John Mauldin: The Money Supply is Not Growing
By John Mauldin, Millennium Wave Advisors
Elements of Deflation, Part 2 | September 13, 2009
Just as water is formed by the basic elements hydrogen and oxygen, deflation has its own fundamental components. Last week we started exploring those elements, and this week we continue. I feel that the most fundamental of decisions we face in building investment portfolios is correctly deciding whether we are faced with inflation or deflation in our future. (And I tell you later on when to worry about inflation.) Most investments behave quite differently depending on whether we are in a deflationary or inflationary environment. Get this answer wrong and it could rise up to bite you.
The problem is that there is not an easy answer. In fact, the answer is that it could be both. Today I got another letter from Peter Schiff, who seems to be ubiquitous. He says the rise in gold is because of rising inflation expectations among investors. Gold is predicting inflation. Maybe, but the correlation between gold and inflation for the last 25-plus years has been zero. I rather think that gold is rising in terms of value against most major fiat (paper) currencies because it is seen as a neutral currency. The Fed and the Obama administration seem to be pursuing policies that are dollar-negative, and they give no hint of letting up. The rise in gold above $1,000 does not really tell us anything about the future of inflation.
In fact, it is my belief that if the Fed were to withdraw from the scene of economic battle, the forces of deflation would be felt in short order. The answer to the question "Will we have inflation in our future?" is "You better hope so!"
I wrote in 2003, when Greenspan was holding down rates too long in order to spur the economy, that the best outcome or endgame over the course of the full cycle would be stagflation. I still think that is the most likely scenario. The Fed will fight deflation and knows how to do that. They also know what to do when inflation becomes too high. But there is a cost.
It is not a matter of pain or no pain; it is a matter of choosing which pain we will face and for how long, and perhaps in what order. As I wrote a few weeks ago, like teenagers, we as an economic polity have made some very bad choices. We are now in a scenario where there are no good choices, just less-bad ones.
In a normal world, the amount of monetary and fiscal stimulus we are witnessing would produce inflation in very short order. That is what has the gold bugs of the world excited. It is their moment. They keep repeating that Milton Friedman taught us that inflation was always and everywhere a matter of too much money being printed. The answer to that is that the statement is mostly true, but not always and not everywhere (think Japan). The reality is somewhat more nuanced. Let's review something I wrote last year about the velocity of money, and this time we are going to go into the concept a little more deeply. This is critical to your understanding of what is facing us.
The Velocity Factor
When most of us think of the velocity of money, we think of how fast it goes through our hands. I know at the Mauldin household, with seven kids, it seems like something is always coming up. And what about my business? Travel costs are way, way up; and as aggressive as we are on the budget, expenses always seem to rise. Compliance, legal, and accounting costs are through the roof. I wonder how those costs are accounted for in the Consumer Price Index? About the only way to deal with it, as my old partner from the 1970s Don Moore used to say, is to make up the rise in costs with "excess profits," whatever those are.
Is the Money Supply Growing or Not?
But we are not talking about our personal budgetary woes, gentle reader. Today we tackle an economic concept called the velocity of money, and how it affects the growth of the economy. Let's start with a few charts showing the recent high growth in the money supply that many are alarmed about. The money supply is growing very slowly, alarmingly fast, or just about right, depending upon which monetary measure you use.
Continue: http://news.goldseek.com/MillenniumWaveAdvisors/1252857780.php
Several things I found immoral
1. His argument assumes the banks and Fed should be able to influence whether we spend or not (velocity), just like when Obama asked us to be good spenders to help his Fed cronies out.
2. "The people in control don't buy Austrian economics." - That's because they want to continue to be the people in control. Its about power over people, not doing the morally right thing.
3. GDP seems to be a fake way to monitor value given the way he portrays it. I could sell a banana to another person, then the other person sell it right back to me, and we could do this a million times, making GDP enormous, but at the end of the day, we only have a banana and a dollar. Some of the services we use in GDP operate that way, there is no real value in them, yet they are traded a lot. For example, I could pay a club to use their basketball court every month, or I could go play at the free basketball court down the street. Paying the club isn't representative of real value in the GDP, just stupid consumerism.
Another way of putting it...
Is that the author has confused the cause and the effect of velocity. Real value and wealth is what drives velocity, velocity does not drive real value. I am more likely to spend money more quickly if I have 100 bananas than if I have 2 bananas. I will not trade 2 bananas 50 times to get to the same GDP as a person who trades 100 bananas one time. I have to have real wealth and value to spend more quickly. Think about it. Only the wealthy buy cars every two years. The poor could never keep up with what the wealthy would have to do to generate the same GDP.
I think your wrong here,
I think your wrong here, velocity does drive wealth due to our fiat system, you have to keep spending to keep a head of the debt curve...
“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.” Plato
“One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors.” Plato
Jim Sinclair’s
Jim Sinclair’s Commentary
Bloomberg at 8:18am this morning on their scrolling news repeated the Retail Sales number 5 times in a row, lauding it as the best news since the recession started.
Please consider subscribing to http://www.shadowstats.com
- 2.7% Retail Sales Jump Reflected Inflation and One-Time Clunker Spikes
- "Core" Retail Sales Up 2.0% (0.2% Net of Clunkers)
- Wholesale Inflation Soared with Oil
A prudent man foresees the difficulties ahead and prepares for them; the simpleton goes blindly on and suffers the consequences. Proverbs 22:3
A prudent man foresees the difficulties ahead and prepares for them; the simpleton goes blindly on and suffers the consequences. Proverbs 22:3
Matthew 10:34 Think not that I am come to
send peace on earth: I came not to send peace,
but a sword.
Is the old "pushing on a string" argument coming home to roost?
Look at this M3 chart, particularly the year on year rate of change (the inflation rate).
http://www.nowandfutures.com/key_stats.html
Something else is about to happen with M1 and M2.
It was about one year ago that the panic hit and the fed pushed the pedal to the metal for the monetary base. All the monetary base increases can do is make reserves available to banks to use to expand the money supply if they are willing to make new loans. M1 and M2 responded but not to rates of change that were not seen before in recent decades. Certainly the doubling of the monetary base had no where near that size effect on M1 and M2 plus M3 has been unbelievably anemic.
Consider that in Sept., 2008 the year before numbers (Sept., 2007) were not under unusual stimulation like they were in Sept., 2008, so when the year on year rate of change was measured it took a jump. Same thing for Oct., 2008 compared to Oct., 2007, etc. But what now happens when Sept., 2009 is compared to Sept., 2008, and when Oct., 2009 is compared to Oct., 2008. The 2008 numbers were the result of massive stimulation, so the year on year comparison will now be apples to apples instead of apples to plums. The numbers that will be coming out for year on year rate of change in M1 and M2 money supply growth for the rest of 2009 and into 2010 will look downright anemic, maybe even negative growth, so what will everyone be saying about the rate of inflation of the money supply, or lack thereof.
I figure that by this time next year, the collapse into deflation will be so obvious that nobody will be talking about hyperinflation, and asset values will implode, particularly real estate, gold and silver. Oil is a case unto itself and supply will be so diminished that even deflation of the money supply will not be sufficient to keep its price from skyrocketing.
While the present monetary system is predatory, unsustainable, unstable, unconstitutional, and immoral, it is not the elephant in the room. The lack of sufficient energy to fuel the industrial age has finally reared its ugly head, and the great expansion since 1776 of economic output, standard of living, and world population is over. Not only is it over, but all this will crash over the next 40 years, sweeping away 75% of the world population for want of the necessities to sustain life. Yea, I know, too much to handle, but I think the math supports my position, thank you M. King Hubbert and Richard C. Duncan.
"The deepest sin against the human mind is to believe things without evidence." Thomas H. Huxley
Please explain....
Our leaders, (Paul, Schiff and other Austrians) are calling for inflation. Are we now questioning their lead?
No. They have identified the
No. They have identified the cause of our chaos, but inflation may be years away.
I favorited this article. I
I favorited this article. I now understand money supply and velocity need to work together to get inflation and growth.
The money is not being worked into the system, because everyone, including banks are deleveraging.
Money Supply Shrinking
True and False.
True: Money in terms of ponzi-credit (30:1 leverage on loans) is shrinking at the fastest pace since the thirties (to 20:1 or 10:1).
http://www.telegraph.co.uk/finance/financetopics/recession/6...
False: Money in terms of Dollar bills in checking accounts has more than doubled in a year as the Fed has "keystroked" a $ Trillion and swapped it with AIG and the banksters for their MBS and CDOs.
http://www.federalreserve.gov/releases/h3/Current/
At the end of the day, the proof lies in the markets. the Dollar Index is TANKING and commodities are rising. The inflation is HERE people.
http://goldsteinrepublic.com
Agree except the the
Agree except thee ponzi-credit is not shrinking it is still growing just at a much slower rate. FRN's are just the petty cash of the system promissory notes are the currency of the banksters.
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End The Fat
70 pounds lost and counting! Get in shape for the revolution!
Get Prepared!
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End The Fat
70 pounds lost and counting! Get in shape for the revolution!
Get Prepared!
Cash Money
is less than 5% of the money supply. The rest is credit/debt.
No, the money supply is not growing (maybe)
but indebtedness and entitlement are. 'Muddle through' Maudlin (sic) is a clever establishment shill.
Very smart and very dumb
This guy basically thinks the central bank is necessary to stabilize prices via monetary policy.
Does he realize that if we had a tangible, free market currency, the increased productivity that has occurred would be translated into all of us holding such a currency to become more wealthy? And that by "stabilizing" prices, the fed is actually STEALING all the wealth that would have occurred had they done nothing. And that decreasing prices is good, not bad.
Amazing how they have convinced us that we need someone to 'stabilize' the economy and that it is so complex so that we believe we need these PhD idiots to steal our wealth. I hope we can learn to see through all these lies.
The big problem I have with this
is the perpetuation of the myth that deflation is bad.
The said "The answer to the question 'will we have inflation in the future' is 'you better hope so'" and that is just plain Keynesian nonsense.
Deflation is unequivocally ALWAYS GOOD for the economy. Deflation punishes debtors who consume more than they produce and rewards savers who produce more than they consume. Deflation is and indication that technology is improving causing the production possibilities curve to expand and lowering the price of consumer goods relative to the price of the resources it took to produce them. Deflation is also an indication that a speculative bubble has burst which means malinvestments are being liquidated the market is in a correction. Corrections are good because you want to correct the mistakes of the past. Nobody should be afraid of deflation because it means you've gotten richer if you posess dollars, and although it's true that wages fall during a period of deflation, consumer prices always fall faster. Finally, contrary to the Keynesian theory of a deflationary spiral, runaway deflation is actually impossible because of a little thing called Scarcity. Resources are scarce and have a cost so it costs the price of resources to produce consumer goods. This always puts a floor on the price of something because nobody is going to produce something and sell it for less than the cost of making it. So don't be looking for the price of Gasoline to fall to zero anytime soon. When it fell to $1.40, that was pretty sweet, but that's the limit to how low it will go.
The money supply was increased by several trillion dollars.
The money supply grew, but there was also a massive contraction of credit as lot of over-leveraged organizations went belly-up.
-jcr
"The problem with trying to child-proof the world, is that it makes people neglect the far more important task of world-proofing the child." -- Hugh Daniel
Here's a good Austrian debunking of "Velocity of Money" concept
http://mises.org/story/2916
Thanks
I remember from one of Rothbard's books, I don't remember which one at the moment, he states that money is always in someone's cash balance....saying from what I understand, that the speed at which it changes hands is basically irrelevant and distracting.
Oh and yes the money supply is growing and has been for a long time.
"In the capitalist society there is a place and bread for all. Its ability to expand provides sustenance for every worker. Permanent unemployment is not a feature of free capitalism." - Mises - www.mises.org
"Endless money forms the sinews of war." - Cicero, www.freedomshift.blogspot.com
http://www.telegraph.co.u...
http://www.telegraph.co.uk/finance/financetopics/recession/6...
The money supply decreases
The money supply decreases every time that a loan defaults. It is nearly impossible to estimate the money supply now nonetheless its future.
Let's hope that Bernake is a good guesser.
Not so true.
A loan on a banks books is an asset of the bank. If it defaults the bank takes a loss which affects its capital, and its solvency. How does this have any direct impact on the money supply?
Checking accounts on a banks book are part of the money supply. Savings accounts on a banks books are part of the money supply. Checking accounts and savings accounts are the liabilities of a bank. Did the liabilities of the bank go up or down when a loan held by the bank defaults? Of course they did not, so the money supply changes by nothing when a loan the bank made defaults.
"The deepest sin against the human mind is to believe things without evidence." Thomas H. Huxley
Correct
Every time a loan defaults, or is paid back, the money supply decreases. It should more accurately be called the "credit supply."
Our working paradigm of an ever growing economy is threatened when people save. In order to keep growing, people need to keep borrowing, and they're no longer doing that.
What we're looking at is the end of an era, imho.
No, No, No. This is only half correct.
Every time a loan is paid back to a bank the money supply decreases. Every time a loan defaults, there is absolutely no effect on the money supply.
When someone goes into a bank and borrows, the bank creates a checking account (part of the money supply) out of thin air by placing the loan receivable on their books as and asset and placing a checking account payable on their books as a liability. The bank if necessary makes good on their liability by clearing a check drawn against this new checking account against their own reserve account (checking account) with the FED or by delivering federal reserve notes to the holder of the checking account out of their vault currency.
Should the borrower repay the bank, the borrower writes a check against his checking account to the bank and the checking account (part of the money supply) is reduced by the repayment. It disappears into thin air, just as the original checking account came out of thin air.
Should the borrower default on the loan, then the loan disappears from the banks balance sheet as an asset and creates a loss for the bank which affects its capital and solvency. The default has absolutely no effect on the money supply (the bank's liability).
So your statement is incorrect that "Every time a loan defaults ... the money supply decreases.
"The deepest sin against the human mind is to believe things without evidence." Thomas H. Huxley
Our dollar isn't worth
Our dollar isn't worth anything when we have all this debt we can't grow our way out of. On top of that they want a global carbon tax. The Fed bailed out its Wall Street buddies, gave them big bonuses, and who knows where they spent the money. The Fed has even been caught paying banks not to loan:
http://www.youtube.com/watch?v=03JKpQsCQQ4
Will it be the dollar's falling due to debt that causes inflation?
The Fed is the regional shareholder of the larger global banking system, its criminal ties protected from detection by audit exemptions. That article says the Fed knows what it's doing. I agree. They want to manipulate us into a new world economy run by the international bankers. And any pulling back of debt will only be because of their fear of an audit or wanting to fine tune the timing of the demise of our economy.
Most inflationists will
Most inflationists will admit that the money supply is not growing, but they argue that the huge growth in the monetary base will eventually lead to growth in the money supply and higher inflation. However, I think that the situation in Japan shows that printing money does not necessarily equal inflation(in the most common use of the word).
Ventura 2012
Eventually...
Can take a mighty long time.
And you're right, the money supply isn't growing now. Great article by Ambrose Evans-Pritchard in the Telegraph confirms this:
http://www.telegraph.co.uk/finance/financetopics/recession/6...
Yes it's the unseen.. The
Yes it's the unseen.. The FED has not had to deal with this type of current situation..They can print all the money they want ,but DEMAND for that money does not exist ..Therefor it's like they didn't print the money ..It's not being circulated ,which means their printed notes are not doing the intended purpose..We are in stagflation..This is what brought us to the crisis.. Buinesses were depending on ciculation instead of profit to keep the doors open ..It's termed CASH FLOW..The cash flow dried up & walla, crisis...Businesses have been suffering under gov't regulation & forced taxation that was & is unsustainable, for too long..
Stagflation cannot be manipulated like the normal economy..The FED has no control over this situation only consumers do...This is why you see some deflation at the store ..They need sale .. The bailout was mearly a stop gap to make up needed cashflow numbers ..All the profits for many years have bee only going to the top ..That factor is still the same ..The little people are squeezed, again, it's called National Debt.
Your gov't hasn't learned that it is the citizens & purchaser that is TOO big to fail...Money & labor flow upward ..Only when gov't manipulates does it flow down...Circulation is a normal two way street ...
They screwed it up..
Good people do Good deeds
Good people make it happen
Their only "manipulation
Their only "manipulation game" is to force people & businesses into more debt.. If this doesnt work, they have a forced HEALTHCARE bill ready to go. The FED will save itself by stapping us with forced, BIGGER debt.
Good people do Good deeds
Good people make it happen
deflation now, inflation later
We are in a deflationary period, I think that's pretty obvious at this point. Everything is cheaper now, except items directly manipulated by the government such as healthcare and education. Money and credit are scarce.
Deflation is the government's worst nightmare, unemployment is high and "prosperity" (i.e. tax revenue) is low. However, for those who have saved it is a beautiful thing, we can get much more for our money.
The masses are not savers though, they are debtors. So they will demand more and more "stimulus" from their masters in DC to keep them afloat. I can easily see $2,000 stimulus checks if/when this thing gets out of hand.
Yep.
In every other economic horror that I've read about that has happened under a fiat system, it deflates and then inflates when it's time is over.
~Live life to its fullest, with an open heart, open arms and most important... an open mind~
Gold is NOT going up because of inflation
While gold has been making another historic try at the $1000 hurdle, Treasury yields have been FALLING, and falling fairly hard. This does not bode well for the current inflation argument.
Gold is going up because it is in a sentiment-based run - everybody thinks its going up from here which is why I'm on the sidelines on gold. I'll be buying it when it comes down to a reasonable level.
We will get inflation, don't get me wrong, it's just there's $500 Trillion of total US money out there and a lot of it needs to be evaporated by writing down default swaps, etc. Therefore total money supply shrinks in huge bites, therefore we have deflation.
Progress is precisely that which the rules and regulations did not foresee. - Ludwig Von Mises.
It's early September and I'm 80% cash and 20% long term Puts AGAINST the market. Gold is also going down. Want to know why?
http://www.investophoria.com
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Progress is precisely that which the rules and regulations did not foresee. - Ludwig Von Mises.