View Full Version : Money supply, lags, velocity
<center>Money supply factors and lags
</center> <center><table border="0" cellpadding="4" cellspacing="1" width="80%"> <tbody><tr><th rowspan="1" colspan="2" align="center">
</th></tr> <tr> <th align="left" width="20%">Item</th> <th width="50%">Lag, operable time frame</th> <th width="30%">Notes</th> </tr> <tr> <td>M1 (http://www.nowandfutures.com/glossary.html#money_measures)</td> <td align="left">4-10 months, averages 6-9</td> <td align="left">
</td> </tr> <tr> <td>M2 (http://www.nowandfutures.com/glossary.html#money_measures)</td> <td align="left">9-20 months, averages 12-18</td> <td align="left">
</td> </tr> <tr> <td>M3 (http://www.nowandfutures.com/glossary.html#money_measures)</td> <td align="left">9-20 months, averages 12-18</td> <td align="left">
</td> </tr> <tr> <td>Monetary base (http://www.nowandfutures.com/glossary.html#base)</td> <td align="left">6-12 months, averages 8-16</td> <td align="left">High importance, controlled directly</td> </tr> <tr> <td>Bank credit (http://www.nowandfutures.com/glossary.html#credit)</td> <td align="left">Two lags - one is 3-6 months, and the other is similar to M3</td> <td align="left">High importance</td> </tr> <tr> <td>Fed & comm'l repos (http://www.nowandfutures.com/glossary.html#repo)</td> <td align="left">Two lags - one is virtually immediate and is more important, and there is also a secondary lag of about 10 months</td> <td align="left">High importance to stock market - the best single stat proxy for the Fed</td> </tr> <tr> <td>Securities Lending (http://www.nowandfutures.com/glossary.html#seclend)</td> <td align="left">Two lags - one is virtually immediate, and the other varies between 1-4 months</td> <td align="left">High importance to bond interest rates</td> </tr> <!-- <tr> <td></td> <td align="left"></td> <td align="left"></td> </tr> <tr> <td></td> <td align="left"></td> <td align="left"></td> </tr> <tr> <td></td> <td align="left"></td> <td align="left"></td> </tr> <tr> <td></td> <td align="left"></td> <td align="left"></td> </tr> <tr> <td></td> <td align="left"></td> <td align="left"></td> </tr> --> </tbody></table> </center>
The changing velocity (http://www.nowandfutures.com/glossary.html#velocity) of money is the primary reason for the wide range in lags from the time money is created until it is reflected in inflation. With high inflation, money moves faster and there appears to be more in the system. Note that these numbers are only guidelines as of 2008.
Also note that the lags above only apply to the U.S. Federal Reserve. Other countries central banks may have different lags since money measure definitions differ.
"Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine months, but in a range of three to 18 months. Usually in about two years in the US, they correlate with changes in the rate of inflation or deflation.
The leads are long and variable, though the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation."
-- Milton Friedman, economist
<center>Other views of lags, velocity, etc.
</center> There is the classic time lag between when excess money is actually created and how long it takes for it to be *fully* reflected in all prices as the following chart clearly shows.
<center>http://www.nowandfutures.com/images/m2m3_cpi_money_supply.png</center>
The big aggregates like M2 & M3 take the longest. The lag is significantly shorter for the effect on financial assets too, no more than about two years being our rule of thumb as noted above.
And changes in velocity also affect the lag. You can see it easily during the 1965-1985 period, where the CPI narrows the gap a bunch.
When we get to the truly "hot" money like TOMOs and TIOs, the lag is measured in days with financial assets.
A case could also be made that the size of the gap between CPI and money supply is a workable measure for real productivity. Also, the gap between M2 and M3 can represent how much the Fed is pumping on a relative basis. Note that the last two are only valid when judged on a longer term.
<center>http://www.nowandfutures.com/images/m2m3_cpi_gdp_velocity_links.png</center>
A longer term picture showing the relationship of one definition of velocity to the entire GDP and inflation picture, but excluding any productivity measures.
Source:
http://www.nowandfutures.com/money_and_lags.html
Then along comes Koo to demonstrate that under a balance sheet recession as the US probably entered this year, everything we know is wrong.
http://www.itulip.com/images/numura19koo.gif
Then along comes Koo to demonstrate that under a balance sheet recession as the US probably entered this year, everything we know is wrong.
I doubt it very much.
The BoJ are amateurs in money creation when compared to the Fed. Koo economics reminds me a bit of voodoo economics and of course, the irreverant Galbraith quote "Economics exists to make astrology look respectable.".
When the BoJ did follow a stronger Fed recommended money creation policy in 2001-2 (and including lags), both the markets and the CPI responded very much as would be expected.
When they reversed in 2006 (and including lags), both the markets and the CPI also responded very much as would be expected... although world money growth also inevitably affected CPI too.
Create more "money" than "goods", you get inflation - when taking velocity & lags etc. into account.
http://www.nowandfutures.com/images/boj_money_short_term.png
Since this has been diverted somewhat into the Richard Koo view area, I thought I'd expand on my thoughts and facts in the area beyond what has already been stated.
The reference to "voodoo" economics was intended to point out that the Econ 101 basic of "create more 'money' than 'goods', you get inflation - when taking velocity & lags etc. into account." has once again been lost sight of.
'Money' is not just M3 or bank credit, etc.
'Goods' are not just trips to the grocery store, iPhone purchases or lawn care services, etc.
Gov't debt assumption or creation does have a monetary component and goods do include new or repaired infrastructure, etc. The Austrians are way off base, and ignoring the actual facts (setting aside the non economic issues). And the balance sheet inflation or deflation concept, while useful, hides the raw basics and that the extant definitions of money and goods are at best incomplete.
The recovery out of the Great Depression was not just about FDR's actions, including the gold revaluation.
Here's a simple chart showing GDP, M3, Base and Federal debt annual change rates from 1920-1940... and its quite clear that both Base and Federal debt increases preceded (as in monetary time lags) GDP recovery. Hoover and his administration and the Fed did actually start to get it "right" in 1931.
And drops in both Base and the Federal debt annual change rate also preceded (as in monetary time lags) the deep recession of the late 1930s too.
Bernanke knows these facts too. Japan is not different.
"The four most dangerous words in investing are, 'It's different this time.'"
-- Sir John Templeton
http://www.nowandfutures.com/download/m1m3_gdp_debt_1920_1940.png
Additionally, the velocity picture in Japan is quite clear too. The sentiment effects on the populace from the money creation games played by the BoJ in the 1970s and especially the 1980s were very costly in blowback.
Velocity crashed due to trust issues, etc. and it still has not recovered.
http://www.nowandfutures.com/images/velocity_japan.png
One item caught my eye:
Bank credit - lag = 3 - 6 months.
EJ 'flight to safety' period ending in 2 - 6 months.
Surely a coincidence, but possibly mutually reinforcing?
One item caught my eye:
Bank credit - lag = 3 - 6 months.
EJ 'flight to safety' period ending in 2 - 6 months.
Surely a coincidence, but possibly mutually reinforcing?
I noticed that too, and always count it as a good sign when different approaches point towards a similar conclusion.
Part of my back order of round tuits recently came in and I cleaned up a lot of the velocity data on my Fed Watch page... and also created brand new weekly based velocity charts. One uses annual change rates, the other quarterly change rates.
http://www.nowandfutures.com/images/velocity_weekly52.png
http://www.nowandfutures.com/images/velocity_weekly13.png
Note that velocity is measured in many different ways, and that no single way is adequate to express it at all times.
I was looking at something similar...
2008-10-22 1.231
2008-11-05 1.193
2008-11-19 1.002
2008-12-03 1.028
2008-12-17 0.954
http://research.stlouisfed.org/fred2/data/MULT_Max_630_378.png
Isn't these how globalodollars are born and allowed to fly free out of the Fed's nest (in order to never return home :eek:)
That's pure genius. Dollarizing the whole world on a cheap ... actually looking to the latest treasury auctions one would better call it global dollarization for free (or even with a small profit :D)
Someone there at the Fed really loves that part in Tom Sawyer with whitewashing the fence :D
Hey bart, do you think you can incorporate this is one of your charts?
http://research.stlouisfed.org/fred2/data/EXCRESNS.txt
Just to understand how deep is the crisis in the financial system :D
Shadowstats is reporting close to a 16% annual growth rate in M1. It seems like the message in the OP is that we also need to factor in velocity in order to make a reasonable estimate of future inflation impact.
But even the recent decrease in velocity doesn't seem large enough to make a serious impact on future inflation rate. Maybe it will act to extend the lag between larger M1 and when inflation hits? M1 started to accelerate seriously in roughly July 2008 -- so the longer side of the lag estimates of perhaps 9 months would mean inflation starts to ramp up in roughly Apr 2009?
http://www.shadowstats.com/imgs/sgs-m3.gif?hl=ad
Hey bart, do you think you can incorporate this is one of your charts?
http://research.stlouisfed.org/fred2/data/EXCRESNS.txt
Just to understand how deep is the crisis in the financial system :D
No December numbers ?
Hey bart, do you think you can incorporate this is one of your charts?
http://research.stlouisfed.org/fred2/data/EXCRESNS.txt
Just to understand how deep is the crisis in the financial system :D
I actually do track it on my Fed watch page. Here's the pictures:
http://www.nowandfutures.com/images/fed_excess_total_reserves.png
http://www.nowandfutures.com/images/fed_excess_total_reserves_long.png
Shadowstats is reporting close to a 16% annual growth rate in M1. It seems like the message in the OP is that we also need to factor in velocity in order to make a reasonable estimate of future inflation impact.
But even the recent decrease in velocity doesn't seem large enough to make a serious impact on future inflation rate. Maybe it will act to extend the lag between larger M1 and when inflation hits? M1 started to accelerate seriously in roughly July 2008 -- so the longer side of the lag estimates of perhaps 9 months would mean inflation starts to ramp up in roughly Apr 2009?
Yes - money supply plus velocity plus time lags is the basic formula, and it also depends on what one is looking at as inflation. The stock market or commodities for example will respond faster than prices at a grocery store or wages.
M1 wise, the raw data from 2 weeks ago actually showed an annual change rate of 17.9% and last week it was 15.8%. Keep in mind that M1 is about 1/2 checking deposits and folk are into savings big time, and the other half is cash which the Fed is allowing to be printed faster too - annual change rate around 7% currently.
And my weekly M3 reconstruction has bottomed (and before John Williams data too ;) ), especially when shown with a 13 week change rate.
http://www.nowandfutures.com/images/m3b_13week.png
But in my opinion you're underestimating the current effect from velocity and how much it has actually dropped. People are scared and aren't spending, as shown in many current stats.
There are some signs that its bottoming.
http://www.nowandfutures.com/images/velocity_weekly13.png
And overall, its far from impossible that your WAG on next April will be roughly correct. My target has been somewhere between the Ides of March and early June for a while, and its also data dependent.
Nothing like Econ 101 to help with crystal ball moments.
I was looking at something similar...
2008-10-22 1.231
2008-11-05 1.193
2008-11-19 1.002
2008-12-03 1.028
2008-12-17 0.954
http://research.stlouisfed.org/fred2/data/MULT_Max_630_378.png
Isn't these how globalodollars are born and allowed to fly free out of the Fed's nest (in order to never return home :eek:)
That's pure genius. Dollarizing the whole world on a cheap ... actually looking to the latest treasury auctions one would better call it global dollarization for free (or even with a small profit :D)
Someone there at the Fed really loves that part in Tom Sawyer with whitewashing the fence :D
How much longer do you think it can/will last?
How much longer do you think it can/will last?
On this one I'm basically in agreement with bart, except some small differences with respect to details.
IMHO the velocity is artificial chocked and can be released by the master crooks quite fast, if desired. And there are quite a few backstops build in in order to stop the inflationary chute that will result in the reversal from treasuries to agencies.
Depending on external development (more precisely on how exactly China falls, or accepts the Fed compromise) the recovery can start as early as March... Most probably we will end the 2009 on a quite positive note.
Honestly, I don't think that can see the complete picture right now, but absent any major unexpected developments the situation should improve sometimes from march to august (based on the current picture, I would guess that it will happen earlier than later ie march to april).
Bart, thanks for your charts. They are simply great.
That's pure genius. Dollarizing the whole world on a cheap ... actually looking to the latest treasury auctions one would better call it global dollarization for free (or even with a small profit :D)
The ROW is complicit.
Swedish financials are still wanting more USD than SEK at the Riksbank auctions, of course they are cheaper:
http://www.riksbank.com/
Today’s auction of credit in US dollars with a maturity of 84 days has now been completed
07/01/2009 Bids were received for a total of USD 13.5 billion. The total allotment was USD 10.0 billion. The marginal interest rate was set at 1.060 per cent.
Today’s auction of three-month SEK loans has now been completed
05/01/2009 On 20 October the Riksbank introduced a programme of recurrent auctions in order to offer SEK loans to the monetary counterparties. The fifth auction within the programme was completed at 12.00 today. The amount auctioned was SEK 120 billion and the total amount of the bids submitted was SEK 56.5 billion, which was also the total amount allocated. The marginal interest rate was set at 2.25 per cent
The ROW is complicit.
Some of them are complicit, some of them are driven by their own stupidity or greed (or both) and some of them are just grasping straws trying delay the inevitable just another week, month etc.
In this particular case, let's not forget Sweden is on the Fed friendly list.... so they are in the accomplice category ;)
Some of them are complicit, some of them are driven by their own stupidity or greed (or both) and some of them are just grasping straws trying delay the inevitable just another week, month etc.
In this particular case, let's not forget Sweden is on the Fed friendly list.... so they are in the accomplice category ;)
What happened to the diversifying ?
Saturday, April 22, 2006
Central Bank of Sweden to Diversify Away from Dollar
China and Japan are not the only central banks wanting to diversify. Sweden is now joining the crowd, according to an article (in French) at boursorama.com.
Sweden will increase Euro reserves to 50% (from 37%) and decrease dollars to 20% (from 37%.)
http://sybilstar.blogspot.com/2006/04/central-bank-of-sweden-to-diversify.html
USD is currently at 20% of reserves.
The Riksbank has a swap agreement with the FED which I would suppose is used to provide the USD for these "Swedish USD Treasury auctions", or whatever they should be called.
http://www.riksbank.com/templates/Page.aspx?id=21200
Asset management at the Riksbank
rdgmail
01-12-09, 05:45 PM
When the BoJ did follow a stronger Fed recommended money creation policy in 2001-2 (and including lags), both the markets and the CPI responded very much as would be expected.
When they reversed in 2006 (and including lags), both the markets and the CPI also responded very much as would be expected... although world money growth also inevitably affected CPI too.
Create more "money" than "goods", you get inflation - when taking velocity & lags etc. into account.
Bart: I very much appreciate your analysis and data. Very interesting and useful. I don't pretend to have a detailed or even rudimentary understanding of many of the economic principles you've discussed, but I nevertheless hope I can ask a relevant question or two concerning your statement about BOJ above.
In 2001-2002, when Japan finally began quantitative easing, what do you mean by "the markets . . .responded very much as would be expected."? Did equities rise after the time lag you mention? Are you referring to markets other than equities?
My understanding, which could easily be wrong, is that the quantitative easing in Japan had a very small effect on GDP, inflation or aggregate demand. I'm not saying no effect, only that I have read the effect was extremely small given the size of the money creation. Is that your understanding?
Your other charts seem to confirm a serious decline in velocity at that time in Japan. Presumably this is because the quantitative easing/ new money was being hoarded to repair broken balance sheets but was not reaching the real economy in the form of an increase in lending, output or aggregate demand. Is this incorrect?
Now I'm not interested in Japan's experience per se, only as it relates to how the US Fed and Treasury may act here in the U.S. now and going forward. In that regard, the vast quantities of money that the U.S. Gov't (including the Fed) is placing in the system, and the related decrease in various measures of velocity, seem to indicate that the current quantitative easing in the US (so far) is being hoarded by banks (or GMAC or AIG) for the purpose of repairing balance sheets or because there are an insufficient number of qualified customers to take out loans at good rates. So it's not clear to me how quantitative easing, 2009 style, will be any more effective in increasing demand or economic output in the US than it was in Japan. Or perhaps Japan was more successful than I realize, and its GDP, inflation, and markets positively (at least nominally) benefitted from Japan's 2001-2002 money creation?
I hope you can help me better understand your points, even though admittedly, my cranial velocity seems seriously diminished at the moment. Many thanks.
Interesting charts in Econobrowser:
http://www.econbrowser.com/archives/2009/01/signs_of_a_thaw.html
TED spread
http://www.econbrowser.com/archives/2009/01/ted_spread_jan_09.jpg
Fed assets
http://www.econbrowser.com/archives/2009/01/fed_assets_jan_09.gif
Fed liabilities
http://www.econbrowser.com/archives/2009/01/fed_liab_jan_09.gif
Fed's balance shit went down $126 bil.
Well bart, I guess you were right.
Interesting charts in Econobrowser:
http://www.econbrowser.com/archives/2009/01/signs_of_a_thaw.html
TED spread
http://www.econbrowser.com/archives/2009/01/ted_spread_jan_09.jpg
Whew! Glad that's all over with. Well, back to business as usual, then. (http://itulip.com/forums/showthread.php?t=7369)
Bart: I very much appreciate your analysis and data. Very interesting and useful. I don't pretend to have a detailed or even rudimentary understanding of many of the economic principles you've discussed, but I nevertheless hope I can ask a relevant question or two concerning your statement about BOJ above.
In 2001-2002, when Japan finally began quantitative easing, what do you mean by "the markets . . .responded very much as would be expected."? Did equities rise after the time lag you mention? Are you referring to markets other than equities?
My understanding, which could easily be wrong, is that the quantitative easing in Japan had a very small effect on GDP, inflation or aggregate demand. I'm not saying no effect, only that I have read the effect was extremely small given the size of the money creation. Is that your understanding?
Your other charts seem to confirm a serious decline in velocity at that time in Japan. Presumably this is because the quantitative easing/ new money was being hoarded to repair broken balance sheets but was not reaching the real economy in the form of an increase in lending, output or aggregate demand. Is this incorrect?
Now I'm not interested in Japan's experience per se, only as it relates to how the US Fed and Treasury may act here in the U.S. now and going forward. In that regard, the vast quantities of money that the U.S. Gov't (including the Fed) is placing in the system, and the related decrease in various measures of velocity, seem to indicate that the current quantitative easing in the US (so far) is being hoarded by banks (or GMAC or AIG) for the purpose of repairing balance sheets or because there are an insifficient number of qualified customers to take out loans at good rates. So it's not clear to me how quantitative easing, 2009 style, will be any more effective in increasing demand or economic output in the US that it was in Japan. Or perhaps Japan was more successful than I realize, and its GDP, inflation, and markets positively (at least nominally) benefitted from Japan's 2001-2002 money creation?
I hope you can help me better understand your points, even though admittedly, my cranial velocity seems seriously diminished at the moment. Many thanks.
Good questions and I'll do what I can to answer them, and thank goodness that a place like iTulip exists where just plain raw facts can mostly be discussed without spin from vested interests or some odd almost worship of one or another economic school.
I do know that some or much of what I post isn't easy to understand without an economic background (and frequently, a thick tinfoil hat ;) ), but I honestly don't know what else to do other than post charts and opinions and let people ask when I do inevitably go over the top.
Anyhow, here are two charts hot off the press that I've been wanting to do for quite a while and finally completed yesterday.
http://www.nowandfutures.com/images/boj_money_key_stats1990on.png
http://www.nowandfutures.com/images/boj_money_key_stats1990on2.png
The first is the more important of the two and the bottom line is in the text box - when monetary base and gov't debt expanded at 10% or more per year, GDP and CPI responded after a lag.
The second chart shows the Nikkei stock index, as well as M3 & credit, but you and others should also easily be able to see how the Nikkei responded much quicker and larger than GDP or CPI - the FIRE economy in action, to use EJ's paradigm.
Part of what you note about QE causing small responses is of course true as you can see, but not only should you compare in the other direction (how much did it take to push the Nikkei to 40,000 and housing prices to their ridiculous level in 1989), you also should consider the large reaction here in the US that surprised so many with such an apparent "small" cause from a drop in housing prices.
And the GDP jump from about -3.5% to almost 10% from late 2003 to early 2005 is quite significant, and the same with the goods CPI move from about -3% to +3% between 2003 and 2006 - it is also a quite significant move... and you can also see others that were smaller.
My basic point here is that it takes a *large* & continuing stimulus to reverse a deflation that occurs after a large inflation, and to turn velocity around. 10% moved it in Japan, 15% or a more consistent 10% instead of all the jumping around would have moved it significantly higher. And its *total* money, not just M3 or credit or whatever that makes the difference.
Note also that I intentionally have not added any velocity measures to those two charts, since they're already quite busy and it would also possibly confuse the issue. Their basic point is to show that if one pushes hard enough on that (money creation) string, both CPI and GDP do and will respond after a time lag.
I'm not going to make any value judgments about how wise the money creation is or isn't though, but rather just show what actually happened.
But you are correct that velocity (or inflation expectations) is also key. The erratic behavior of the BoJ with base and the MoF with gov't debt just plain wasn't enough to shift velocity and inflationary expectations. Part of the increases in both base and debt were indeed soaked up in repair of the horrific state of the average big Japanese bank too, and that's another reason why they didn't generally succeed... and again, 15% and more consistently probably would have.
You also need to take into account the huge differences in cultures - the US is deflation averse while Japan is more inflation averse, and that also constrained both the BoJ and MoF.
Also consider that although the US economy was beginning to turn in 1932, there was also about a 70% dollar devaluation (aka inflation) caused by FDR's revaluation of gold too... and even that didn't do it since the stimulus backed off in 1935-36 and *bang*, the US was right back in the soup with the nasty 1937 recession (or depression continuation as some think).
The yen has "only" dropped by about 30% since 1990 too, for what its worth.
The real bottom line, as always, is that inflation is basically more money than goods and if inflation is what is wanted then creating enough money is all it takes.
bart, the recent bump in japan's cpi seems [just eyeballing here] to correspond with the sharp drop in global equity markets, the fdi's deflationary move, and a strengthening yen, presumably accompanied by repatriation of japanese capital back to japan. do you think those exogenous factors might have been significant in japan's cpi bump?
My basic point here is that it takes a *large* & continuing stimulus to reverse a deflation that occurs after a large inflation, and to turn velocity around. 10% moved it in Japan, 15% or a more consistent 10% instead of all the jumping around would have moved it significantly higher. And its *total* money, not just M3 or credit or whatever that makes the difference.
Here on iTulip we always distinguish between asset price inflation and goods and services price inflation, as high inflation of the former is a goal of monetary policy versus low inflation of the latter. We also distinguish between the inflation that results from sources other than an increase in the money supply, such as high import prices resulting from a weak currency, and decreases in goods and services supply, which is regrettably more difficult to measure.
Note also that I intentionally have not added any velocity measures to those two charts, since they're already quite busy and it would also possibly confuse the issue. Their basic point is to show that if one pushes hard enough on that (money creation) string, both CPI and GDP do and will respond after a time lag.
Indeed, it's only a matter of time.
I'm not going to make any value judgments about how wise the money creation is or isn't though, but rather just show what actually happened.
But you are correct that velocity (or inflation expectations) is also key. The erratic behavior of the BoJ with base and the MoF with gov't debt just plain wasn't enough to shift velocity and inflationary expectations. Part of the increases in both base and debt were indeed soaked up in repair of the horrific state of the average big Japanese bank too, and that's another reason why they didn't generally succeed... and again, 15% and more consistently probably would have.
You also need to take into account the huge differences in cultures - the US is deflation averse while Japan is more inflation averse, and that also constrained both the BoJ and MoF.
Again, it is important to distinguish between asset price inflation and goods price inflation. See Lessons from Japan: The Devil's in the Details Part I - Asset price deflation versus general prices. (http://itulip.com/forums/showthread.php?p=65602#post65602)
Also consider that although the US economy was beginning to turn in 1932, there was also about a 70% dollar devaluation (aka inflation) caused by FDR's revaluation of gold too... and even that didn't do it since the stimulus backed off in 1935-36 and *bang*, the US was right back in the soup with the nasty 1937 recession (or depression continuation as some think).
Not quite. What happened was that, as in Japan, when the political heat got turned up on Congress in 1937 to reduce deficit spending, the economy sank. Same occurred in Japan in 1997. Economies that are stimulated by government spending become dependent on it. The housing bubble was a government stimulus program that went terribly wrong, so now we're going to use government to bail the economy out of that government bailout. On and on it goes.
The real bottom line, as always, is that inflation is basically more money than goods and if inflation is what is wanted then creating enough money is all it takes.
And/or devaluing the currency and/or allowed output to fall while holding the money supply constant.
I'm not sure though if historical observation of lag periods can apply very well for the current "crisis". Since on another tread on this forum we had a very interesting discussion about financial astrology, it think is is natural that it should be equally interesting to discuss about another favourite of mine... financial alchemy. This is the proof magic things do happen:
http://research.stlouisfed.org/fred2/data/BOGNONBR_Max_630_378.png
bart, the recent bump in japan's cpi seems [just eyeballing here] to correspond with the sharp drop in global equity markets, the fdi's deflationary move, and a strengthening yen, presumably accompanied by repatriation of japanese capital back to japan. do you think those exogenous factors might have been significant in japan's cpi bump?
No question, and its just one of many of the dangers of attempting to show a point with charting. The recent CPI goods bump & drop has much more to do with global factors like oil prices and the credit & bank solvency issues than anything local to Japan.
Here on iTulip we always distinguish between asset price inflation and goods and services price inflation, as high inflation of the former is a goal of monetary policy versus low inflation of the latter. We also distinguish between the inflation that results from sources other than an increase in the money supply, such as high import prices resulting from a weak currency, and decreases in goods and services supply, which is regrettably more difficult to measure.
True enough, but both also submit to money supply analysis whether their source is local monetary or fiscal policy, or global ones. A weak currency is always caused by either lax monetary policy or poor fiscal policy, or both. There are other factors, but those are the root causes.
In the case of Japan in the asset inflation area, there also were significant real estate price increases starting in about 2004 and carrying into 2006, which was caused primarily by local but also by global money supply changes.
Not quite. What happened was that, as in Japan, when the political heat got turned up on Congress in 1937 to reduce deficit spending, the economy sank. Same occurred in Japan in 1997. Economies that are stimulated by government spending become dependent on it. The housing bubble was a government stimulus program that went terribly wrong, so now we're going to use government to bail the economy out of that government bailout. On and on it goes.
Sort of... we're talking about two different items. I was referring to base having dropped (monetary policy) in 1935-36 and it appears you're referring to fiscal policy and the debt creation drop off that started in very late 1936 and continued into 1938.
And/or devaluing the currency and/or allowed output to fall while holding the money supply constant.
Its probably semantics, but devaluing the currency does fiddle directly with and affects money supply, and is also fiscal policy.
And I did simplify excessively too for purposes of that explanation - the inflation definition I was using is roughly the iTulip one - "more money than goods"... and even that definition is overly simplified for some.
I'm not sure though if historical observation of lag periods can apply very well for the current "crisis". Since on another tread on this forum we had a very interesting discussion about financial astrology, it think is is natural that it should be equally interesting to discuss about another favourite of mine... financial alchemy. This is the proof magic things do happen:
http://research.stlouisfed.org/fred2/data/BOGNONBR_Max_630_378.png
I was tempted to make a comment about the crystal balls of the Fed but think I'll choose discretion as the better part of valor for now... ;)
I do sometimes wonder if an FOMC meeting ever resembles a seance though... :eek:
http://www.nowandfutures.com/grins/seance.gif
...
Fed assets
http://www.econbrowser.com/archives/2009/01/fed_assets_jan_09.gif
Fed liabilities
http://www.econbrowser.com/archives/2009/01/fed_liab_jan_09.gif
Fed's balance shit went down $126 bil.
Well bart, I guess you were right.
It may augur a change in Fed actions, but one or two weerks isn't a long enough picture to say.
And when looking at the overall picture, including Treasury actions, at best the money creation rate is only slowing.
http://www.nowandfutures.com/images/fed_all_short_stacked.png
It may augur a change in Fed actions, but one or two weerks isn't a long enough picture to say.
And when looking at the overall picture, including Treasury actions, at best the money creation rate is only slowing.
http://www.nowandfutures.com/images/fed_all_short_stacked.png
I guess you are right again. About the slowdown in money creation ... two interesting things... First I've red few days ago the FED is finally going to do something about those Treasuries FTD's ... and it seems they are planning a program to back charge FTD's and they were talking about a lot of FTD's...
http://www.bloomberg.com/apps/news?pid=20601103&refer=news&sid=aJQOEPb4pCYg
The problem is market participants haven’t always delivered the bonds, causing “fails” to exceed $5 trillion at their peak, according to the New York Fed. Because the penalties will be imposed across the government debt market, unregulated investors like hedge funds will be held to the same standard as banks and bond dealers
Another interesting thing I've seen recently an interesting chart in Setser's blog:
http://blogs.cfr.org/setser/files/2009/01/trillion-deficit-1.png
I would say the conditions are primed and the backstops in place ...;)
I guess you are right again. About the slowdown in money creation ... two interesting things... First I've red few days ago the FED is finally going to do something about those Treasuries FTD's ... and it seems they are planning a program to back charge FTD's and they were talking about a lot of FTD's...
http://www.bloomberg.com/apps/news?pid=20601103&refer=news&sid=aJQOEPb4pCYg
Hadn't seen that yet - thanks. It's about time.
Another interesting thing I've seen recently an interesting chart in Setser's blog:
http://blogs.cfr.org/setser/files/2009/01/trillion-deficit-1.png
I would say the conditions are primed and the backstops in place ...;)
*rimshot*... and I'm in agreement with EJ about a "currency event" this year - I actually thought it would happen last year.
*rimshot*... and I'm in agreement with EJ about a "currency event" this year - I actually thought it would happen last year.
As, I've said after Lenman failed the housing bubble outfall can be stopped (or better said put on hold for a year or two) only by a currency event. I suspect that this "currency event" will be like no other... respectively it will be far more benign than we will be let to believe at the burst time.
It's all about prodding the herd of dumb and scared investors in the desired corner of the slaughter house pen ...;)
One think I have to give to Hank, Ben and their buddies: they are extremely smart and gutsy to pull such a stunt.
rdgmail
01-13-09, 09:46 PM
*rimshot*... and I'm in agreement with EJ about a "currency event" this year - I actually thought it would happen last year.
Bart: Thanks again for the discussion, but you've lost me on this. Why/how is the change in Treasury holdings related to a possible currency event - and what types of events do you envision as being possible?
If you mean an event that triggers a dollar plunge, I'm beginning to think that China, Japan and the petro countries will prevent any significant decline in the dollar (i.e., keep funding U.S. deficit) until somebody figures out how to replace U.S consumer demand (former demand) with something else. I assume China now sees what happens when US consumer demand decreases and they certainly don't want to worsen (by slowing their puchases of treasuries) the situation while their own economy is in freefall. This is a hunch rather than anything based on analysis, but it seems to me that just as bubbled markets can stay irrational longer than most can stay solvent, perhaps, too, the US Dollar can levitate and the Gov't can fund deficits at absurdly low interest rates, so long as the U.S. remains in a liquidity trap.
Now I can imagine a currency event this year involving the Euro because many Eoropean banks levered up more than the U.S. and it's doubtful that Germany will want to bail out Spain or Ireland.
rdgmail
01-13-09, 10:29 PM
As, I've said after Lenman failed the housing bubble outfall can be stopped (or better said put on hold for a year or two) only by a currency event. I suspect that this "currency event" will be like no other... respectively it will be far more benign than we will be let to believe at the burst time.
Ok, $#*, what kind of event are you talking about? Dollar devaluation? Many thanks.
peekoil
01-13-09, 11:53 PM
Lurking and following your work ….IMHO, nowandfuture.com is one of the most useful/insitefull sites on the web.
Comment and a question…..
Comment…..the Money Supply, Inflation and GDP chart….the apparent disconnect with GDP beginning in the early 1970s coincides with the beginning of off-shoring manufacturing from the US…..a chilling trend in my opinion. My concern (for many years) is the loss of the manufacturing component of US GDP is a fatal national economic flaw…..and a sustainable recovery from the credit crisis, without a manufacturing base, is problematic at best. Any thoughts?
Question…related to the above…Don Coxe, in his 12/31 conf call, proposes that the current recession is not nearly as severe as the 73-74 and 81-82 recessions. Do you have Money Supply, GDP and CPI-U data plots for those time periods? It would be useful going forward to track the 2009 “recovery” versus 73-74 and 81-82. Coxe has been adamant that, not withstanding the gross financial malfeasance, this isn’t 1929.
As, I've said after Lenman failed the housing bubble outfall can be stopped (or better said put on hold for a year or two) only by a currency event. I suspect that this "currency event" will be like no other... respectively it will be far more benign than we will be let to believe at the burst time.
It's all about prodding the herd of dumb and scared investors in the desired corner of the slaughter house pen ...;)
One think I have to give to Hank, Ben and their buddies: they are extremely smart and gutsy to pull such a stunt.
I assume the pen is US Treasuries?
As, I've said after Lenman failed the housing bubble outfall can be stopped (or better said put on hold for a year or two) only by a currency event. I suspect that this "currency event" will be like no other... respectively it will be far more benign than we will be let to believe at the burst time.
It's all about prodding the herd of dumb and scared investors in the desired corner of the slaughter house pen ...;)
One think I have to give to Hank, Ben and their buddies: they are extremely smart and gutsy to pull such a stunt.
I'm still leaning towards the currency event (including the dollar and probably more than a few other currencies) and other items being an "answer" to a much messier situation than we have now, ala the white horsed cavalry gambit... in maximum tinfoil hat mode.
Lurking and following your work ….IMHO, nowandfuture.com is one of the most useful/insitefull sites on the web.
Comment and a question…..
Comment…..the Money Supply, Inflation and GDP chart….the apparent disconnect with GDP beginning in the early 1970s coincides with the beginning of off-shoring manufacturing from the US…..a chilling trend in my opinion. My concern (for many years) is the loss of the manufacturing component of US GDP is a fatal national economic flaw…..and a sustainable recovery from the credit crisis, without a manufacturing base, is problematic at best. Any thoughts?
Question…related to the above…Don Coxe, in his 12/31 conf call, proposes that the current recession is not nearly as severe as the 73-74 and 81-82 recessions. Do you have Money Supply, GDP and CPI-U data plots for those time periods? It would be useful going forward to track the 2009 “recovery” versus 73-74 and 81-82. Coxe has been adamant that, not withstanding the gross financial malfeasance, this isn’t 1929.
Thanks for the kind comments peekoil, much appreciated.
As far as the manufacturing trends since the early '70s, they're of concern to me too. One of the main advantages the US has is relative creativity and freedom and that will help a great deal in the long run... assuming its allowed to by the various political influences and powers that be. Currently, I'm not terribly optimistic to put it mildly due to the various factors discussed here - entitlement or socialist thinking probably being my biggest concern followed closely by how comparatively little reward and how big the barriers are for entrepreneurs.
I agree with Don Coxe too. Although there are many rhymes with 1929, there are also a number which are not tracking at all - as shown in the Monetary & fiscal stat comparisons, 1929 and now (http://www.itulip.com/forums/showthread.php?t=6856) thread. I just added a new chart to it also, showing unemployment, TBonds and BAA bonds.
I also do have a chart like you describe with GDP. CPI w/o lies etc., and its one of the hundreds I have that's aren't on any of my pages.
I just added it as a link to my Fed watch page under money supply though.
I've also linked it below instead of embedding it since its very wide - almost 2000 pixels (making it a more normal size hides the detail... and its still spaghetti like).
http://www.nowandfutures.com/images/m3_base_credit_gdp_cpi1966on.png
As, I've said after Lenman failed the housing bubble outfall can be stopped (or better said put on hold for a year or two) only by a currency event. I suspect that this "currency event" will be like no other... respectively it will be far more benign than we will be let to believe at the burst time.
It's all about prodding the herd of dumb and scared investors in the desired corner of the slaughter house pen ...;)
One think I have to give to Hank, Ben and their buddies: they are extremely smart and gutsy to pull such a stunt.
Okay, if you are right (and, I believe you are) where to be when said "event" takes place?
Domestic stocks?
International stocks?
Bonds?
Currency?
Real estate?
Where can you put your cash to be safe (or at least do the least damage, to YOURSELF)?
??
Okay, if you are right (and, I believe you are) where to be when said "event" takes place?
Domestic stocks?
International stocks?
Bonds?
Currency?
Real estate?
Where can you put your cash to be safe (or at least do the least damage, to YOURSELF)?
??
The problem is that I'm missing few pieces of the puzzle to have the complete picture, respectively how exactly is China going to fall and what exactly are thy going to do with the T bubble.
IMHO playing this event in currency, although may prove to be very profitable may not be trivial at all and anyway it is not for he fainthearted and those who don't understand the field very well. (For example I'm not a currency expert and I'm planning to stay out of it.)
Corporate bonds may be a solution, but I believe only big guys like Buffet or very well connected hedgies know exactly what are the winning bets and can play it well due to their size.
IMHO international stocks are a no-no, except some safe shorts of Russia and China (I personally hold shorts in that area). If doing that is a good idea to have a good cash position, or to be well hedged, because things can spike to the sky for a while, and you don't want to be hit by margin calls at the completely wrong moment.
REITs may be a long bet, but again there are REITs and REITs. If one does his homework well it may not be at all a bad idea. The most important thing is to figure out which REITs are owned by people in very good terms with the FED.
My personal strategy is to pick severely depressed domestic stocks that will springboard in the recovery and to short foreign/emerging markets (OK let's call them China and Russia) manufacturing stocks.
I believe we may experience as a currency event, a 10% to max 30% sharp dollar devaluation, which, after the initial moment of panic, will be stopped dead in its tracks by well placed backstops engineered by the FED and sudden capital inflows , exactly as it happened during the Asian Tigers crisis, only on a much bigger scale.
That's why I'm watching so closely the monetary outflows from China and Russia ... if the capital inflows in US are forming a deluge before the official T bubble burst ( I believe unofficially it has already been pricked but the public doesn't know it yet), the sharp dollar devaluation may be just a blip (below 10% or a sharp dip followed by a fast recovery).
Unfortunately, as I've said, I don't have a perfectly clear picture and there are a few pieces of the puzzle I'm still missing.
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