May 22, 2006
A HIGHER PLATEAU
It's passé, out-of-favor, irrelevant, and just plain dull. But its rate of increase has shifted higher. Is anybody watching? Does anybody care?
Not necessarily. Money supply elicits yawns these days. It's been a generation since the days when the release of the latest money supply numbers every Thursday from the Fed attracted widespread attention. Even when the central bank stopped publishing its broadest measure of money supply--the so-called M3 series--a few months back, there was a collective yawn from the financial world.
At the risk of putting readers to sleep, The Capital Spectator nonetheless continues to monitor money supply in the perhaps mistaken belief that something relevant may emerge from the analysis. That includes our belief that maybe, just maybe, there's a link between inflation and money supply.
For those of you still reading, it may be of interest to note that seasonally adjusted M2 money supply (the broadest measure of money supply currently published...last we checked) seems to have acquired a habit this year of consistently growing at a rate above 4%. The last time that happened with any consistency was back in late-2004 and early 2005.
To cite the latest example, in last Thursday's money supply report, M2 advanced by 4.4% over its year-earlier level. Although that's down from the recent peak of 5.0%, it's materially higher than the rate that prevailed in last two months of 2005.
In other words, dear reader, the pace of M2 expansion seems to have found a higher plateau, as the chart below reveals, which shows the rolling 52-week rate of change for seasonally adjusted M2 through May 8. Whether this higher plateau is destined to be long-running, or the start of even greater rates of ascendancy, remain to be seen. But for the moment, there's reason to ponder the implications, the risks, or (for the skeptics) if any of this matters.
Posted by jp at May 22, 2006 9:25 AM
we are all functioning (to best of our respective abilities)in a fiat money system - to ponder issues like money supply growth is akin to fish pondering what it would be like to blow bubbles or "hold breath" - the fact of fiatness trumps the marginal impact of money supply figures - i would be remiss if i did not also observe that those among us receiving more than the median household income should be careful about rocking the boat (wrt fiat money system and inflation) since those people are IN the boat - don't spook the herd please
Posted by: franko at May 23, 2006 9:23 AM
The higher growth rate of M2 has come down recently on a month-to-month basis, averaging 0.3 % last 3 months.
Good to keep watching it, though growth of sweep accounts has lowered the signal to noise ratio, I think. Best use of money supply is when inflation gets close to zero. The Japanese thought their policy was easy when interest rates were near zero, but inflation was negative. Only when they started "quantitative easing" meaning money supply increases did they get out of the outhouse. So keep money supply in the tool box for the low-inflation years.
Posted by: Bill Conerly at May 22, 2006 2:10 PM