Annual M2 Growth Is Nothing Like the 1970s

The chart above shows annual M2 growth rates (monthly data here) based on the average M2 level in each year, except for 2008, which shows the growth rate of M2 from July 2007 to July 2008.

Notice that in the inflationary 1970s period, there were 5 years of M2 growth above 12% (1971, 1972, 1976, 1977 and 1983), 12 consecutive years of above average M2 growth between 1975 and 1986, above average growth in 15 out of 16 years between 1971 and 1986. More recently, we've had five years of slightly above-average M2 growth between 1998 and 2003, and below average M2 growth for the last 5 years.

Bottom Line: Today's inflationary environment is nothing like the 1970s.

Comments

[2houndz:]

Gotta love this Paul guy. Same comments on nearly every article admittedly not having read it. This article is not 150 words in it's entirety. Go away, genius. Did you get that Rolex from Amazon yet? I suppose you got yourself booted off this site under your last screen name with your drivel.

Mark - thanks for providing this chart. I guess we knew this to be true from recent mone supplyreports, but it is helpful to see it with some perspective in relation to the hyperinflation of the 70's.

2008 Aug 24 08:29 AM

[JCC:]

In March 2006 the Fed ceased publishing data on changes in the M3 which is the broadest measurement of the U.S. money supply, the so-called M3. It was expanding at a 10-12 percent annual rate in 2006; however, with the large growth in ABS (asset backed securities) and hedge funds the real growth has accelerated. Some calculations indicated that the growth is roughly 14% or higher.

Couple this with world wide natural resource inflation and peak oil, and we might be facing very heavy inflation, much greater than the 70s. This could well be true even with decreasing demand.

2008 Aug 24 09:59 AM

[Aaron Krowne:]

We have a much larger problem today with dollars abroad threatening to come home to roost; the "endogenous" (US-only) analysis probably doesn't really apply. Consider the exchange rate effects also... if our trading partners allow their currencies to reach their natural levels, prices will increase sharply here.

2008 Aug 24 10:47 AM

[2houndz:]

Both JCC and Aaron make very good points, but I don't know. The level of credit destruction around us seems to be headed toward a crescendo, and the availability of new credit is seriously diminished.

On the residential real estate side I have been afraid for some time that homeowners are simply not going to have the 20% equity that banks are requiring. The stories I'm hearing over the last week or so are beginning to prove that out.

I make a living on the commercial side of the real estate business and I'm seeing projects that are 90% leased with 40% equity and the banks are still draggng ther feet. For those of us who churn out projects with the intent to flip, the inability to leverage kills our IRR, which makes risking capital kinda pointless. I'm no economist, but surely this has a deflating effect on the money supply. I would like to hear from more folks who have a better grasp on this.

2008 Aug 24 12:25 PM

[Did U Think...:]

Childisly simple analysis does not take into account the liklihood of a huge increase in the velocity of money as all those foreigners lose confidence in our money system due to things like FNM and FRE and all the other bail outs that will be placed on not just the backs of US tax payers but of ALL holders of the USD through the magic of inflation.

Think of it like the ice caps melting and raising sea level by 200 feet. Also, you fail to even touch on the part which (diminished) production plays in inflation. When production falls (i.e. recession) relative to the money supply, that is inflationary. You again end up with too much money chasing too few goods.

2008 Aug 25 04:01 AM

[GaryD:]

This guy published the same data 5 days ago, he just changed the formatting of the graph:

seekingalpha.com/artic...

Check out what academic publishers think about this practice (see the section entitled "Ethics" towards the bottom of the page):

www.bioline.org.br/req...

2008 Aug 27 02:09 AM