1970s Style Stagflation? I Don't Buy It

The topic of stagflation was discussed tonight on CNBC's "Kudlow and Company," and guest John Browne, former member of British Parliament and ultra-stagflationist, argued that we are facing a "far, far worse situation than the 1970s," and further predicted that we are "facing a massive recession."

Larry Kudlow disagreed, and said "Stagflation is a total canard."

The money supply data support Larry Kudlow, not John Browne. The chart above compares the growth of M1 during the peak of the stagflation period of the 1970s (the 85 month period from December 1974 to December of 1981) to the growth of M1 over the last 85 months, from January 2001 to January 2008. (M1 is set to equal an index value of 100 in the beginning month of each sample period.)

Notice that there is a significant difference between the two periods: During the 1970s, M1 grew by almost 60%, compared to a 24% growth during the last 7 years. And for the last 3.5 years, M1 has been flat, with almost 0% growth!

Like Larry Kudlow, when it comes to staflation, "I don't buy it for a nanosecond." Not gonna happen.

UPDATE:

The chart above compares the growth of M2 during the peak of the stagflation period of the 1970s (the 85 month period from December 1974 to December of 1981) to the growth of M2 over the last 85 months, from January 2001 to January 2008. (M2 is set to equal an index value of 100 in the beginning month of each sample period.)

Notice that there is a significant difference between the two periods: During the 1970s, M2 grew by almost 95%, compared to a 50% growth during the last 7 years.

Bottom Line: The money supply data (M1 and M2) don't support the position that we are entering a period of 1970s-like stagflation.

The chart above compares the growth of the monetary base during the peak of the stagflation period of the 1970s (the 85 month period from December 1974 to December of 1981) to the growth of the monteary base over the last 85 months, from January 2001 to January 2008. (The monetary base is set to equal an index value of 100 in the beginning month of each sample period.)

Notice that there is a significant difference between the two periods: During the 1970s, the monetary base grew by more than 70%, compared to less than a 40% growth during the last 7 years.

Bottom Line: The money supply data (M1, M2 and monetary base) don't support the position that we are entering a period of 1970s-like stagflation.

Comments

[EL-GRECO:]

I thought M3 or its equivalent (is it MZM?) was the true measure of money supply growth. Have you tried the excercise with the M3 curves and what result would it give? Why is the M1 curve a better indicator of whether staglation is an issue or not? Thank you.

2008 Feb 22 07:02 AM

[westwest888:]

M1 is not releveant to an inflation discussion in 2008. Credit cards do not fall under M1, M2 or M3 they are not considered to be part of the money supply. Of course M1 is flat, nobody has any money. Negative savings should produce negative M1. What people have is debt and credit.

The 1970s didn't have credit cards like we know today. Seriously, this is elmentary. Delete your post.

2008 Feb 22 07:15 AM

[Eric Balkan:]

The Global Money Trends service reports that M3 has been rising in double digits, currently 18% over the past year. It should be obvious that inflation is a problem given that we've hit an all-time high in oil, soybeans, gold, Euros.... Haven't had we had something like a 70% rise in the price of corn, a staple for chicken and hog feed. How can that not be inflationary? Oh, maybe yacht prices will drop to make up for it.

2008 Feb 22 08:49 AM

[locke:]

My understanding is that M3 is the most useful number, and that is no longer published, making an analysis of inflation based on monetary supply somewhat ambiguous. I'm sure Dr. Perry knows what he is doing, but it would be nice if he addressed the concerns (misconceptions?) about M3.

2008 Feb 22 10:54 AM

[Fed up:]

I agree with the comments. The good Doctor's post needs much further explanation and to also address the issue of M3. With inflation rising and the economy slowing, I don't think the post begins to refute the stagflation argument.

2008 Feb 22 11:51 AM

[flow5:]

The broad downswing in M1 is probably a seasonal trend. The downswing from 12/01/96 (420.1) until 01/01/08 (287.8) is due to other reasons. The cash-drain factor (currency held by the non-bank public) has fallen because of ATM machines, debit cards, credit cards, checks, etc. People don't need to carry & hold "cash-on-hand" because with these devices. They have instantaneous access to their funds in their banks.

The trend rate in the demand deposit component of M1 has fallen because people are now also able to "economize" on the cash holdings due to such financial innovations as ATS accounts, NOW accounts, etc. The shifts (demand deposit/time deposit mix) in the new money & credit that is created is encourged by transfers to higher yielding time deposits.

The extent to which the "underground economy" has grown is unknown. A large number of foreigners with work visas & illegal immigrants are paid their wages in cash and then turnaround and wire their families their funds. I don't know how to track that?

2008 Feb 22 12:47 PM

[flow5:]

One alarming aspect of the Federal deficits is not the effect on interest rates but the effect of high interest rates on the level of taxable income and the volume of taxes required to service a cumulative debt now exceeding $9.1 trillion.

Both high interest rates and high taxes induce stagflation, thus eroding the tax base and increasing the volume of future deficits.

With the eternal decline in the exchange value of the dollar alone, we can expect a vicious level of stagflation that will become an enduring feature of our economic landscape.

Also, Kudlow should know that no money supply figure standing alone is adequate as a “guide post” to monetary policy. Does he really get paid for this?

2008 Feb 22 12:55 PM

[GaryD:]

Funny how you miss the most important money supply indicator, M3. Here is a link to a real economist's web site:

www.shadowstats.com/al...

Looks like money supply is increasing to me!

2008 Feb 22 01:01 PM

[Winston Kotzan:]

Forget the money supply causing stagflation, how about $100 oil and commodities rising across the board... all with the US Fed powerless to stop international demand.

2008 Feb 22 10:25 PM

[jcrash:]

shadowstats? Now, I'll be the first to say I'm a card carrying conspiracy theory guy, but that website would have you believe the US has been in a recession for SEVEN YEARS. Egads man...If you can't stop reading it after that, well, you get what you pay for, I guess.

2008 Feb 22 11:48 PM

[User 155059:]

The question of whether we're going to have a repeat of the 70's is too simplistic, and not particularly useful. A more pertinent question is whether or not inflation will be SUFFICIENT to undermine stock prices. Will DBC, DJP, GLD, and DBA outperform SPY over the next 12 months? There's a good chance that they will.

2008 Feb 23 02:06 PM

[strutzma:]

Dr. Perry,
As an academic, I believe that you'd know that your data are irrelevant to each of your "Bottom Line" statements. As you point out in each statement, the data do not support the argument that we are ENTERING a period of stagflation, however you compare the 70s stagflation data with data from 2001-08. If we are ENTERING a period of stagflation, you should only be able to compare the last few months (perhaps beginning Jan.'08) with the beginning data of the 70s stagflation (1974 per your report's title).
This kind of comparison would have had you laughed out of your dissertation defense... Give us the work you're capable of....

2008 Feb 23 09:04 PM

[E.D. Hart:]

Gentlemen,
Im particularly keen to agree with the statements of strutzma--we may be "entering"--so perhaps this is more like 1968 than it is 1974, and that we have anther, oh, lets say, 15 years of higher inflation ahead of us.

Why have we had such high rate of growth in the money supply, but such little apparent inflation until recently? Two reasons (1) globalization has absorbed much of those excess dollars in currency reserves and global trade, particularly by the Chinese, and (2) the US government supplies bogus inflation data that is beset with fudge factors to make the number come out right.

Agree or diagree with Soros' politics, but I'm inclined to believe him when he says we are entering a new era of the decline of the US Dollar hegemony. Already petrodollar nations are looking for ways to diversify out of the US currency, and this is likely to happen incrementally, between nations at first, and in larger market later. When the world no longer needs our dollars to purchase oil, this will accelerate the decline of our currency.

But it may take a decade, or two.

2008 Feb 24 02:30 AM

[compwiz4u:]

Are you kidding?

Click through to two of your source references "the monetary base" and "growth of M2." They will show we have had explosive monetary growth that dwarfs what occurred prior to 1981.

What has happened is that inflation has shown up in stocks and real estate. Add the value of all those goods to the M1 money supply growth and see how it looks. Low interest rates have been forcing people into those asset classes.

We have been experiencing rolling bubbles of inflation passing through the system and commodities are now having their day. Have you looked at wheat, corn, platinum and some others? They are going stright up.

Shame on you, Dr Perry, for trying to pass this off as serious economic journalism. And please don't ever use Larry Kudlow as a source of solid economic thought. He is a lightweight entertainer.

As much as I hate see the coming hyperinflation, John Browne is, without a doubt, correct.

2008 Mar 02 06:08 PM

[ennuifiat:]

These charts do not compare anything of use. We are entering the stagflation now while 74 through 81 was the 70s stagflation. We should be looking at charts from the 60s to 74 (but it may be hard because we abandon the gold standard in 71) and 01 to 08 to predict anything! 08 and beyond is when the stagflation may occur, and the fed cuts and other government action will be the cause.

To compare 74 to 81 with 01 to 08 is misleading at best :(

2008 Mar 02 06:19 PM