GLOBAL MONEY SUPPLY GROWTH VS. INFLATION
Investors in the USA are still excessively concerned about the expanding money supply. The usual argument has something to do with the always scary sounding “debt monetization“, “money printing” due to QE and other mythical forms of money supply expansion which are repeated on a daily basis by people who are more interested in scaring you than providing sound research about the actual workings of our monetary system (see here for more on this).
There is, however, a region of the world where these concerns are legitimate. In a recent research note Richard Bernstein of Richard Bernstein Advisors discussed this misconception and how it is the emerging markets that are most at risk of high inflation due to excessive “money printing”:
“There is a gross misperception among many investors that “printing money” (using the current phrase for monetary stimulus) causes inflation. That is not quite the relationship outlined in economic textbooks. Monetary theory does not state that printing money alone causes inflation. Rather, it says that printing money and doing something with it causes inflation. That “doing something” is commonly referred to as credit creation.
It is interesting that investors are very worried about inflation in the US, where credit growth is moribund, but they are not particularly worried about inflation in the major emerging markets where credit growth has been rapidly growing. Emerging-market investors like to use the term “overheating” to describe those markets, but few point out that overheating (i.e., demand greater than supply) typically occurs in late-cycle economies.
Chart 2 highlights the current relationships between monetary growth and inflation. The BRIC’s extreme monetary growth has clearly contributed to the world’s highest inflation rates.”
Source: RBA
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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30 Comments
That may account for the Egyptian revolution.
And indicate who may be next.
Okay, so it isn’t inflation I am worried about, it’s just rising prices. Yesterday I bought 2 containers of kitty litter, 2 a/c filters, 2 1-pound packages of whole carrots, 1 6-pack of club soda, and 1 liter of sparkling water. The cost? $52.50!
Let’s see…
Food, energy, medical, and education costs going way higher in the US.
Purchasing power of the US middle class stagnant or declining over past 30 years.
OK, so it’s not “inflation”, it’s “stagflation” isn’t it Cullen?
Inflation in the things we need (food, medicine, etc). Deflation in the things we want (iPads). Overall declining real wages.
How is this not a recipe for disaster?
Tricky definition we have here. Stagflation is technically “high inflation”. We don’t have that. And don’t forget the fact that housing prices are still cratering. This is the most important component in the inflation picture and should not be downplayed.
Unfortunately, this “transitory” inflation appears to be largely due to the Fed’s policies. But that’s the world in which we live. The Fed is doing everything they can to help the banks separate the middle class from their savings. It will continue until we have another massive crisis….
“The Fed is doing everything they can to help the banks separate the middle class from their savings. It will continue until we have another massive crisis….”
This is the true tragedy. Inflation is the last thing savers should be worrying about. 3% yield on the 10yr on the other hand…
Your point is also where MMT draws a lot of criticism from. People read this blog and others and cannot separate the seemingly reasonable necessity of current deficit spending with the blatant and shameful allocation of such funds (read: blank check to wall street).
I don’t think the fact that housing is cratering fits into the picture in the way you are saying. If I owned my home prior to the recession I am likely underwater and the price drop isn’t helping. It may not be hurting either but it certainly can’t help me offset the price increase in gas, food, etc. For individuals who did not own their homes prior to 2007 it seems to me that the majority would not be in a position to tale advantage of lower prices because of tighter lending standards and higher unemployment.
What about the fact that int rates are near all-time lows and allow you to refinance your mortgage at a cheaper rate? Why doesn’t that count?
Cullen,
I agree that in some cases qualified buyers can lower their payments if they have sound credit and are in a positive equity situation. However, I think we are talking about a minority of homeowners. Furthermore, unless you have a pretty large mortgage, the increased cost of day to day needs eats away all of that potential savings and then some. Now if rents were substantially lower I would agree with you but I do not believe that is the case.
That is the strangest blue I have ever seen.
Perception is reality.
Cullen,
I’m curious what metrics you will utilize to determine whether or not you are correct about current inflation being “transitory”. In other words, looking back two years, five years, ten years from now, what would you need to see in order to come to the conclusion that you were either correct or incorrect. I’m not making the assumption that you are wrong, but rather wondering what data would lead you to conclude that in retrospect?
If we get very high inflation (7, 8, 9, 10%+) or hyperinflation then I will have been wrong…..
Agreed. I suppose my question is really what metric/s you will use to judge this. Will it be CPI, PPI, CRB, the billion price index or some other index or combination of raw/finished goods prices? What specifically would need to increase by 8, 9, 10%/year? I would assume hyper-inflation would be fairly self-evident but a 70’s style inflation would obviously appear better/worse depending on the metric/index that one utilizes.
Contrary to conspiracy theorists, I think the CPI is a fine measure.
Much like “Bubbles Bernak”–
TPC uses the “Core Core CPI” which eliminates all things going up in Price.
-conspiracy theorists
The rationale is rather simple really. If you can’t understand this chart then god be with you.
http://pragcap.com/wp-content/uploads/2011/05/stl.png
The CPI’s weakness has been debunked 2 many times.
While I agree with you 80% of the time — we are on different planes when it comes to Inflation and ALL of its contributors.
Actually, the BLS has debunked all of these supposed debunkings of their metric….
Where? The chart you provided doesn’t show that the CPI is a very good metric in and of itself.
I thought the metric wouldn’t be prices, but an increase in the money supply.
Why would it be the money supply? So long as good’s/services for sale and being bought increases with the money supply then there would be no inflation.
It’s one of MMT fundamental’s, deficit spending doesn’t necessarily result in inflation provided that production and output increase similarly (more $$ chasing proportinally more thing’s).
Cullen Roche-
Regarding your claim that we do not have significant inflation and that CPI is reliable, do you mind commenting on this: Inflation Actually Near 10% Using Older Measure. http://www.cnbc.com/id/42551209
If true, this seems problematic. I’m not smart enough to know what to believe yet
Yes, Shdaow Stats is excluding hedonic adjustments. So, an ipad 2 costs the same as an ipad 1. A tv from 1980 is the same as a tv from 2010. There is no accounting for product improvement. It makes zero sense….
Here is why ShadowStats is very, very wrong.
Thank you for responding. I’ve read this site for about a year now (but this is my second time commenting).
I guess I’ve been skeptical about the hedonics argument–with computers you need to run to stand still. That is, a new computer is required to run new applications, even though they don’t necessarily make you more productive. Anyways, if you believe the hedonics argument, I’ll try to keep an open mind to it.
Cheers.
Skript,
It’s not all that illogical really. A house in 1950 is not a house in 1990. The average house today has all the McMansion upgrades that your average house in 1950 had none of. So, to simply say that a 2 br house is 10 X the cost of the 1950 house and go screaming about inflation is entirely misleading….
I hope that clarifies it a bit.
Fair enough, but does it take into account the available supply of 1950′s houses or TV’s? I’d be happy to buy half a house but no one is selling.
That red line looks suspicious. If you were to do a rigorous statistical test would the data prove that red line is significant. I doubt it; which even more bolsters TPCs position that higher money growth doesn’t equal inflation.
JohnZ – yes, to be more correct, there would be an increase in the money supply beyond the growth in the economy. My main point being that Cullen has been saying that higher prices aren’t necessarily an indication of inflation.
Because banks are still sitting on excess reserves. Not sure how Cullen Roche thinks his little chart shows that inflation is not a concern. Oh, I guess if you look at a limited number of consumer goods, there’s no “inflation” to worry about. What a rosy little world to live in. Only a “conspiracy” theorist would maintain that the Fed’s infusion of billions in credit – now sitting on bank reserves (or already seeping into stock markets) – is potentially inflationary.
Come off it. No one believes this kind of apologetics anymore. Of course, I doubt Cullen has much insight into monetary theory and thinks you can debunk monetary dilution claims by referring to consumer prices minus food and energy, ignoring the rest of the economy, because all prices are just aggregates in the end, mirite?