This seemingly simple question, is not so simple. What is the money supply? How does one measure inflation.
ODL vs M2 Chart Notes
- Other Deposit Liabilities (ODL see description below), is a monthly average.
- M2 is a monthly measure through March.
A Better Definition of Money
The main difference between ODL and M2 is that ODL does not include currency or retail money market funds.
Currency is accepted at an increasingly fewer number of business establishments and simply cannot be used for very large sized transactions. Retail money market funds never became an important medium of exchange. Both are becoming a far less used medium of exchange.
ODL has the additional advantage that it is the main source of funding for bank loans and investments, making ODL both a monetary and credit aggregate. Friedman would not be surprised that the need to change the best definition of what constitutes money would change over the years.
The above three paragraphs from Lacy Hunt at Hoisington Management.
Whether or not one uses M2 or ODL, money supply has generally been decreasing. Why the Fed cannot release M2 more timely is a mystery. It’s July 15, but the latest M2 is for May. One might wonder “What the H is the Fed hiding?”
Definition of Inflation
Some Austrian economists would say increases in money supply do not “cause” inflation, it is the definition of inflation.
If you hold that view, then deflation is the opposite and we are in deflation now.
Some mean the CPI when they refer to inflation. Others, notably the Fed, think the Personal Consumption Expenditures (PCE) price index is the best measure of inflation.
The huge problem with both the CPI and PCE is that it does not include asset prices, especially housing.
OER stands for Owners’ Equivalent Rent, the price one would pay to rent one’s own house unfurnished and without utilities.
We have had two obvious housing bubbles, neither of which constituted inflation to most economists. I find that absurd.
Why all M2 Increases/Decreases are Not Equal
Compounding the discussion is the simple fact that some reasons for M2 rising or falling are far more important than others.
QE expanded M2 greatly. But the main result was lifting of asset prices, especially homes by lowering interest rates.
That is vastly different than M2 rising because of free money stimulus. QE is not directly spendable, free money is.
The CPI Broken Record Continues, Rent Keeps Rising, Otherwise Inflation Is Cooling
For discussion of the CPI, please see The CPI Broken Record Continues, Rent Keeps Rising, Otherwise Inflation Is Cooling
Real Disposable Personal Income and Real PCE
Real Disposable Income and real PCE data from the BEA, chart by Mish.
Real Personal Income Chart Notes
- Real means inflation adjusted by the PCE price index.
- PCE stands for Personal Consumption Expenditures.
- Transfer payments are free money handouts such as Social Security, Medicare, Medicaid, and the three huge rounds of fiscal stimulus.
Excluding transfer payments, real income has gone nowhere. But the huge handouts led to equally huge jumps in income and spending.
The Fed has been struggling with inflation ever since. Demographics adds to the problem.
A huge wave of boomers retirements is in progress. Skilled boomers are now replaced with unskilled Zoomers (generation Z), who do not seem to have the same work ethic.
Do Rising Wages Tend to Increase Inflation?
I discussed the above chart in Do Rising Wages Tend to Increase Inflation?
A huge wave of boomers retirements is in progress. Skilled boomers are now replaced with unskilled Zoomers (generation Z), who do not seem to have the same work ethic.
So, it’s no wonder productivity is in the gutter.
This is the battle the Fed is fighting. Is the Fed winning? For how long?
This brings another aspect of the problem into play.
Productive increases in money supply will not cause consumer price inflation. Free money will. QE tends to create asset bubbles which many do not see as an increase in deflation.
So add it all up, and the answer is “It depends on all of the things discussed above and also what one means by inflation.”
Addendum
A reader commented “I think what most people care about is what does their money buy so let’s simplify the definition.”
It’s still not so simple. Do you own a house already or do you want to buy one?
Are you retired with Medicare paying your insurance or do you buy your own insurance?
The BLS and Fed average it all out ignoring asset bubbles which the reader comment does as well, at least for someone who already has a house, but also someone who has company paid medical care or is on Medicare.
The CPI ignores expenses paid on behalf of someone else (Medicare and company insurance). The PCE includes expenses paid on behalf of consumers but even more radically ignores housing bubbles.
Correction
An astute reader caught an error in my real disposable income chart. It’s now fixed.
Dear Mish
You are right – Obama set up quantative easing, which in reality was an increase in money supply. However QE can bed targeted . Pbamas QE was targeted for banks and insurance companies. Therefore QE eased off their bad debts and let them go back to lending.
QE id 100% a function of the Fed.
Obama had nothing to do with it.
You’d have to agree with Bernanke’s savings-glut hypothesis.
https://www.federalreserve.gov/boarddocs/speeches/2005/200503102/
I do not agree with Bernanke at all.
It’s absurd to equate printing money with “savings”
Savings = Production Minus Consumption
What exactly is produced by printing dollars and dropping bombs thus using them up?
The increase in our balance of payments deficits, 18 trillion dollars since becoming a debtor nation in 1985, contributes substantially to our asset price inflation.
Maybe a simple thought exercise would help? If two people are on an isolated island, and one has a coconut, and the other only has a $10 bill to purchase it with, then assuming the coconut owner is willing to exchange, that coconut is worth $10. If the second only has a $1000 bill to trade with, that coconut is worth $1000. So my definition of inflation is the quantity of available money (in whatever form) as the numerator, with whatever assets or services are available to purchase as the denominator.
In your thought experiment the dollar is actually worthless. Only the coconut has value.
Maybe using the dollar is not a good example. I was thinking along the lines that if there are only two items to exchange on the island, they are only worth whatever the exchange item is. But yes, I agree the coconut is actually useful, while the dollar in this example not so much.
If the coconut is small enough you could use the dollar for wrapping paper.
As a man once said – a dollar is intrinsically worth less than a blank piece of paper that you can write upon.
Check this out Mish:
https://www.macrobusiness.com.au/2023/07/us-credit-crunch-second-worst-in-history/
I would be happy to hear your take on it.
Whereas Bernanke shouldn’t have let bank credit contract, Powell is right in letting it fall.
The measures of inflation changed ~22 years ago so that the GOV could reduce the COLA’s. Big savings for guv, more money for earmarks and hence campaign contributions. They are such slippery b…….
“Economist” is just another word for lobbyist.
During the 08 crisis I would tune in to CNBC and this became quickly obvious.
Both Friedman and Hayek started their careers with great ideas, but over time as they mingled with special interests and corporate think tanks their ideology evolved to more beneficial theories for corporate and high net worth entities.
There isn’t a lot of demand for economists, so they will gravitate to whomever pays – which equates to bias, and that bias is not usually beneficial for the majority middle class.
The Laffer Curve still makes me chuckle.
.
I too get a chuckle out of a lot of economists presenting their case, curves and credentials. I have to chuckle at myself
sometimes.
The pay for advice economists present sometimes compelling cases for future trends, and speculative defensive positions against fiat entropy. The truth is nobody really has a crystal ball, but some do have inside information to get ahead of the curve.
The time to bet is AFTER the fix is in.
We knew the precise “Minskey Moment” of the GFC:
POSTED: Dec 13 2007 06:55 PM |
The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.
10/1/2007,,,,,,,-0.47 * temporary bottom
11/1/2007,,,,,,, 0.14
12/1/2007,,,,,,, 0.44
01/1/2008,,,,,,, 0.59
02/1/2008,,,,,,, 0.45
03/1/2008,,,,,,, 0.06
04/1/2008,,,,,,, 0.04
05/1/2008,,,,,,, 0.09
06/1/2008,,,,,,, 0.20
07/1/2008,,,,,,, 0.32 note the peak
08/1/2008,,,,,,, 0.15
09/1/2008,,,,,,, 0.00
10/1/2008,,,,,, -0.20 * possible recession
11/1/2008,,,,,, -0.10 * possible recession
12/1/2008,,,,,,, 0.10 * possible recession
RoC trajectory as predicted.
Nothing has changed in 100 + years.
Well done!
I remember as I was watching after late 2006.
Actually I started started paying attention with Greenspan’s first 1% and the manufacturing overseas exodus.
ODL. The digital tsunami #1 : from $11B in Sept 2008 to $860B in Dec 2008. The Fed liked so much (Yelen) they asked for more, because Fed controlled the long duration for the first time. Mortgage rates were suppressed, held at a very low level for years.
Tsunami #2 : From $1.66T in Feb 2020 to $3.318T in May 2020.
Dr. Franz Pick:
(1)”government bonds are certificates of guaranteed confiscation.”
(2)“The fact is that the destiny of every currency is devaluation and expropriation.”
(3)“The difficulty with a debt that doubles every ten years is that the interest compounds to the point that it can no longer be paid out of the current revenues. Once the interest itself is debt financed, the compounding accelerates.
That’s why folks subscribed to Dr. Franz Picks’ “Pick’s Currency Report”, a monthly newsletter, and “Pick’s Currency Yearbook” (90 currencies each year).
I have always been in awe of debt financed interest payments.
It gives “bootstrap” yet another meaning.
As Dr. Philip George states: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
I don’t see any difference here between “hands” and “deposits.”
Transaction’s velocity is defined as debits to deposit accounts. This definition is more precise.
Lacy Hunt thinks currency should be excluded because it doesn’t contain large payment amounts.
I agree with Mr. Hunt most of the time, but the currency question does depend upon which drug dealer or foreign government you are dealing with.
Yeah, without a Central Bank Digital Currency, there’s a big black market.
“How Big Is the Underground Economy?
Estimates vary widely, but some put the underground economy at 11% to 12% of U.S. gross domestic product (GDP). In the third quarter of 2022, U.S. GDP was estimated at $25.7 trillion, which puts the underground economy at more than $2.8 trillion.”
All monetary savings, income not spent, originate within the confines of the payment’s system. The source of interest-bearing deposits is non-interest bearing deposits. DDs are just shifted into TDs within the system. All the deposits are created ex-nihilio by the Reserve and commercial banks.
Unless monetary savings, income held beyond the income period in which received, are expeditiously activated by their owners, saver-holders, a dampening economic environment is fostered, i.e., secular stagnation. In the current situation, we have the opposite scenario, where TDs are being activated.
Please define the length of “the income period in which received.” Thank you.
You and Friedman have the same concerns. I use monthly figures.
Link
https://www.jstor.org/stable/2548929
The “demand for money” has fallen by 18% since C-19. This has increased the transaction’s velocity of money (not income velocity). See M2/GDP
https://fred.stlouisfed.org/graph/?g=eTtE
re: “We have had two obvious housing bubbles, neither of which constituted inflation to most economists. I find that absurd.”
Valuations driven from loan collateral, generally depend upon Gresham’s law: “a statement of the least cost “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable (most widely viewed as promising), aka, the Cantillon Effect.
The emerging asset bubble would have been conspicuous had the G.6 Debit and Demand Deposit Turnover release had not been discontinued in Sept. 1996 – as both new and existing real-estate transactions would have been reflected big time, in an expansion of bank debits.
There have been quite a few inconvenient series discontinued at the Fed over the past ten years or so.
M3 wasn’t one of them.
This rolling gDp represents, once again, “The Case of the Missing Money”
https://www.brookings.edu/wp-content/uploads/1976/12/1976c_bpea_goldfeld_fand_brainard.pdf
When the stock prices exceed net tangible assets of public corporations issuing the shares, does that represent asset inflation? I would think so.
Are U.S. treasuries “assets” subject to inflationary pressures? Or are they merely tokens of debt, owed by the federal government to the bond purchaser?
Both are a bit akin to holding a far dated lottery ticket.
Currently they have only future potential and some residual value.
As I said: The only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. The FED will obviously, sometime in the future, lose control of the money stock. May 8, 2020. 10:38 AMLink
Link: Daniel L. Thornton, May 12, 2022:
“However, on March 26, 2020, the Board of Governors reduced the reserve requirement on checkable deposits to zero. This action ended the Fed’s ability to control M1.”
This is just as how Shadow Stats reports it: “The most-liquid “Basic M1” (currency plus Demand Deposits) held 118.1% above its Pre-Pandemic Level and is increasing year-to-year,” I.e., velocity is increasing.
Link: The G.6 Debit and Demand Deposit Turnover Release
https://fraser.stlouisfed.org/files/docs/releases/g6comm/g6_19961023.pdf
Anyone that thinks any figure other than DDs is important can’t read.
Re: “The main difference between ODL and M2 is that ODL does not include currency or retail money market funds.”
I agree with both. But watching the cash/drain factor is important as it turns with economic junctures.
The problems with Shadow Stats, TMS, Divisia Aggregates, Lacy Hunt, etc.
is that they get the distributed lag effects wrong.
But contrary to Lacy Hunt, banks don’t lend deposits. Deposits are the result of lending/investing. That’s one reason why the Austrian school, as cited by Rothbard-Salerno, money supply measure (TMS) is more accurate in that it excludes small time-deposits. And the FED ignores large time-deposits completely (the Feds’ Ph.Ds. can’t perform double-entry bookkeeping on a national scale).
It’s stock vs. flow. That’s why Dr. Philip George’s “The Riddle of Money Finally Solved” works. “For nearly a century the progress of macroeconomics has been stalled by a single error, an error so silly that generations to come will scarcely believe that it could have persisted for as long as it has done.” & “The logic was that such precautionary holdings are not intended to be spent and hence do not qualify as money.”
Divisia aggregates shows a contraction, negative rate of growth, too. But the shifting of deposits from the banks to the MMMFs activates monetary savings, increasing velocity. It increases the supply of loan funds, but not the supply of money.
Aggregate demand is still too high. But the trend is decelerating. Without further contraction in “means-of-payment” money, there will be no recession this year.
“What the H is the Fed hiding?”
It’s the Keynesian macro-economic persuasion that maintains a commercial bank is a financial intermediary. The Keynesian economists have achieved their objective, that there is no difference between money and liquid assets. The Gurley-Shaw thesis. I say its conspiratorial, led by the ABA.
The demarcation was in 1965, when the interbank demand deposits reserve requirements were removed for the member banks.
That’s when William McChesney Martin Jr. re-established stair-step case functioning (and cascading), interest rate pegs (like during WWII), thereby abandoned the FOMC’s net free, or net borrowed, reserve targeting position approach in favor of the Federal Funds “bracket racket”.
I have described boom times as when a Society or an Economy lives above it’s means. A recession being a time when a Society or Economy lives within it’s means. I would imagine that the same quotient could be applied in reference to inflation. The question then is, where does the money come from to live above ones means.
At an individual level the ability to tap savings and expand credit has it’s limits. Collectively an Economy too will get tapped out and sputter. Any new debt does not add to productivity and prices rise. When prices rise productivity collapses further until the system implodes. The monetary gravitation of this implosion eventually contracts prices and the cycle starts all over. Wash, Rinse, Repeat…… Winter, Spring, Summer, Fall.
It is not just a numbers game, but a Spiritual, Psychological, Sociological, and Physical game all wrapped up in one.
Higher numbers have their limit as to what is normalized. Eventually things try and revert to equilibrium.
Equilibrium, like Brownian motion or the quantum vacuum.
Real-time Supply/Demand imbalance news. United to give pilots a whopping 40% raise.
https://www.cnbc.com/2023/07/15/united-reaches-preliminary-4-year-labor-deal-with-pilots-with-up-to-40percent-raises.html
With pilots retired during COVID and more retiring daily, it makes sense there is a supply and demand imbalance leading to higher wages. this will continue across almost all professions over the next decade. Those higher wages will be passed on to consumers in the form of higher ticket prices or fees. Don’t be surprised if you see a “pilot training fee” in the near future on your air ticket.
Just took a domestic flight with layovers both way, three or four flights were delayed, maybe this will change that
The Fed wants digital cash, to increase ODL. ODL is a source of funding for banks
loans and investments. Money market funds are a source for short selling : borrow your money for an IOU, without your knowledge and permission, until the trade is done.
The Fed is a bank. Why Citi and JPM can, but NY Fed can’t.
ODL : no wheelbarrows to transfer your money to NY Fed. It was done digitally, in
a click.
“So add it all up, and the answer is “It depends on all of the things discussed above and also what one means by inflation.””
I believe economists used to say inflation was the rise in prices. Certainly that’s what I call it when I go to the store and see either more expensive products or smaller products for the same price.
Hyperinflation is officially defined as the doubling of prices every 24 hours. It hasn’t happened much in world history, yet that term is horribly abused by analysts.
China and India accumulated gold, constricting supply for years, but gold didn’t care.
When the Fed raided “other”people money in Oct 2008 and in Mar 2020 gold popped
up and productivity fell.
China and India are paying for Russian oil in deflated currencies. China and India
India will never sell one ounce of gold. They can change the peg, but will not pay in
gold. Gold is holier than cows.
Gold has been used for a long time. I understand its use in art, jewelry and electronics. I even understand its use as a medium of exchange in everyday transactions. However, we no longer use gold as a daily medium of exchange. And we no longer use it to back currencies. Instead, we spend billions each year to find it, dig it up, refine it, and transport it. We then essentially bury it back in the ground again, by storing it in underground bunkers and safes. Where it sits for decades; useless. What a colossal waste of time and effort.
Imagine doing that with copper, nickel, etc Fortunately, gold is pretty much the only commodity that we mostly put in storage. We actually make use of all the other commodities.
The increase in fiscal money supply has minimal impact on inflation. Increase in private and corporate debt eventually has an inflationary effect until it causes debt deflation because debt is the only/monopolistic way to get newly created money. All of the orthodoxies of economics and money can be intelligently and strategically exploded by policies that accomplish monetary gifting. Throw off the human civilization long ideas you’ve aquired and think anew.
Demand inflation is not only eliminated, but transformed into beneficial deflation (mind blowingly to the orthodox) by a policy of a 50% Discount/Rebate at the strategic point of retail sale and a rock solidly enforced opt in pledge not to arbitrarily inflate. Regulating a monopoly paradigm with either palliative policies or doing nothing in the name of “free” market theory when the reality is that the monetary paradigm enforces alternately goose and strangled financial chaos becomes egg on your face…so think anew please.
A strictly enforced 120% rebate at point of sale will not only eliminate inflation but put a little jingle in your pocket for incidentals at another store.
Gotta go with MPO45v2. Inflation is a supply v. demand issue, but it is enabled by cash available to the demand side. Some demand goes unrealized because there’s not enough cash to spend. $10T of Lockdown stimulus unleashed that demand. Rising salaries should keep it elevated.
The flip side is expanding the supply side, flood the market with goods to lower prices. The Fed is helpless. Every inflation problem looks like a nail to them because the only tool the have is a hammer.
so more credit directed at expanding supply is what we need. Counterintuitive.
The problem with Supply is labor, the FED can’t fix that
Credit inflation/debt deflation dynamics would not matter if everything were equal.
If all retail prices, income streams, asset prices, etc., were do go up/down in concert with some measure of money supply, it would not matter.
Problem is, things are not equal and don’t work in concert.
The amount of debt does not matter (if we owe it to ourselves, since it would net to zero), but obviously the distribution and term structure really does matter. It is impossible to find something to which we can compare the credit inflation/debt deflation to figure out whether it matters … the money supply is manipulated and uneven and therefore benefits/disadvantages certain parties and certain activities in a manner that is not transparent and certainly not optimal for society as a whole. The effects are impossible to express in terms of abstract aggregate dimensions.
for thousands of years, debt growth, plus currency growth has been the cause of “inflation” of aforementioned purchasing power of currency. as many smart commenters have noted, prices of things are impossible to determine in a world wide market place, and it’s meaningless bringing it back to the micro level of individuals from jungles to back woods to biggest city dwellers on planet. one thing is for 100% certainty, the BLS and all the rest of the clerks and the bloggers for eyeball revenue have NO CLUE. economics is a soft science. it’s akin to psychology and sociology and performing arts…………IT MOST CERTAINLY IS NOT A HARD SCIENCE. not even close. the lag affects to currency debauchment over the past thousands of years can be short term to very long term measured in decades. i like to just look at fed balance sheet, and us treasury balance sheet, and M1(funny they did away in 2020 panic with this), and M2….. to take a stab in dark. i go back to basics. my saw buck and my millions of currency buys much less of what i desire in life. that’s my inflation.
Science provides formulae that accurately describe the physical world. Economics (if you wish to call it a science) provides formulae that inaccurately describe the human world. These formulae are sometimes good at approximating the human world, but because humans can be very unpredictable, sometimes these formulae don’t work at all.
Once you accept their inaccuracy, you can stop complaining about their inaccuracy, and use them as the rough tools that they are. But its better to have a rough tool, than no tool at all. I understand that people want to improve the tools (like Mish), but no matter how much you might improve them, they will never be very accurate.
As MPO stated, people want simplicity, such as supply vs demand to determine prices. Yet after two years of growing demand and declining inventories, the price of oil first shot up (on expectations of big supply disruptions because of Russia) then settled back down (on expectations of demand destruction because of rising rates and a risk of recession). Neither of which have happened yet. Still, the trend is still towards more demand and tighter supply going forward.
Supply and demand can also lead to strange situations. European electricity prices might go negative this month for a short period of time because of the huge amount of electricity currently being generated by solar and wind.
Hard to predict these things.
re: ” humans can be very unpredictable,”
I’d say just the opposite. Humans are very predictable. That’s how William G. Bretz of Juncture Recognition, called up Ed Fry in Washington D.C. to tell him the last 3 months of the G.6 Debit and Deposit Turnover statistical release were wrong. And Fry corrected them. And Current Yield’s Jim Grant ratted on me.
Strange. I would not have predicted a reply like that.
Hari Seldon would agree with PapaDave.
I suppose so would anyone working at the Temple of Apollo at Delphi.
Oh, it gets better than that. There are 6 seasonal inflection points each year.
QE does not increase M2. It increases the monetary base and it gives banks more reserves. If the bank lends those additional reserves, then M2 increases, but if it just increases excess reserves (like it has since 2008), then it doesn’t increase M2. Before 2008 banks were lending out virtually all of their excess reserves, but since 2008 banks have been sitting on trillions of excess reserves. So QE since 2008 hasn’t increased M2.
M1 and QE moved hand in hand
Banks don’t lend reserves, or deposits, for that matter.
That is correct
Banks do not lend reserves or deposits
Banks have not been sitting on excess reserves.
Banks have been “investing” excess reserves with the Fed to earn interest.
There is no such thing as excess reserves anymore. Reserve requirements were dropped.
That is correct – All reserves are excess reserves
🙂
+++++
“If you hold that view, then deflation is the opposite and we are in deflation now.”
Problem is, what is the money supply?
Gold convertibility makes that ultimately precisely answerable.
Without Gold convertibility, nor any other real constraint at all, it’s just yet more of the ever present mush which makes up everything in the Dumbage.
In practice, since bailouts; regardless of whether by Congress or by interest rate suppression or other Central bank redistributions-to-creditors; now ensures that not one penny of debt will ever be defaulted on: Total outstanding credit, including, even, every not-yet-strictly-monetized “promise” such as social security, is the money supply. Changes in that, is what constitutes inflation/deflation.
That won’t change, since it can’t change, until defaults and writedowns again starts constituting a very significant share of both total wealth and actuivity/GDP every year. For years, and cycles, on end. Until then, every penny some lowbrow can get commission for liar-lending to some dunce, is as good as a paper dollar, since it will be replaced by a fresh-of-the press latter long before the lowbrow’s connected bossman will ever be forced to take a writedown. Ditto every penny some DC dimwit promises his lobbyists in completely useless and wasteful future spending. All as good as hard currency.
Banks do not use ODL to make bank loans, or anything else. Bank loans are made whenever a willing and able borrower requests it. New deposits (a bank liability) are created out of thin air, offset on the bank’s balance sheet by a promissory note from the borrower (a bank asset).
Almost correct.
Bank loans are made whenever a borrower acceptable to the bank requests one.
Poor choices are one reason we get bank failures.
Agreed. In my meaning, able = acceptable, able to repay
Economics ain’t rocket science. There are two relevant items.
1. Inflation is always a monetary phenomenon.
2. The Cantillon effect. Prices rise where the money flows.
And generally the money flows to the politically connected.
Vote Vivek 2024!
My “unified theory” is based upon American, Yale Professor Irving Fisher – 1920 2nd edition: “The Purchasing Power of Money”:
“If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors:
…“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”
That’s how I predicted both the flash crash in stocks on May 6, and the flash crash in bonds, on October 15, six months in advance and within one day.
Harris for president sometime around 2026.
I’m no economist, but it seems to me assets/home and commercial real estate prices are a result and function of leverage due to low interest rates.
On the demand side, deflation is the natural evolution of goods and services. Business continuously finds more productive ways of doing work while at the same time consumers needs are met. That is the law of diminishing returns.
The time scale depends on the they type of product. Perishable food has a much different time scale from a CD or a building.
Money printing is the Feds way of propping up prices. The problem is that excess money is distributed unevenly and then compounded by leverage through fractional banking.
Where the economy falls apart is when there are shocks to the system like crop failures, supply shortages and de-leveraging.
In 1967 the Suez canal was closed for 10 years. In 1973 ARAMCO was confiscated.
Inflation is caused by exogenous events. The printing in the 1960’s/ 1970’s and the Fed raids in 2008 and 2020 were the symptoms.
I agree. Inflation comes from exogenous events. It should be easy to come up with a workable theory of on inflation because we should have only three variables; the amount of money, the supply of goods and services, and the speed at which money is used. Variations in these variables should be easily tracked making inflation easy to predict but it isn’t that way so we should look at variables that come from outside and what is more outside than space. Yes we should put inflation to its true source. Look at this chart:
https://www.universetoday.com/133792/ufo-visualizations-show-trends-alien-spotting-saucers-lights/
As you can see inflation follows closely the number of UFO sightings and this chart shows the the TYPE of INFLATON corresponds to the type of UFO being sighted at the time! The 1960-1980 inflation was a price of goods inflation and that corresponds to saucer UFO’s while the 1990 to now asset inflation corresponds to the “flashing light in the sky” UFOs. Some may say that corresponds to the increase of the use of hallucinogens but I don’t buy it. Now that the US government and Military have confirmed the existence of UFOs and aliens we can no longer ignore the fact that extraterrestrials are the root cause of inflation.
Those aliens come here and buy tchotchkes to take back to Rigel IV or wherever, driving up the prices for all of us. It’s like living in a tourist town in the summer!
They seem to like real estate in nice areas on the coasts and art good, bad and downright awful. Some people have publicly said who buys this shit. Now we know.
There is a popular meme on the internet that shows the Wright Brothers building the first airplane in 1903 and man landing on the moon in 1969 asking how it was possible.
Well the supposed Roswell crashed ship of 1947 and subsequent looting of tech seems like a good fit.
I have long felt that aliens counterfeiting US currency has been causing inflation by diluting the outstanding stock.
It is only true that the “symptoms” were validated by monetary policy, otherwise there would have been deflation in other products and services.
If you think of the economy as a human body with multiple organs, structures, systems, all comprised of cells; and if you think of those cells as units of currency – individual slices of the economy – then inflation is when cells increase in number of cells, and it can be through a good reason like growth, which is like building muscle , or it can be through a bad reason like debt, which is like obesity. The conclusion is that the economy cannot be expanded beyond the reality of its functionality in the environment, and “inflation” as people describe it, is a malfunction in the money system, like a malady in the body.
Mish, you’re right. It’s complicated and we’ve never had QE on the scale of the last 14 years. It’s not just houses. It’s stock, it’s bonds, it’s crypto, it’s banks, it’s money markets, real estate….the money has to find a home. We’re in a debt Ponzi and the last one was in the 1920s…..That ended badly for the whole world. Too much money and too much debt, which is how most money is created.
The idea that a certain ‘quantity’ of money can cause inflation is an unfortunate legacy of Milton Friedman. The theory holds water from many fronts and the practice was a disaster. The Fed tried to target the ‘quantity’ of money in the early 80s and it was a disaster.
Unfortunately Friedman’s legacy is strong, as if he was the only economist in town. But his theories were mainly driven by ideology. Friedman hated government debt and people’s wages.
The quanity theory of money comes with other terrible corollaries, like blaming inflation on the wages prices spiral. This is a very convenient excuse to suppress workers wages over time.
The theory also distracts away from many current causes of inflation, such as industry concentration, crony capitalism, lobbying, etc.
Unfortunately much economic theory is ideology disguised as a science.
I am getting the impression that there are to many moving parts that no one fully understands. It may be more of an art than science.
There is no such thing as the “wage-price spiral”; the “price-wage spiral”; or the “cost-push spiral”, in the sense that increases in wages, prices, or costs are causes of inflation. Unless effective demands (money times its velocity) are adequate to prevent a cutback in sales, or a diversion of purchasing power to the price raisers, any administered increase in prices will result in less sales, smaller outputs, less employment, lower payrolls and less demand for products—in other words, depression and deflation in due course.
I like to use Robert Prechter Jr’s definition of inflation as the growth in debt.
As long as; as is the case in financialized dystopias like our own; all debt is bailed out and none is ever defaulted on, that is certainly the only reasonable one. Anyone connected enough to be a “lender” can then create demand driving money which is just as ultimately good as a physical dollar.
In the immortal words of Bill Clinton, it depends on what the definition of “is” is.
“It’s the economy stupid.”
So add it all up, and the answer is “It depends on all of the things discussed above and also what one means by inflation.”
I think what most people care about is what does their “money” buy so let’s simplify the definition. There is supply and there is demand.
If supply < demand prices of that thing (inflation)will go up,
if supply > demand then prices of that thing will go down (deflation).
This is really the only definition of “inflation” that matters to 95% of the population. And since we are de-globalizing, having huge retirements, smaller population growth, and endless consumption it would follow that supply < demand for the next decade.
A reader commented “I think what most people care about is what does their money buy so let’s simplify the definition.”
It’s still not so simple. Do you own a house already or do you want to buy one?
Are you retired with Medicare paying your insurance or do you buy your own insurance?
The BLS and Fed average it all out ignoring asset bubbles which the reader comment does as well, at least for someone who already has a house, but also someone who has company paid medical care or is on Medicare.
The CPI ignores expenses paid on behalf of someone else (Medicare and company insurance). The PCE includes expenses paid on behalf of consumers but even more radically ignores housing bubbles.
“It’s still not so simple. Do you own a house already or do you want to buy one?
Are you retired with Medicare paying your insurance or do you buy your own insurance?”
You ask some important questions but there’s the fallacy, every single person doesn’t need the same thing at the same time. Some people don’t ever want to buy a house, they are happy renting.
Some people have medical insurance through an employer, others can’t afford insurance and yet others get subsidized insurance from the government (medicare). So in the insurance example, let’s say we have 3 people. Ideally they all want insurance (demand) and there is supply (insurance companies) so why does one person not have insurance? Because the supply offered at the price offered isn’t affordable for the one person who has demand. Clearly a new insurance supply market at a lower price point is needed for the 3rd person to get insurance. For that 3rd person, inflation is bad, for the other two it isn’t as bad or not bad at all.
Inflation comes down to the individual consumer, what we have reported on by the government, bloggers, and academics are groups and averages which distort everything. To prove the point, you can ask an amazonian tribe that lives in the jungle and ask them what inflation is and they won’t know or care because everything they need they just harvest off the land. If there is demand for bananas and there is no supply, they switch to other fruit or go without. Simple and easy. It was foretold 2000 years ago that the meek would inherit the earth and it’s easy to see why, took me a long time to understand that simple concept.
It’s not so simple.
This time the guy with the bananas wants more of my fish for the same quantity of bananas we traded me last time. If they aren’t better bananas that’s inflation. Unless, of course, my fish aren’t quite up to snuff.
Inflation is when nothing changes in my expenditures (lifestyle, standard of living) but I have less left at the end of the month. And that is foolish to attempt to aggregate across an entire population.
Inflation was pretty easy. Before, Friedman said it was money supply. Then, Jim Rickards said “no, it’s not money supply. Look at these charts … money supply went thru the roof, but we stayed at 2% inflation. Inflation is caused when the VELOCITY of money increases.” So we consult the FRED graphs and find the M2 (and M1) velocity graphs and … velocity is dropping like a rock, but we just had 18 months of inflation. Now, we dont know who to believe …
Don’t forget, we had almost $10 trillion of added stimulus in one form or another added to economy. There is also a 12 to 18 month before the full impact is felt. It is not only monetary policy that impacts inflation but fiscal policy as well.
Milton Friedman also lied and said the government creates all money on a printing press in Washington DC. In fact, private banks create all money, not government. So Milton Friedman was either completely dishonest, or the worst economist to ever live.
Here’s the youtube video of him blaming inflation on “money printing” in Washington DC. Skip to 13:31 to hear his BS: https://www.youtube.com/watch?v=GJ4TTNeSUdQ
Hmm, I wonder why such a highly esteemed economist would do his best to shield the banking industry from the blame they deserve for creating all money, all business cycles and all inflation?
I am wondering if he meant that their deficit spending was his equivalent of printing money. Back then I don’t believe the fed was buying USG debtsso the banks primary dealers sold it to investors. That would tie up the cash and decrease velocity? When the find buys, I think 8 trillion, or so of USG debt that cash circulates? I think.
The formula is Money x Velocity=GDP=Price of all goods x quantity of all goods. If money supply goes up, but velocity goes down then they can pretty much cancel each other out and this is what happened with the 2020 COVID government payouts. Money supply went up a lot but velocity crashed. If velocity stays the same and money supply increases more than the quantity of all goods increases then you have inflation, but there’s often a lag before it kicks in. The inflation we have was created by the $2 trillion Biden stimulus he signed in February 2021, because velocity didn’t crash but went up slightly. The checks went out in March and the significant inflation started in April. If Velocity had returned to pre-2020 levels then we would have had 20% or so inflation, but velocity only increased slightly.
Income velocity may move in the opposite direction as the transactions’ velocity of funds, money actually exchanging counterparties. But the transaction’s velocity of money was always a statistical stepchild.
See: New Measures Used to Gauge Money supply WSJ – 6/28/83
“But opinions vary widely on what M1 and the other, broader Fed measures really mean. The experimental measures are designed to resolve some of the confusion by isolating money intended for spending, the money held as savings. The distinction is important because only money that is spent-so-called “true money” – influences prices and inflation.”
Link: “The Money Supply” on the NY-Fed’s website:
(I believe that the FED erased this comment, see: “This content is no longer available”).
“Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. Depositors moved funds from savings accounts—which are included in M2 but not in M1—into NOW accounts, which are part of M1. As a result, M1 growth exceeded the Fed’s target range in 1982, even though the economy experienced its worst recession in decades. The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987.”
The FED doesn’t know a debit from a credit, money from mud pie.
Correct about velocity, the only reason it has gone down in recent years is that money supply has been increased disproportionately, velocity is measured as a percent of Total Money Supply.
It stayed depressed because they tinker with the CPI inputs. Like owners equivalent rent. Instead of just using actual home prices. Inflation is still double digits. the CP-Lie is in fact a lie.