Author Topic: M2 Money supply growing at 28.4%  (Read 9984 times)

LearningMachine

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M2 Money supply growing at 28.4%
« on: January 03, 2021, 09:23:35 PM »
Have folks been paying attention to the M2 Money supply?

Since March 2, 2020, it has increased 23.7% (annualized rate of 28.4%) from $15.513 Trillion to $19.197 Trillion, much faster then it grew during money printing days of GFC.

Maybe we'll get high inflation and high interest rates this time.

Source: https://fred.stlouisfed.org/series/M2



JRM

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Re: M2 Money supply growing at 28.4%
« Reply #1 on: January 04, 2021, 05:22:54 AM »
I think I posted a link to this interview in a different thread, but I think its an excellent discussion of the topic:

https://podcasts.apple.com/us/podcast/the-end-game-ep-6-lacy-hunt/id1508585135?i=1000487560045

Lacy Hunt has some very good insights as to why M2 alone doesn't account for CPI inflation, and what could change that.

wabuffo

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Re: M2 Money supply growing at 28.4%
« Reply #2 on: January 04, 2021, 05:53:47 AM »
I think of of money supply this way:
Private sector assets = Public sector (i.e., Federal govt) liabilities.   

So money is basically a liability of the Federal government and an asset of the private sector.  As I've indicated in other posts, the Federal government offers the private sector three forms of "money":
a) currency in circulation
b) reserve balances with the Federal Reserve banks
c) US Treasury securities

In my view, the traditional measures of money supply - M1, M2, MZM are simply imperfect measures of private sector assets that can be more easily measured by looking at their mirror image of Federal government liabilities of "moneyness".

Here's a FRED chart that puts it together.  The formula is: (currency in circulation + reserve balances at the Fed + US Treasury debt held by the public - US Treasury debt held by the Fed).  As of this Dec. 30th, 2020 - the total money liabilities of the Federal government stood at $22t.  That liability has grown 18.9% since March 4, 2020.  While that sounds impressive - this measure has been growing at +10.8% per year since mid-2008.  [click on chart for full-screen viewing]



Ok - so what is the effect of all this?  My own theory is that it is already having an effect - just not in CPI measures, but in debasement of the currency which manifests itself in asset inflation.  The canary in the coal mine for me is gold which has been very sensitive to this "money" growth.  Here's two examples from this dataset - one when money "supply" fell significantly and one when money "supply" increased significantly.

The first is from 1997-2001 when the US actually ran a Federal surplus (taxes exceeded spending).  This caused "money supply" to fall for one of the few times in our recent history (-4% per year over this period).  Look what happened to gold - it fell too.  In addition, the stock market had a three-year funk (2000-2002) as it finally started to feel the cumulative deflationary effect at the beginning of 2000.



The next chart is after the GFC, when spending ramped up in response to the crisis, "money supply" increased 17% per year from mid-2008 to the end of 2012.  Gold responded to this as well.  Now the relationship between money supply growth and asset inflation (or gold) isn't linear or perfect so its not a perfect "hard and fast" rule.  But I think the general relationship makes sense to me as the supply of new gold mined every year is around 1.8% of the above-ground gold inventory.  Gold's monetary attribute is stability since it grows very slowly.  This is also what Bitcoin is trying to do - grow supply at 2% per year (like gold).



My guess is that the reason gold is jumping again since early December is because it is starting to "feel" the effect of this second round of stimulus that has begun this week and will start to appear in the US Treasury spending numbers in January.

FWIW,
wabuffo
« Last Edit: January 04, 2021, 06:13:09 AM by wabuffo »

LearningMachine

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Re: M2 Money supply growing at 28.4%
« Reply #3 on: January 04, 2021, 08:36:10 AM »
My own theory is that it is already having an effect - just not in CPI measures

I agree with this. So far, the goods and services that CPI measures have not gone up in price.  Part of it is probably that folks impacting the marginal/supply demand of those goods and services have not been getting the increased money supply.

With minimum wage going up, I think those folks will start getting a part of the increased money supply as well, and they will then compete with each other on the same limited goods and services to raise their prices.

Regarding asset inflation so far - yes, part of it could be due to money supply, but I think for a lot of assets, e.g. real estate, it has been due to the lower interest rates.  With inflation, will come high interest rates, which will be negative for CRE.
« Last Edit: January 04, 2021, 08:40:18 AM by LearningMachine »

cherzeca

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Re: M2 Money supply growing at 28.4%
« Reply #4 on: January 04, 2021, 01:09:38 PM »
@wabuffo

"Private sector assets = Public sector (i.e., Federal govt) liabilities."

how about public sector assets? how much is the Grand Canyon (etc) worth?

wabuffo

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Re: M2 Money supply growing at 28.4%
« Reply #5 on: January 04, 2021, 01:18:37 PM »
how about public sector assets? how much is the Grand Canyon (etc) worth?

i was talking about the US monetary system - you know, more mundane stuff. Accounting ledger debits and credits....

I don't do the big picture stuff like you do. My cognitive capacity is quite limited.   8)



wabuffo
« Last Edit: January 04, 2021, 01:56:43 PM by wabuffo »

Morgan

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Re: M2 Money supply growing at 28.4%
« Reply #6 on: January 04, 2021, 07:34:57 PM »
Perhaps I donít understand M2 completely, but the price of everything I bought in 2020 for my company (plumbing and electric supplies, lumber, tools, etc) has gone up by at least 10%. Frequently 20% - 100% increases in prices. Lumber in particular has been completely insane. This is anecdotal of course, but everything is getting more expensive!

gary17

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Re: M2 Money supply growing at 28.4%
« Reply #7 on: January 04, 2021, 08:40:36 PM »
thatís because everybody is renovating their homes during covid lockdowns

mattee2264

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Re: M2 Money supply growing at 28.4%
« Reply #8 on: January 05, 2021, 03:42:20 AM »

 I think what is different this time is the money supply growth is enabling enormous budget deficits. That has a much more direct impact on aggregate demand and as capacity is still somewhat constrained I'm expecting quite significant inflation later this year (that will ease slightly as encouraged by strong demand businesses are incentivized to ramp up)

wabuffo

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Re: M2 Money supply growing at 28.4%
« Reply #9 on: January 05, 2021, 06:26:45 AM »
I think what is different this time is the money supply growth is enabling enormous budget deficits.

Is it really different this time, though?   The numbers look big, but as always I think its important to put them in context.

During the response to the GFC, the US hit a peak deficit-to-GDP ratio on a trailing-twelve month basis during Sep Q 2009 of 12.58%.   
During this crisis, the peak deficit-to-GDP ratio on a trailing-twelve month basis was during the June Q 2020 of 14.8%.   The deficit continued to go up on a TTM basis for the Sep Q 2020 but so did GDP such that the ratio for Sep Q 2020 actually fell slightly to 13.31% of GDP.

So yes - the budget deficits are a bit bigger, but not enormously so, when place in the context of the size of the US economy.   

Did we have inflation after 2009?  I didn't see much of it.  Did we have currency debasement?  That we sure did - gold took off and hit a peak in 2012 but declined after that as deficit-to-gdp ratios came back down to the single-digit range percentages.

wabuffo
« Last Edit: January 05, 2021, 06:29:54 AM by wabuffo »