The final data for October 2008 indicates that the money supply has gone up by 8% as compared to October last year.
It will be important to watch whether or not this trend hold up over the next 2 months. If it does, it is very likely that that the current asset market crash will bottom out in about 1 year from now.
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10 comments:
Nima
How do you reconcile this growth in the money supply with the current perception that there is widespread deflation?
Somewhere in one of the components of your measure of the money supply, money must be becoming "stuck" and not circulating any further.
Joe
Hi Joe,
The deflation you are referring to is nothing new. It started in housing around February 07. About 1 year after money supply growth had dropped below 3% (http://nimamahdjour.blogspot.com/2008/04/recessions-and-true-money-supply.html)
After that it began to permeate one by one: Stock prices, commodity prices, foreign exchange prices. This is where we are now.
A new spike in the money supply, if sustained, will not have an immediate adverse effect. But it will have an effect eventually.
The power of the money supply data lies in the fact that it enables you to predict future developments, rather than just confirm current ones.
Thanks Nima.
It would be good if you could break down the money supply measure into it's constituent components or explain how or why the overall measure is increasing. My understanding is that any new money should be being hoarded on banks' balance sheets, hence the money supply should be decreasing, which is why I'm a little surprised to see this result.
Joe
Joe,
I noticed that I was using a broken link.
Now, if you click on the word "money supply" in the article it will take you to a page with a detailed break down of the components.
Best,
Nima
Nima
Apologies, I have already read the article you link to. What I meant was, perhaps you could break down the ~8% growth figure numerically into its constituent parts.
Basically, I'm having difficulty understanding how it is that you show the money supply increasing, when it is clear that credit is more difficult to come by.
What do you make of the "pushing on a string" argument of Shostak and others which suggests that central banks are currently unable to inflate? Either that argument must be wrong or your money supply measure paints an incomplete picture. This article shows similar data to yours but suggests it is not the full picture because the money multiplier is falling.
Likewise, in this article Mike Shedlock explains why inflation is an increase in both the money supply and credit. Am I wrong, or is it the case that your data only picks up the increase in the money supply and somehow leaves out the decline in credit? If so, I would like to understand why/how your data fails to capture both money and credit, and how I can get hold of data that covers both and gives me a picture of the true level of inflation.
I don't mean to be a pain with these questions, but it's an important issue because while all other indicators suggest we are currently in a deflationary period, your data seems to suggest inflation.
Thanks
Joe
Hi Joe,
I will prepare a breakdown of the change of the different components. However, I have to point something out again which you seem to ignore in my arguments above: An increase in money supply doesn NOT IMMEDIATELY lead to the typical symptoms of inflation. The same holds true for deflation. When I was first talking about a deflationary trend gold and other commodities were soaring. It was only a few months later that it was reflected in those prices.
The decline of credit is fully reflected in my money supply data:
When people foreclose on their homes and other loans, and scramble for money which goes toward paying off a large fraction, money is debited from their bank account but doesn't appear anywhere on the bank's own accounts. All the bank does is reduce the loan amount on the left side of the balance sheet (since the loan is a bank asset) and report a write off which creates a loss which will be accounted for on the right side of the balance sheet. Now, if on top of that, banks don't create additional money via credit expansion, then the money supply growth slows down or comes to a complete stand still.
In order to make sure you have read and understood my most important point, however, I will repeat it again: An increase in the money supply will not immediately lead to an inflationary increase in consumer or asset prices. It takes about a year to take effect.
Hey Nima
I didn't miss your point about the time delays for the money supply to affect prices. It's just not the question I was trying to get at. When I say "inflation" I mean an increase in the money supply and credit, not merely an increase in price levels.
The substantive point for me is this one:
"When people foreclose on their homes and other loans ... all the bank does is reduce the loan amount on the left side of the balance sheet ... and report a write off which creates a loss which will be accounted for on the right side of the balance sheet. Now, if on top of that, banks don't create additional money via credit expansion, then the money supply growth slows down or comes to a complete stand still."
But that's exactly my point. I thought that the banks aren't lending and are writing off bad loans, hence credit should be shrinking. My understanding, based on the 'pushing on a string' argument, is that the monetary base is increasing due to the money printing activities of the central banks, but that credit is shrinking since banks won't lend out. Since the effect of shrinking credit outweighs the effect of an increasing monetary base, the overall money supply should be shrinking. However your data contradicts that and that's what I'm trying to understand.
If you can provide any commentary on that, whether by splitting out the money supply components and/or by any other means, I would be very grateful. Maybe you can explain for instance, using the data on your money supply components, why the 'pushing on a string' phenomenon appears not to be happening (or perhaps it is happening but your data doesn't pick it up, which would be equally interesting).
Obviously, I hope you will only answer to the extent that this is interesting for you. I'm very grateful for this site you have created and your replies so far.
Joe
Hi Joe,
I believe the "pushing on a string" argument has been accurate over the past year, ever since the central bank embarked upon a low interest policy. The fed has barely been able to keep up with the credit contraction. I have fully agreed with Shostak and Shedlock on this.
I just happen to believe that at this point the government credit injections have become so massive that in spite of the loan contraction effect, the money supply is rising.
I will create that breakdown later this evening and maybe then we can find out more.
I appreciate your great questions and feedback.
Hi Joe,
I now posted the contribution of each component to the money supply growth here:
http://www.economicsjunkie.com/money-supply-growth-october-2008-by-component/
Best,
Nima
http://www.economicsjunkie.com/money-supply-growth-october-2008-by-component/
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