Money supply & inflation link... and output

[bart]

Many have seen this long term chart showing the clear relationship between M2, M3 and inflation as defined by CPI-U adjusted with John Williams corrections. It's very clear, as far as it goes.

http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png




Some have noted that there is no output factor on that chart though, and that it detracts from the basic message. So here's the same chart, but with the addition of both chained GDP and also a (M3 minus CPI without lies) factor.

The M3 minus CPI without lies shows quite a high correlation with chained GDP (.67), and that's before any velocity factor is added. The correlation is also visually obvious.

Using either nominal GDP or GDP corrected by CPI w/o lies shows similar patterns, especially if a velocity factor and a credit/GDP factor are added in. I just used chained GDP since it's clearer & simpler.


http://www.nowandfutures.com/images/m2m3_cpi_gdp_links.png



Basically, the growth of money supply minus a corrected CPI is very close to the growth of GDP. Velocity adjustments make it even closer.

[Sapiens]

Bart,

How is Bank Credit of All Commercial Banks growth doing in relation to M3, do you happen to know?

http://warpics.googlepages.com/totalbankcreditaugust2008.png

[bart]

The green line - its growing at about 1/2 the rate of M3 and on the way down too.


http://www.nowandfutures.com/images/credit_types_roc_short_term.png

[Sapiens]

Goodness Bart! How are they going to pull out of this tailspin!

[bart]

Goodness Bart! How are they going to pull out of this tailspin!

In theory at least, the same way they always do - "print". It's also KaPoom in action.

We also have some probable helicopters warming up on Fannie & Freddie this weekend.

Note also that we're still far from the bottoms from 2002.

[bart]

I guess the issue with a missing output variable on my M2/M3 & inflation link wasn't a big deal, since no one has commnented on the charts with it added in.

To continue the velocity issue and how both to track it and show how it affects the whole inflation, disinflation and deflation areas, here's the same basic chart but adding M1/Base (thick red line) as a proxy for velocity.

The relationship between GDP, velocity adjusted money supply and real inflation as measured by CPI without lies can hopefully easily be seen.

http://www.nowandfutures.com/images/m2m3_cpi_gdp_velocity_links.png

[metalman]

I guess the issue with a missing output variable on my M2/M3 & inflation link wasn't a big deal, since no one has commnented on the charts with it added in.

To continue the velocity issue and how both to track it and show how it affects the whole inflation, disinflation and deflation areas, here's the same basic chart but adding M1/Base (thick red line) as a proxy for velocity.

The relationship between GDP, velocity adjusted money supply and real inflation as measured by CPI without lies can hopefully easily be seen.

http://www.nowandfutures.com/images/m2m3_cpi_gdp_velocity_links.png

cool. now where's the 'jockey on the horse' :D the fed in the picture mucking with rates to maintain the correlation?

[bart]

cool. now where's the 'jockey on the horse' :D the fed in the picture mucking with rates to maintain the correlation?

Grasshopper, that knowledge is only available after you buy the silver lined tinfoil hat lifetime subscription... :cool:

But I did hear that the Gnomes of Zurich are looking at financing a remake of...

http://www.nowandfutures.com/g2/perils_of_pauline1.jpg

... to be called the Perils of Paulson, which might include the gory details... stay tuned for further cliff hangers...