Inflation With No Growth in M1 For 3 Years in a Row?

There's been a lot of talk and discussion recently about inflation and fears of future inflation, but not a lot of focus on the main and necessary ingredient for inflation: the supply of money.

The top chart above shows that the growth in M1 has been close to 0% for about the last 30 months, since early 2006 (percent change from a year ago). The bottom chart shows M1 growth for the last 50 years.

Bottom Line: Maybe I am missing something, or maybe inflation is no longer a "monetary phenomenon," but if we do have rising inflation in 2008, it would be the first time in at least half a century, and maybe ever, that we had problems with inflation accompanied by NO growth in M1 for three years in a row.

Comments

[Things Come...:]

So you don't believe the numbers?

2008 Jun 11 08:47 AM

[Stephen Met...:]

Price increases occur for two reasons: 1) Excessive money creation, a la the Quantity Theory of Money; or, 2) A reduction in the economy's capacity to expand. In the latter situation, the economy will exhibit low or negative growth and rising prices (stagflation). If we experiencing this, which seems likely, then no growth in M1 is probably a good thing.

2008 Jun 11 08:48 AM

[k612:]

As I understand it, M1 is too narrow a measure. M2 is normally used, but with globalization M3 has value as well. See: en.wikipedia.org/wiki/... , particularly the chart of money supply growth. M3 growth is now estimated by shadow statistics at something around 18%.

2008 Jun 11 10:59 AM

[flow5:]

First, there is no ambiguity in forecasts. In contradistinction to Bernanke (and using his terminology), forecasts are mathematically "precise” (1) nominal GDP is measured by monetary flows (MVt); (2) Income velocity is a contrived figure (fabricated); it’s the transactions velocity (bank debits, demand deposit turnover) that matters; (3) “money” is the measure of liquidity; & (4) the rates-of-change (roc’s) used by the Fed are specious (always at an annualized rate; which never coincides with an economic lag). The Fed’s technical staff, et al., has learned their catechisms;

Friedman became famous using only half the equation, leaving his believers with the labor of Sisyphus.

The lags for monetary flows (MVt), i.e. proxies for real GDP and the deflator, reoccur at constant intervals. Roc’s in (MVt) are always measured with the same length of time as the economic lag (as its influence approaches its maximum impact; as demonstrated by a scatter plot diagram).

Not surprisingly, adjusted member commercial bank “free gratis” legal reserves (their roc’s) corroborate/mirror, both lags for monetary flows (MVt) –-- their individual lengths are identical.

The lags for both monetary flows (MVt), & “free gratis” legal reserves, are indistinguishable (contrary to the aforementioned economic fraternity, e.g., as in Planck’s constant in physics – 6.62607x10 power of-34 joule-seconds). Consequently, forecasts are mathematically infallible. There are no inaccuracies, just non-conforming & unavailable data. It is in a heuristic way, theoretically correct.

The BEA uses quarterly accounting periods for real GDP and deflator. The accounting periods for GDP should correspond to the economic lag, not quarterly.

Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP. Note: roc’s in nominal GDP can serve as a proxy figure for roc’s in all transactions. Roc’s in real GDP have to be used, of course, as a policy standard.

Because of monopoly elements in conjunction with other structural defects (un-competitive markets) ,which raise costs/prices unnecessarily and inhibit downward price flexibility in our markets (notably housing), it is probably advisable to follow a monetary policy which will permit the roc in monetary flows to exceed the roc in real GDP by c. 2 percentage points. In other words, some inflation is inevitable given the commitment of the federal government to hold unemployment rates at tolerable levels (assuming the co-existence of a responsible fiscal policy, etc.).

Some people prefer the devil theory of inflation: “It’s peak oil’s fault.” This approach ignores the fact that the evidence of inflation is represented by “actual” prices in the marketplace. The “administered” prices of the world’s oil producing countries, would not be the “actual” market prices, were they not “validated” by (MVt), i.e., “validated” by the world’s monetary

2008 Jun 11 11:59 AM

[adan:]

though i don't fully understand flow5's comments above, i sense it means inflation is artificially created and stated

so, are we being legally robbed for our own good? :-)

2008 Jun 11 12:11 PM

[User 208515:]

Try to use M4 ou M5. I'll wont like what you'll see.

2008 Jun 11 12:34 PM

[flow5:]

No money supply figure standing alone is adequate as a "guide post" to monetary policy.

The transactions concept of money velocity (Vt) has its roots in Irving Fischer’s equation of exchange (PT = MV), where (1) M equals the volume of means-of-payment money; (2) V, the rate of turnover of this money; (3) T, the volume of transactions units. The “econometric” people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.

The real impact of monetary demand on the prices of goods and serves requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M) (as opposed to Milton Friedman WSJ, Sept. 1, 1983). The product of MVI is obviously nominal GDP. So where does that leave us?... In an economic sea without a rudder or an anchor. A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) (which by definition the Keynesians have excluded from their analysis), (2) an increase in real GDP, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process.

To the Keynesians, aggregate demand is nominal GDP, the demand for serves (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.

But we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M. Inflation analysis cannot be limited to the volume of wages and salaries spent.

To do so is to overlook the principal "engine" of inflation - which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these money flows.

2008 Jun 11 02:05 PM

[flow5:]

The money supply can never be managed by any attempt to control the cost of credit - (Greenspan's held the 1% FFR too long Jun 03 - Jun 04).

2008 Jun 11 02:11 PM