Thursday, October 30, 2008
Should We Fear Inflation?
In addition to arguing over the existence of a "credit crunch," we libertarian economists can't even decide on the sign of price changes over the next six months. (Really, I feel I should go apply at the IPCC.) For example, I'm currently throwing down with Mike Rozeff on the Mises blog about gold prices.
Robert Wenzel has a new post explaining why he is dipping his toes into the alarmist camp. C'mon in, the water's fine! I am quite confident our gurus will do what it takes to prevent price deflation, just like Greenspan did back in 2003. (Folks, they were actually worried about falling prices and paying off the entire federal debt back then! Sort of the central banker's analog to the missile gap. BTW I can't find a link to him warning about the loss of the Treasury debt market, but here is Greenspan in 2001 forecasting that the government would pay off the federal debt.)
Let's review the money supply figures. First, the truly scary monetary base (which includes bank reserves and actual currency). And note that these are bi-weekly, and the units are the % change from the prior data point:
OK that's pretty crazy. In fact, if you do it monthly, you have to go back to a single month in the 1930s with a higher month/month percentage growth than the most recent data point.
"But that's misleading!" say some people. "Sure, Bernanke's pumping in base, but it's just offsetting declines in other components of the total money supply."
OK let's go up one level to M1. It too shows rather healthy growth. (Here the frequency is weekly, and again the units are the % change from the prior data point.)
Now because of the frequency, the above graph is pretty choppy. (If I weren't so lazy I would download the data myself, and then plot it in Excel doing a month/month change, but FRED won't let me do that with the latest weekly data points.) Still, I think you can see that recent growth in M1 is quite high, going back 10 years.
Still, you could say that doesn't imply prices will rise, since people are just sitting on cash. Fair enough. We finally can try M2. (The Fed stopped releasing M3 numbers.) And, just to eliminate one possible objection, we will remove the non-M1 components of M2, and just show the remainder. So the chart below doesn't include anything that M1 counts, namely actual cash and checkable deposits. So I think more than any other item that FRED stores for us, the following chart should give an idea of the "non panic hoarding" money supply as of late:
In the above, note that I smoothed it out by switching to yr/yr growth rates. This actually downplays the most recent data points, because M2 growth was admittedly very low earlier in the year.
Still, yr/yr growth in "Non-M1 Components of M2" has been higher the past few weeks, than during the entire time from about 2004-2007.
Maybe I'm missing something, but when people say, "Aww, you can't just look at those huge spikes in the base, because there's a credit crunch man!" I don't see it. I see healthy growth in M2, and I see un-freakin' believable growth in the base.
P.S. It's late, but tomorrow I will go over this again and clarify the components of the various aggregates.
Robert Wenzel has a new post explaining why he is dipping his toes into the alarmist camp. C'mon in, the water's fine! I am quite confident our gurus will do what it takes to prevent price deflation, just like Greenspan did back in 2003. (Folks, they were actually worried about falling prices and paying off the entire federal debt back then! Sort of the central banker's analog to the missile gap. BTW I can't find a link to him warning about the loss of the Treasury debt market, but here is Greenspan in 2001 forecasting that the government would pay off the federal debt.)
Let's review the money supply figures. First, the truly scary monetary base (which includes bank reserves and actual currency). And note that these are bi-weekly, and the units are the % change from the prior data point:
OK that's pretty crazy. In fact, if you do it monthly, you have to go back to a single month in the 1930s with a higher month/month percentage growth than the most recent data point.
"But that's misleading!" say some people. "Sure, Bernanke's pumping in base, but it's just offsetting declines in other components of the total money supply."
OK let's go up one level to M1. It too shows rather healthy growth. (Here the frequency is weekly, and again the units are the % change from the prior data point.)
Now because of the frequency, the above graph is pretty choppy. (If I weren't so lazy I would download the data myself, and then plot it in Excel doing a month/month change, but FRED won't let me do that with the latest weekly data points.) Still, I think you can see that recent growth in M1 is quite high, going back 10 years.
Still, you could say that doesn't imply prices will rise, since people are just sitting on cash. Fair enough. We finally can try M2. (The Fed stopped releasing M3 numbers.) And, just to eliminate one possible objection, we will remove the non-M1 components of M2, and just show the remainder. So the chart below doesn't include anything that M1 counts, namely actual cash and checkable deposits. So I think more than any other item that FRED stores for us, the following chart should give an idea of the "non panic hoarding" money supply as of late:
In the above, note that I smoothed it out by switching to yr/yr growth rates. This actually downplays the most recent data points, because M2 growth was admittedly very low earlier in the year.
Still, yr/yr growth in "Non-M1 Components of M2" has been higher the past few weeks, than during the entire time from about 2004-2007.
Maybe I'm missing something, but when people say, "Aww, you can't just look at those huge spikes in the base, because there's a credit crunch man!" I don't see it. I see healthy growth in M2, and I see un-freakin' believable growth in the base.
P.S. It's late, but tomorrow I will go over this again and clarify the components of the various aggregates.
Comments:
Bob,
do you see short term deflation followed by massive inflation as a possibility? All central banks are pumping in huge amounts of cash but a lot of people are sitting on it so it doesn't get multiplied as much as usual. But once people believe that things have gotten better, they will start to lend and all that pent up cash will hit us like an inflationary ton of bricks.
do you see short term deflation followed by massive inflation as a possibility? All central banks are pumping in huge amounts of cash but a lot of people are sitting on it so it doesn't get multiplied as much as usual. But once people believe that things have gotten better, they will start to lend and all that pent up cash will hit us like an inflationary ton of bricks.
Jackson,
That's what I've been wondering—and why I don't feel particularly calmed by people telling me not to worry about M0 because the velocity of money has decelerated. Perhaps they are arguing that the Fed can shrink the monetary base to compensate for higher M2 in the future. But what would they sell in order to do that?
That's what I've been wondering—and why I don't feel particularly calmed by people telling me not to worry about M0 because the velocity of money has decelerated. Perhaps they are arguing that the Fed can shrink the monetary base to compensate for higher M2 in the future. But what would they sell in order to do that?
# posted by 
: October 31, 2008 at 9:09 AM
: October 31, 2008 at 9:09 AM
Hey guys,
At this point I am just trying to get a handle on the numbers. I had gotten the impression that M2 had been getting crushed while M1 had been growing, but that's obviously not the case.
In general, yes, the Fed can suck base out just as fast as it pumped it in. Look at this graph (of levels) to see what they did for Y2K and 9/11.
However, I think E.B. is right that this would be tricky in the present situation. Once things get back to "normal," is the Fed really going to dump $200 billion of dubious assets back on the market? That might set in motion the very process that they're trying to arrest right now.
So even if they make an honest effort to suck that liquidity out once it's not "needed," what if they only get 95% of it? That's still a humongous increase in the base.
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At this point I am just trying to get a handle on the numbers. I had gotten the impression that M2 had been getting crushed while M1 had been growing, but that's obviously not the case.
In general, yes, the Fed can suck base out just as fast as it pumped it in. Look at this graph (of levels) to see what they did for Y2K and 9/11.
However, I think E.B. is right that this would be tricky in the present situation. Once things get back to "normal," is the Fed really going to dump $200 billion of dubious assets back on the market? That might set in motion the very process that they're trying to arrest right now.
So even if they make an honest effort to suck that liquidity out once it's not "needed," what if they only get 95% of it? That's still a humongous increase in the base.
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