Yes, We Are In For A Harsh Rogering: Money Supply & The Economy

[roo_ster]

I have been wondering about why, despite the printing of money like there is no tomorrow, that we haven't had much inflation to speak of.

My usual thought is that the drop of gasoline from $4+/gal down into the $1.50-ish price range had the effect of countering the expansion of the money supply.  Such a drop reduced my expenditures on fuel from a $4K/year rate to a $1.5K/year rate.

Well, if that is so, I doubt the buffer generated by the collapse in gas & oil prices will buffer us for long.

Take a gander at the following website, published by the St Louis Fed:
http://research.stlouisfed.org/fred2/data/AMBNS_Max_630_378.png

Specifically, the money supply chart:


X-axis is time (1910-present)
Y-axis is billions of dollars in money supply
Gray vertical bars are recessionary periods
Blue line is money supply

The little blip up ~2000 was the loosening done for Y2K fears.  The thought is hte subsequent tightening by the fed brought on the "bomb" part of the "dot-bomb" earlier & harder than it otherwise would have.

Now gander at the farthest-right recessionary bar.  That near-vertical blue line is not a data-plugging error.   

We are in for a harsh reckoning, possibly a decades-long re-adjustment.

I think I'll plant a garden this year.

[MicroBalrog]

Which money supply measure was used to generate this graph?

[AZRedhawk44]

You know what this graph says to me?

Money supply has to increase as population increases.

We have supply stagnation in the 1930's and a great big old grey bar representing that Great Depression.

The steeper the slope, the longer between recessionary periods.

Look at the top of the slope, just before the recent spike.  It begins to level, as we get a recession.  Despite a fast growing population... or at least "residency."  The money supply isn't keeping up with the fact that 10% of our population consists of illegal aliens.

The spike is drastically too much infusion into the market, IMO, but we do need more money in the market if 20-30 million illegals can come here and purchase homes, cars and other things, while officially not existing to the Great Planners.

Of course, my reading may be just as valid as an interpretation of this, saying that global warming is a function of pirate population.



Moral:  Correlation does not imply causation.

[Nick1911]

That's... interesting.

Paging makattack:  I'd like to know your thoughts on the topic.

[makattak]

Actually, I was planning on holding off until I found more data.

At first glance though- it may be we are only at the beginning of our problems.

AZRedhawk is right about one thing: as our economy is currently built, we must have more money as population increases.

What particularly frightens me is what the 1970's look like. That was the most recent period of money mischief. (term borrowed from Friedman)

In the 70's we tried to manipulate the money supply to keep unemployment down. It worked, for a time. However, the economy adapts to inflationary tendencies and all you end up with is high inflation and high unemployment (Stagflation).

However, the early-mid 70's don't show this level of increase in the monetary base.

You can fool the market for a time (whether people are actually fooled by inflation is another matter for debate, the outcome is the same, though) but it will adjust.

Simple measures of the monetary base may not be the best indicator though.

As I recall, banks are holding more reserves currently. (This assertion needs substantiation, I don't have data on this)

IF the increase in the monetary base has been caused by massive infusion of reserves into banks, which they have not been lending, then we should not see any inflation as the money has to be used to create money supply.

In fact, banks reluctance to lend may be why we have not seen massive inflationary pressures.

If, however, these banks are induced to lend these massive reserves, we would be in for a massive price-level spike.

The graph is interesting and I'd like to see some more data before passing judgement.

It could be rather scary, though.