Is Inflation a Clear and Present Danger? No Way 14 comments
-
Font Size:
-
Print
- TweetThis
Brian Wesbury writes in yesterday's WSJ article, "Inflation Is a Clear and Present Danger":
The most painful and frustrating economic policy blunder of the past 50 years was the Great Inflation of the 1970s. Painful, because it was the catalyst for three damaging recessions (1973-75, 1980, 1981-82), all the while eroding living standards and seriously undermining confidence in America.
It was also deeply frustrating. Despite the teaching of Milton Friedman -- which clearly explained that inflation was caused by too much money chasing too few goods -- a combination of bad economic models, denial and political expediency allowed it to happen.
Unfortunately, the lessons seem to be fading. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency.
Brian invokes Milton Friedman's monetarism to explain the inflationary 1970s, but then fails to apply it accurately to today's monetary aggregates (M2 and the monetary base, shown in the above charts), in my opinion.
Exhibit A: During the inflationary 1970s and early 1980s, M2 was growing at double-digit annual rates for much of the time, especially in the three periods circled in red in the top chart above during that period. There was a brief spike of 10% annual M2 growth during the 2001 recession and around 9-11, but M2 has been growing fairly moderately recently, in the 4-7% range for the last 5 years, suggesting that money growth is nowwhere near the double-digit levels required to replicate 1970s-era inflation.
Exhibit B: The monetary base, the "raw ingredient" of money supply and the one monetary aggregate that the Fed can control directly through its open market operations, has been on a contractionary trend since early 2002, almost 7 years ago. From 10% annual growth in early 2002, the growth of monetary base money has declined steadily, and has been around 2% since early 2007. In contrast, the monetary base was growing at around 10-12% annually in the inflationary 1970s.
Bottom Line: Invoking Friedman's monetarist theory (summarized as "inflation is always and everywhere a monetary phenomenon," and "inflation is caused by too much money chasing too few goods") clearly suggests to me that there just hasn't been large enough, recent enough increases in either: a) M2 or b) the monetary base, to fuel a return to the levels of inflation in the 1970s.
In other words, if inflation is a monetary phenomenon, where's the recent money growth that will cause it? It's just not there.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 14 comments:
First of all, what about foreign dollar `reserves', which have been expanding at an unsustainable pace for the past 8 years while we binge on cheap credit? Most of these are held as short term US paper and if they were sold on the open market, the fed would have to buy them up to maintain their low interest rate target, which would send the M2 into the stratosphere.
So foreigners have been soaking up our excess money for far too long. That won't last forever.
Second, you reference money supply RATE of growth, not the actual value. So M2 is growing according to your chart, just decelerating. Well, if our productive capacity as a nation decreases or remains stagnant, any growth in money supply, accelerating or decelerating, will lead to inflation. More $--less goods.
In 1999, M2 was around 6 T dollars. Since China alone has reserves of > 2T.. well you do the math,
Who cares about your theory (maybe St.Peter does) when most people buy not rotten aples or salmonella eggs,most people like to buy Rolex,Diesel jeans,Mercedes and organic food.For those people inflation is not in Bernanke's eyes,it is in their wallets that have too many holes.
Guys,wait for some rebound today in the stock indexes (yesterday I made 7000$ on short side while others were digesting some inflation graphs) then go short.I already hold the trigger on the Dow,maybe it will be sold before you wake up.Yesterday Dow was shorted at 11460 covered 100 points below.
Don't sleep too long please.
Inflation is too much money chasing too few goods. There are no shortages of anything except money. The above people who have commented should sit in Perrys class and clean out their empty heads.
Short run variations in velocity, M2 growth, output and prices will be washed out by using a 10 year CAGR series.
www.mises.org/content/...
Inflation has nothing to do with shortages.
The evidence of inflation is clearly visible in constantly rising prices for a broad basket of goods. Everything from health care to college tuition, from energy to food to gold, is rising year over year.
You better be careful they may send out a team of clowns with toy pistols to silence you. It's not in fashion to be sensible - just like in 2001 (if I may use your words).
i hope we are not suggesting that inflation can only happen when the money supply is expanding in the USA? what about europe, china and india?
inflationary pressures begin when demand exceeds supply. over time, inflation is eased by switching to alternatives.