Tuesday, February 03, 2009

Graphs: The U.S. money supply

M2, the broadest measure of the money supply currently tracked by the Federal Reserve:


M1, a narrower measure of the money supply:


M0, the monetary base (currency plus central bank reserves), the portion of the money supply directly controlled by the Federal Reserve:

19 comments:

  1. Theoretically all of this extra cash would be inflationary, but all of the debt that is floating about also acts like a form of money supply, and as this bad debt gets written off, that part of the money supply contracts.

    For the time being we appear to be in a deflationary phase - the Government can't print money fast enough to offset the debt that is being written off.

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  2. If that is so, then why are prices rising all around us? (Prices going up, smaller product containers for same price, etc. etc.) I know my observations are anecdotal, but I know I've read BH observations that under Clinton the calculation of CPI got changed to make inflation appear lower than it really is for the things most people must purchase.

    I mean I get your theory. It's very sound. But I don't see any indication of deflation in the things we must buy (yeah, maybe big screen TVs are going down in price, but what about food and other necessities ... vs. luxuries.) And most of the money hasn't even been given out yet ...

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  3. Lance - your anecdoted are a bit of a lagging indicator. I see them too, but they are the product of the inflation head fake we saw (mostly driven by energy) in 2008.

    Refuting the anecdotes is the latest CPI figure of 0.2% lowest calculation in like forever. Very well could go negative shortly.

    However, leading theory is (and one i believe in) is that deflation is a short term phenomenon. So long as they keep printing, Bernanke's quantitative easing will work - we will have inflation - its just a question of how soon and how severe?

    My guess (and it really is just that) is we start seeing it in 3Q 2009, and by early 2010, CPI could be close to 6%.

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  4. However, leading theory is (and one i believe in) is that deflation is a short term phenomenon. So long as they keep printing, Bernanke's quantitative easing will work - we will have inflation - its just a question of how soon and how severe?

    I agree. I don't see how such a blunt instrument can be applied so accurately as to avoid inflation. I do see what James is saying though, but I think it's like turning off a spicket the minute a non-opaque container gets filled. You almost have to wait till it starts to overflow to know it's time to shut it off. Now, if you just kept is flowing even after it started to overflow, you'd have hyper-inflation ... In our modern times with our modern measuring tools, unlike intra-war Germany, this won't occur. But we will have inflation.

    I mentioned a couple years ago how I felt like I was seeing the 70s Vietnam era re-run. Johnson's argument that you could both have more guns and more butter (i.e., spend vast sums on military expenditures without affecting consumer production ... and the inflation which resulted) was going to be disproved again. Yes, I understand things are a bit different this time around with the massive global re-alignment of resources and capital, but could have Iraq and the billions spent daily on it have played into this too?

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  5. And I agree with your argument re: deflation. It has to be temporary, because if it is not ... then it will spiral down quickly and we will have to revert to a barter economy since no-one could trust the currency as a means of exchange and savings. But almost by definition this complete downward spiral cannot happen since it's not like we need to re-invent currency and what it does for us ... We'd just switch to another currency (maybe a foreign one ... or maybe a new one ... remember 'new' francs?) Yeah, grave and sustained deflation is a part of the BH myth that I am particularly leery of. And since it is a pillar of the BH belief that prices will fall substantially (everywhere), I think it a good reason why we shouldn't put much fate in the BH theory.

    Yeah, they all think it's occurring ... but when all is said and done they'll realize how really isolated (and tempory) this drop in prices was. The minute inflation really kicks in, the far out burbs will begin their climb back toward where prices were a few years ago. They probably won't get all the way back, but a good part of the way back.

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  6. "when all is said and done they'll realize how really isolated (and tempory) this drop in prices was"


    Riiight. So you think that a >100%increase in prices in the last few years in the DC suburbs was almost entirely based on the actual fair market value increasing? Right now I am looking at a 1400 sq foot townhouse in Gaithersburg for $410,000. The same property was recently almost $500,000. You REALLY think that 1400 sq ft in freaking Gaithersburg is worth that much money?!? Eight years ago it sold for $175,000.

    I plan on waiting for a year to see what happens...

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  7. "Lance said...
    deflation. It has to be temporary, because if it is not ... then it will spiral down quickly and we will have to revert to a barter economy since no-one could trust the currency as a means of exchange and savings."

    Lance, I think you have that backward. In a deflationary environment, the currency is so scarce it is worth its weight in gold. In this case, people will bend over backward in order to get the currency (or as what the banks are currently doing, horde it).

    If we have inflation or worse hyperinflation, the currency does indeed become worthless (everyone has boatloads of it) and we go to the barter system because no one trust the govt will not just print more.

    Case in point, I got a note from the bank of Zimbabwe as a Christmas Present. Face value $100,000,000,000 (cost 4 bucks on Ebay). This is what happens if we have too much inflation, no one wants the currency.

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  8. "we saw (mostly driven by energy) in 2008."

    Except that energy demand and consumption are waaay down. CBS Evening News ran a story about an unemployed Chinese shower curtain factory worker. He isn't working because US demand for shower curtains fell through the floor.

    Shower curtains are made from oil. Shower curtain factories and distribution systems run on oil.

    If the "recovery" does in fact happen, then energy demand and consumption will rise concurrently during a period of engineered inflation.

    What happens to energy prices then?

    If energy demand and consumption do not rise, then we're all hosed anyway.

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  9. Anon:

    While made from petroleum products, you likely burn more petroleum products in your car in one month than are in your entire house. That's not what is driving demand; which is why smarter, reduced use of petroleum products in autos is the much more dire need now; not to mention the state of sovereignty of the US.

    What is driving deflation right now is the decreased demand for practically everything and increased saving by pretty much everyone. You see that borne out in leverage ratios at banks, and reduced mortgage debt (via foreclosure).

    Think of it this way. A house that was bought 100% financed for $800K in 2005 is resold for $550K now with 20% down has "reduced" the money supply by $360K (800-550*.80). That's a 45% reduction in "money". The bondholder "loses" 250K and the new borrower "gives up" 110K out of savings. Leverage ratios are way way down (from infinite to 5X), but the 110K of "liquid" cash is now removed out of the system along with $250K of the illiquid assets.

    BTW, my rent (in SoCal) is lower than it was in 2005. Gas is now also lower. Unfortunately food and some consumer products are more expensive (except for computers, tvs, and camcorders which I have all bought within the last year). One can't look at a single price of an item and declare inflation or deflation, but overall, the general cost of living is lower now than it was one year ago.

    I personally like it as long as I get to keep my job.

    Chuck Ponzi

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  10. A couple of interesting indicators

    Pendings up 6%
    http://finance.yahoo.com/news/Pending-home-sales-post-apf-14235513.html

    Carl Case calls bottom 2009
    http://www.bloomberg.com/apps/news?pid=20601206&sid=aPHG5j9o577o

    S&P call bottom (firming) 2009
    http://outlook.standardandpoors.com/NASApp/NetAdvantage/mkt/OutlookMarketInsight.do?subtype=OWMO&pc=NET&tracking=NET&context=Company&docId=13909857

    Even doomish Chris Thornburg says were close to bottom
    http://www.beaconecon.com/products/Presentations/OCcft09.pdf

    If this continues, expect the treasury to turn off the printing pressess pretty quickly.

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  11. "While made from petroleum products, you likely burn more petroleum products in your car in one month than are in your entire house."

    I don't drive. Period.

    Anon in the SIT_TAY!

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  12. "Anon said...

    I dont drive. Period."

    Well I do!!!

    GOG Fa Shizzle in the SIT_TAY

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  13. GOG, I'll keep an eye out for you. I'll know you're near when I see the yellow Hummer making a right turn from the left turn only lane. :) But really, I don't think you're the REAL Gay Oil Guru. After all, anyone upscale and sophisticated enough to anonymously boast about their "Italianite Design" home would never say "Fa Shizzle."

    Chuck, here's a thought; walk around your home and identify all the things that are made from oil, or arrived there by burning oil. Odds are... its everything. Everything from the digging of the foundation to the plastic beverage bottle in your 'fridge to......you. And the "recovery" depends upon resumption of the consumption of all those things. Cool, huh? Will GM's Volt be able to handle all that?

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  14. "GOG, I'll keep an eye out for you. I'll know you're near when I see the yellow Hummer making a right turn from the left turn only lane. :)"

    Actually its a 1998 Isuzu Trooper II - perhaps the only one with DC registration. I may have just given myself away :)

    "But really, I don't think you're the REAL Gay Oil Guru. After all, anyone upscale and sophisticated enough to anonymously boast about their "Italianite Design" home would never say "Fa Shizzle."

    What can I say, I am a study in contradictions!!!

    Peace out

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  15. G to da O to da GFebruary 04, 2009 9:43 AM

    BTW - I saw your piece on the Gas Station disaster - hilarious. I do cry for all the lost gas, fueling the tanks of the Angels in heaven!

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  16. Time to find a currency to a country that isnt connected to the US buyer to put my cash in.

    Any suggestions?

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  17. "Time to find a currency to a country that isnt connected to the US buyer to put my cash in.

    Any suggestions?"

    Not really - even with all the inflationary pressures, countires around the world are eager to get us dollars - they have less faith in their own currency than we do in ours. Right now, in terms of currency, the USD may be #1

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  18. JackRussel (first comment) is correct.

    For an exhaustive discussion of debt-as-money, see:
    http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

    The money supply isn’t expanding, it’s collapsing.

    Few will agree with that, because M0, M1, M2 are all moving upwards. But none of these include newer debt instruments.

    Debt is traded and transferred like other forms of money. Over 60 TRILLION dollars of credit default swaps (CDS) alone existed at their peak. The value of this form of money is plummetting, and this represents a rapid collapse of the effective money supply that is an order of magnitude greater in the downward direction than the upwards movement of M2 and other measures.

    The Federal Reserve is expanding the more traditional measures of money supply to compensate for the collapse of the total real money supply. The seemingly-reckless expansion of M2 is a result of attempting to compensate for the far-larger collapse of the real money supply.

    Thus, the “asset deflation” is really no different from price deflation and reflects the contraction of the money supply.
    Welcome to 1929, relived.

    What the Federal Reserve is doing (quantitative easing) is absolutely correct, but probably still too small to achieve the needed effect.

    The fiscal stimulus of big federal budget deficits is also perfectly appropriate, but probably too small to achieve the needed effect.

    Steve

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  19. FYI - credit default swaps are not at all like a debt instrument... so really it has nothing to do with money. It is a swap, which is a much simpler term is really a bet that a specific company will default on their bonds. If they defualt, then the person who wrote the swap has to pay up to the person who bought the swap. Has nothing to do with the money supply.

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