M2 Growth Suggests That 1970s Inflation Won't Return

There has been a lot of concern lately about U.S. inflation, and a lot of comparisons to the inflationary 1970s, but here's why that concern might be overblown:

The chart above shows the annual growth in money supply (M2) from 1969 to 2008, and it is easy to see that money growth in the 1970s was much different than today. Notice the three periods in the: a) early 1970s, b) mid-1970s and c) early 1980s of sustained, double-digit money growth (circled in red). Since the early 1980s, money supply growth has been in single digits, except for a brief, double-digit spike around 9-11, and has been growing at around 4-7% for the last 3 years.

To the extent that inflation is a monetary phenomenon, and to the extent that inflation is related to the growth of M2, inflation can't and won't return to the levels of the 1970s - there just hasn't been enough double-digit money growth to make it happen.

Comments

[Alan von Al...:]

Let's see a chart with M3 or L (total liquidity) or better still a public and private debt series. Sigh. This will become abundantly clear a few weeks from now, but Mark Perry and the Fed are okey-doke as of yesterday.

In a relatively sane world, unpayable debt would be written off, bad firms would die. But the US isn't going to take any strong medicine. Therefore monetary expansion, beyond TAF and TSF, beyond GSE, beyond anything previously discussed, to stave off deflation, bail out the States, and support our troops.

It has long been my conviction that tiny little errors are the rocket fuel of history. The US can't stand any major shock during this protracted bad debt write-down. What if there's a real oil shock, like 1979?

2008 Aug 19 04:26 AM

[CLH:]

Perry --You are right right right. Debt has gone up since the 1930s. It is now being eliminated. Savings will go up as debt goes down. Continue to short gold and commodities. This is a needed correction and a whole generation will learn about saving and not wild spending.

2008 Aug 19 09:02 AM

[neeb??:]

Saving is a very good thing, especially now.

2008 Aug 19 10:00 AM

[Warren B. M...:]

'money growth' such as M2 follows 'inflation' and is further supported by the higher interest rates the Fed ordinarily uses to 'fight inflation.'

2008 Aug 19 11:06 AM

[whidbey:]

You are not looking is the right places. The need for more liquidity to fund housing etc is so great that the Fed and Treasury have little choice but to sell bonds and monetize the debts of government including the bail outs necessary to skirt deflation and unemployment. The unemployment numbers will climb and PE will fall and equities will tank and the money will flow. Be nice to CLH he is everywhere and nowhere. Keep a little gold on hand, it is not over yet. Z

2008 Aug 19 11:08 AM

[Adrienne Go...:]

Oh you mean THIS M2? research.stlouisfed.or... FAIL

I know when *I* am trying to analyze the bigger picture it helps *me* to focus on just a small portion of the picture - not. This is not a realistic indicator.

But of course hindsight IS 20/20

Feb 27 12:34 AM