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M3 Growth Touches 18%

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M3 Growth Touches 18%

Unread postby mattduke » Tue 13 Nov 2007, 16:22:02

There it is folks. 18% inflation in the USA.

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Re: M3 Growth Touches 18%

Unread postby Nano » Tue 13 Nov 2007, 17:38:19

Great find.

How trustworthy are these guys in making charts, though? I mean, this data is so suggestive that predicting the future seems childsplay. Hardly seems likely it could be that way, somehow.
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Re: M3 Growth Touches 18%

Unread postby FoxV » Tue 13 Nov 2007, 17:59:53

Personally I'd wait for this to be confirmed by Shadowstats before getting to excited about it

However Shadowstats data is old (November 10th :roll:) and both their charts are pretty vertical so perhaps we'll have this confirmed by Shadowstats next week. in either case these guys and Shadowstats are showing some pretty nasty acceleration.

Also keep in mind an increase on a Percent scale means a parabolic increase on a linear scale. If the trend they're suggesting keeps up, you won't be using your wheel barrows for gardening this spring
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Re: M3 Growth Touches 18%

Unread postby ohanian » Tue 13 Nov 2007, 19:26:38

$this->bbcode_second_pass_quote('mattduke', 'T')here it is folks. 18% inflation in the USA.

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18% my foot!
You guys can't count for sh it!

Try 10%

$this->bbcode_second_pass_code('', '
(2007.91 , $12700)
(2004.00 , $8950)

deltaT = 2007.91 - 2004.00 = 3.91

deltaY = $12700 - $8950 = $3750

dY/dT = $959.07

percentage change = 959.07/8950 * 100% = 10.71% per year

CHECKING
========

2004 $8950 * 1.10^0 = $8950.0
2005 $8950 * 1.10^1 = $9845.0
2006 $8950 * 1.10^2 = $10829.5
2007 $8950 * 1.10^3 = $11912.4
2008 $8950 * 1.10^4 = $13103.7

2007.91 $8950 * 1.10^3.91 = $12991
compare with (2007.91 , $12700)
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Re: M3 Growth Touches 18%

Unread postby mattduke » Tue 13 Nov 2007, 20:08:23

You are calculating the arithmetic mean of the entire 3.91 year period. That is not the correct way to calculate the annualized inflation rate over the period. Percentages multiple, they don't add. The correct calculation would be to use the geometric mean. That would give you the following:

(12700./8950) ^ (1/3.91) = 1.093

Which would be a 9.3% annualized inflation rate over the 3.91 year period. That is an interesting number. However, for a more "current" inflation rate, you would take a shorter, recent period (last 3 weeks) and annualize that. That is the calculation that is being performed in the chart. In other words, if you extrapolate the inflation rate during the past 3 weeks out a full year, you would get 18%.

Shadowstats uses a "current window" larger than three weeks.
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Re: M3 Growth Touches 18%

Unread postby kadoomsoon » Tue 13 Nov 2007, 23:11:07

My money buys 50% less energy than 5 years ago.
Last edited by kadoomsoon on Wed 19 Dec 2007, 23:29:48, edited 1 time in total.
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Re: M3 Growth Touches 18%

Unread postby ohanian » Tue 13 Nov 2007, 23:28:56

$this->bbcode_second_pass_quote('mattduke', ' ') However, for a more "current" inflation rate, you would take a shorter, recent period (last 3 weeks) and annualize that. That is the calculation that is being performed in the chart. In other words, if you extrapolate the inflation rate during the past 3 weeks out a full year, you would get 18%.


Ah! I get it, you are saying the current instantaneous inflation is at 18% annualized rate.

Yes, in the very short term, you can get extremely high inflation rate which I completely believe because of the sudden jump in oil prices to $96 per barrel recently.
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Re: M3 Growth Touches 18%

Unread postby mattduke » Tue 13 Nov 2007, 23:55:30

$this->bbcode_second_pass_quote('ohanian', 'A')h! I get it, you are saying the current instantaneous inflation is at 18% annualized rate.

Yes, in the very short term, you can get extremely high inflation rate which I completely believe because of the sudden jump in oil prices to $96 per barrel recently.

I was using the traditional definition of inflation which is an increase in the dollar supply. The increase in the dollar supply is determined by the Fed and the banking system and not by oil. Goods prices typically increase as the markets digest the increased quantity of dollars.
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Re: M3 Growth Touches 18%

Unread postby sjn » Tue 13 Nov 2007, 23:58:53

$this->bbcode_second_pass_quote('ohanian', '')$this->bbcode_second_pass_quote('mattduke', ' ') However, for a more "current" inflation rate, you would take a shorter, recent period (last 3 weeks) and annualize that. That is the calculation that is being performed in the chart. In other words, if you extrapolate the inflation rate during the past 3 weeks out a full year, you would get 18%.


Ah! I get it, you are saying the current instantaneous inflation is at 18% annualized rate.

Yes, in the very short term, you can get extremely high inflation rate which I completely believe because of the sudden jump in oil prices to $96 per barrel recently.


You don't get it. M3 is the broadest measure of the US money supply. An increase in the money supply *is inflation*. Inflation can result in higher prices, but it doesn't have to... Historically has CPI (often used as a proxy for inflation) followed M3 at an offset due to the fact that not all new money ended up chasing consumer goods and an increase in supply of goods (economic growth) counters the effect. Today CPI is whatever is the government says it is, and no longer acts as an inflation proxy!
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Re: M3 Growth Touches 18%

Unread postby Gerben » Wed 14 Nov 2007, 01:10:28

$this->bbcode_second_pass_quote('sjn', ' ')An increase in the money supply *is inflation*.

It's not the same. If the economy grows you can buy more goods with the money as well.
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Re: M3 Growth Touches 18%

Unread postby MrBill » Wed 14 Nov 2007, 09:47:51

$this->bbcode_second_pass_quote('mattduke', '')$this->bbcode_second_pass_quote('ohanian', 'A')h! I get it, you are saying the current instantaneous inflation is at 18% annualized rate.

Yes, in the very short term, you can get extremely high inflation rate which I completely believe because of the sudden jump in oil prices to $96 per barrel recently.


I was using the traditional definition of inflation which is an increase in the dollar supply. The increase in the dollar supply is determined by the Fed and the banking system and not by oil. Goods prices typically increase as the markets digest the increased quantity of dollars.


Don't get me wrong, mattduke, I can sympathize with your underlying assumption that excess money supply growth 'can' lead to increased inflation, but it is patently wrong to say that this is "the traditional definition of inflation which is an increase in the dollar supply".

It is sloppy wordsmithing that leads to sloppy thinking and therefore the wrong conclusions.

First of all taking a snapshot of short-term money supply growth and extrapolating it for the full-year is a meaningless exercise. Much better to take rolling 12-month historical data for average money supply growth and compare it to growth in the real economy. Money supply growth that equals growth in the real economy is not inflationary, but inflation neutral.

Measures of short-term increases ignore money supply that is subsequently removed later before it becomes imbedded in consumer prices.

$this->bbcode_second_pass_quote('', ' ') The pace of growth in money supply is a number that's meaningless in a vacuum. To quote a rate of expansion offers no more insight than looking a stock or bond and having no knowledge of valuations beyond. With that in mind, what can we say of the 6.6% advance (in nominal terms) over the past year in M2 money supply, based on the latest data for the week through October 29?

We can begin to search for an answer by considering the speed of the economy. For the third quarter, the government's current estimate tells us that nominal GDP grew by an annualized 4.7%. Using those figures in combination, it's clear that the Fed's printing money at a significantly higher rate than economic growth.

source: DEVILISH DETAILS - The Capital Spectator

If we take an alternative measure of inflation, as proposed by some, and that is a loss of external purchasing power then as compared against Sterling (-7.5% ) and the euro (-13% ) we see that the US dollar has lost approximately 7.5 + 13 / 2 = 10.25% of its purchasing power.* That is much closer to ohanian's calculation, but arrived at by other means.

However, M3, that includes eurodollar deposits for example ignores that money supply creation within the banking system offshore that stays offshore, say as loans to Russian companies for investment in Russia, does not enter the US domestic economy and therefore would not contribute to US domestic inflation.

That I admit is a tricky concept because those US dollars must eventually flow somewhere if they are not subsequently removed by the banking system, and eventually the Fed, after those loans are repaid with interest, but I can give you another few anecdotal examples.

If I borrow money to buy a share, it temporarily adds support to the share price, but I am buying that share from someone. They now no longer own the share, so it is again price neutral. They have my borrowed cash. If they put that money back into shares then it is price positive for share prices.

If they use that money to buy goods and services in the domestic economy then it is inflationary for the domestic economy. A new source of stimulous entering the economy via the financial markets.

However, if they are a foreign investor and they take the sale proceeds from the shares and repatriate them to their own country then it does not contribute to higher share prices or to domestic inflation. As they sell USD and buy, say, GBP, EUR or JPY, it puts downward pressure on the USD and upward pressure on one of those other currencies.

Another example is when there is a lack of domestic demand and low capacity utilization in the economy. Like Japan. Again foreign investors are taking out loans in yen because the cost of money is low, but this is not showing up as domestic inflation. That is because again the foreign investor is selling yen to buy assets in another currency. They are only using the yen for funding. But the demand is showing up somewhere else.

And as there is excess capacity and slow growth in the domestic Japanese economy no one is borrowing those yen that were created to fund offshore carry trades. So those yen sit around in the Japanese banking system unused until they are mopped up via reverse repos (draining liquidity) by the BOJ or find themselves in low yielding JGBs (depressing yields).

Complicating matters is that excess money supply growth elsewhere in the global economy can show up as both asset price inflation and in domestic inflation from faster growth, so a central bank would have to keep rates restrictive to offset this external growth in order to keep inflationary pressures in the domestic economy low. That is independent of money supply growth, but effects it as higher real interest rates dampen money supply growth as well.

So there is no direct link between money supply growth and inflation, although excess money supply creation can lead to higher inflation eventually, but it depends on various other factors as well. Therefore, it is incorrect to say, "that this is the traditional definition of inflation which is an increase in the dollar supply".


* UPDATE: using a broader measure of the US dollar decline against a basket of 6-major world currencies - CHF, CAD, SEK, GBP, EUR & JPY the USD has sunk from a high of 85.28 to a low of 75.40 or a 11.5% decline.
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Re: M3 Growth Touches 18%

Unread postby mattduke » Wed 14 Nov 2007, 13:18:15

I'm not sure how you can disagree that the traditional definition of inflation is an increase in the money supply. The traditional definition cannot be altered by current events. Just go to any older dictionary. I do agree that extrapolating 3 weeks is rather meaningless. That is why I carefully, not sloppily, used the word "touches" in the post title. I also agree that there has been a worldwide desire to own inflated dollars which has distributed the losses incurred around the world and not just to Americans. To say that because the banknotes of a aggressively inflating 1800's era bank were carried to remote states means that that bank was not inflating is silly. The focus on prices is what leads to sloppy thinking. Even goods that are falling in price would have fallen more if not for monetary inflation.
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Re: M3 Growth Touches 18%

Unread postby Kingcoal » Wed 14 Nov 2007, 14:20:53

The way I understand it, if the extra money can be exported, it isn't inflationary to the domestic economy. However, apparently the oil markets are not willing to eat the extra money.
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Re: M3 Growth Touches 18%

Unread postby mattduke » Wed 14 Nov 2007, 14:35:33

$this->bbcode_second_pass_quote('Kingcoal', 'T')he way I understand it, if the extra money can be exported, it isn't inflationary to the domestic economy.

Yes, but your factories rust. It is better to run out of money to export and be forced to produce.
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