely with changes in the the CPI. Counter-intuitively, changes in money supply have not been related to changes in CPI, which of late, seems ruled by oil.
Rodger Malcolm Mitchell
December 18th, 2009 at 2:13 pm
The Curmudgeon sez:
“Money is just a measure. It is a means of accounting for activity. The real truth to learn is that expansions or contractions do not depend on variations in the money supply. Look elsewhere to explain those.”
Minsky sez:
Variations in the money supply depend on expansions and contractions.
Bankers and others create money and near money to finance the booms. The fact that such financing “innovations” were screwed up by the housing bust (and actually caused the bust, endogenously) is the cause of the crisis. The Fed continuing at zero or printing more for so long without effect should give us some inkling that they are not able to do what they think they do.
This idea of money being a means to avoid the awkwardness of barter is not correct, or at least does not inform the question of how it is created.
If we see investment return, whether government induced or elsewhere, then we will see the money supply pick up.