The Fed Says "Money Doesn't Affect Inflation" Others Say "It's the Money Stupid"

Mish

The Fed stopped updating both M1 and M2 weekly reports. What's going on?

The Definition of Monthly

When the Fed stopped weekly reporting of money supply numbers I told a friend "they still report monthly".

Yesterday, I pulled the latest numbers and I noted we need a new definition of monthly. The reports were nearly two months old. 

I updated the chart just now and the data is now just a month old.

Here is the new schedule of Money Stock Measures. 

"These data are released on the fourth Tuesday of every month, generally at 1:00 p.m. Publication may be shifted to the next business day when the regular publication date falls on a federal holiday."

Two Month Lag

The Fed reports "monthly" data of numbers that it actually knows instantaneously, with a 1 to 2 month lag. 

Changing Definitions

In addition to changing the frequency of reporting, the Fed changed the Definition of M1. 

Seasonally adjusted M1 is constructed by summing currency, demand deposits, and OCDs (before May 2020) or other liquid deposits (beginning May 2020), each seasonally adjusted separately.

OCDs are Other Checkable Deposits. Other liquid deposits includes OCDs as well as money market deposit accounts.

What's the Fed Hiding?

Steve Hanke, Professor of Applied Economics at Johns Hopkins University discusses the setup. 

Key Quotes

  • Before we get started let me remind you of President Bill Clinton's maxim: 'It's the economy stupid.' My maxim is 'It's the money supply stupid.'
  • The reason is, money supply determines the course of nominal GDP. And nominal GDP includes real growth and the inflation rate.
  • Chairman Powell has very explicitly claimed that money doesn't matter in recent testimony. He's basically said that money and the measurement of money doesn't really matter because it's unrelated to inflation. 
  • In principle, they don't think [this data] is important. They want to deep-six the monetarists, basically and push them off to the sidelines. They want to bury Milton Friedman once and for all and be done with it, and their preference would probably to not report any monetary statistics. 

Hello Fed, Inflation is Rampant and Obvious

Yesterday I commented Higher Prices at the Grocery Store as Ag Futures Surge the Most in 8 Years

More importantly, year-over-year home prices are up 11.2%, some cities even more. The Fed does not see this or count it if they do.

For discussion, please see Hello Fed, Inflation is Rampant and Obvious, Why Can't You See It?

The problem for the Fed is bubbles burst, and this set is the biggest yet. Expanding bubbles constitute inflation. Popping is the reverse.

With nearly everyone looking for stronger inflation and higher bond yields please consider The Fed Wants to Stimulate Bank Lending, Charts Show the Fed Failed.

For further discussion of disinflationary trends please see comments from Lacy Hunt in my post Expect Inflation to Accelerate? Here's 8 Reasons to Expect Decelerating Inflation.

Something has to give.

Mish

Comments (42)
No. 1-16
Quatloo
Quatloo

Pesky facts are so inconvenient when they interfere with the narrative the Fed wants to propagate. The CDC has been facing similar problems.

dbannist
dbannist

The real question for me is "what happens to inflation when all the exported debt comes home to roost?"

That's what I really really want to know. I suspect.

RonJ
RonJ

"Chairman Powell has very explicitly claimed that money doesn't matter in recent testimony."

Money doesn't matter- until it does. After all, the housing crisis was confined to subprime- until it wasn't.

Casual_Observer
Casual_Observer

Looks like the loopholes are going to be targeted. 99.6% of people don't even know these exist.

Scooot
Scooot

The Fed obviously thinks hiding the stats, and changing the definition, is more important than the reduction of people’s trust in them. I doubt they care. They seem to be trying to make it more difficult for people to analyse and assess their actions. My trust in Central Banks has just gone down another notch or three.

CRS65
CRS65

Money does not cause inflation like guns don't kill people. Money in the hands of people and businesses demanding goods and services at a rate that pushes the supply/demand balance out of equilibrium causes inflation.

Tengen
Tengen

I suppose this writing has been on the wall since the Fed stopped publishing M3 fifteen years ago.

When BLS manipulation isn't enough, the next step is to hide the raw data.

Rbm
Rbm

Who wants to be guy who crashed the world economy.

jfpersona1
jfpersona1

"When it becomes serious, you have to lie"
-- Jean-Claude Juncker; Former EU President

Carl_R
Carl_R

This begs the question, if money doesn't affect inflation, what does?

bluestone
bluestone

What i think is ridiculous is the way housing is excluded from inflation measurements and owner equivalent rent is used instead (although names of this may be different for US and UK).
People rent shelter.
People own shelter + -inflation hedge- and its the inflation hedge that is increasing in price.
Does the argument that the increasing price of an inflation hedge is not actual inflation hold water? You could make that argument but I would disagree because we can see increases in shadow inventory i.e. that people will not sell because they fear debasement of the cash proceeds. These are all aspects of the cost of saving for a real income in the future is itself increasing in price.

What is worse is that (the extremely wealthy) Ray Dalio actually laughed when asked if he held treasuries, but these treasuries are forced onto the lower income demographic as a pension vehicle. Not to blame him of course.

Anda
Anda

The chart doesn't only show the large increase in money supply, it also shows M2 has almost dissapeared. By that I mean that because M2 includes M1, almost all time deposits have gone, now replaced with cash or cash equivalent. This is really odd, and an explanation would be good.

albacore
albacore

Hi Mish, on the chart you ask "Does this matter?" but don't really answer the question.

I don't think the question should be rhetorical given that the majority (IIRC) of the vertical leap in M1 your question addresses is due to the recent reporting change, rather than an increase in money supply.

If the arrow on the chart was pointing to the M2 uptick, I would say "Yes, it does matter". Pointing at the M1 vertical, I would say "Not as much as this chart suggests".

Things are crazy enough at the moment as they are, but I think that pointing to that M1 vertical without explaining the context is misleading.

Matt

Herkie
Herkie

Anyone else see their cable/internet bill go up by 20% this last month? My spectrum bill did and they did not even bother to announce it, the bill was just higher.

I will have to cancel the TV, I only watch a few hours per week anyway, and that is just Saturday evening PBS. And news, but I can get that from the net.

I have a rule, whatever the government (Veterans disability and social security) gives as a COLA for my annual raise if we even get a raise at all, is the maximum I will pay in increased prices for the things I have to spend money on.

If it is something that I am compelled to purchase like auto insurance which by law I have to buy, and that goes up by 13% as mine did in February, then I still have to buy it, but I will look for a cheaper source, and if I cannot find it then I have to cut out other things. Or, like my homeowners insurance that rose 24% in April for no explained reason. Now cable up 20%, but at least part of that bill I can live without, I do have a library card.

If food goes up too much then I cut out that which rises unreasonably. For example frozen peas for some reason have gone up to more than double what they were last year at this time. And I do not accept Covid as an excuse since we have now had more than a full year for producers to figure out production and transport.

Unfortunately I have to do a home repair that will require some heavy timbers and those have gone up by more than 300% in the last year, and I cannot avoid that expense. Just as gasoline is up by almost 50%, I can try to drive less, but there is little hope of driving less when I already drove little.

In general I am estimating that my cost of living has risen in excess of 22% in the last year. But I have seen some spectacular increases that are well over double the price they were pre pandemic, I think the virus is being used as an excuse to gouge throughout the economy, it started small enough but as some gouged others had to increase prices to pay for that, pretty soon everyone was raising prices for everything till it took on a sort of auction mentality towards prices. That is they raise prices to the point where sales fall off dramatically then slowly and incrementally lower them to a point where sales start to recover and leave them there.

But I agree with Mish here and will say this is just the beginning of a hyperinflation wave. It is looking like people are planning to simply stop producing and lay employees off rather than accept anything less than maximum markups.

And there is an insidious side effect of inflation now taking place, a few things are not included on the CPI that have devastating consequences for Americans, housing is the largest item in most monthly budgets and that is up 12-22% in areas where most Americans live. This means the most fundamental item driving people into poverty is screaming upward at double digits.

I also believe that the so called poverty rate for a single person is now closer to double the official poverty rate which is still around $12k per year. If you make $24k you are one step above homeless in 80% of the nation. And in most urban regions you are already there.

BillSanDiego
BillSanDiego

Inflation only occurs in consumable goods. The increase in the price of houses is not inflation, it is "appreciation," because houses are assets, not consumables. I learned that in economics school. When the price goes up, if it's a consumable it's inflation, if it's an asset it's appreciation. You now have one leg that is longer than the other. Your leg is an asset, so your leg did not inflate, it appreciated.

Eddie_T
Eddie_T

Some of you might enjoy this interview with Robert Schiller.


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