M2 money supply is going down....deflation?

M2 money supply is going down....deflation?

 

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Care to elaborate on the economic rationale on that one? I'm unfamiliar with it.

 

I believe that is probably the case. Extreme levels of debt become naturally deflationary unless there is a conscious policy decision to inflate the debt away. Monetary neutrality is, in practice, deflationary when there is a large amount of debt.

 

M2 money supply is the amount of money in circulation. It is a key economic indicator of inflation. Helicopter Ben printed trillons of dollars for the bank bailouts. In exchange, TBTF sold the toxic junk to the taxpayers, who paid 100 cents on the dollar. Runaway inflation was held in check when TBTF would not help main street. Now with the concentration of wealth, the masses have less to spend. Before the 2008 meltdown, industry was plagued with excessive production and today the two factors is very deflationary which scares the heck out of the Federal Reserve.

Just my .02 I welcome any debate.

 

I would add the following comments [my $0.01].

The toxic assets were largely sold to the Fed, not the taxpapers, or were kept by the banks since they aren't required to mark to market. Whether or not this eventually comes back on the taxpayers with a bailout of the Fed someday remains to be seen.

There was never a real threat of runaway inflation because the recapitalization of the banks was just a replacement of what was lost thorugh default and not a real addition to the money supply. So the addition to the "flows" was offset by the subtraction from the "capital." Since inflation measures only look at flows, some of the internet analysts got this wrong.

It wasn't a bank refusal to lend as much as a customer refusal or inability to borrow that led to a reduction in bank lending [unless you advocate lending to bad credits].

 

Thanks Cloudsweeper99, I value your knowledge. But isn't "inflation" rigged by excluding food and energy prices? The Federal Reserve's purpose is to create inflation and the gov't's refusal to acknowledge it. I think "stagflation" is the best description of today's economy. Interest rates and labor costs are the only differences that come to mind from living through the 70's. So, the money in circulation is going down because of interest payments to China? Thanks

 

First let me say that I'm not convinced that the money supply is actually shrinking, but it also probably isn't growing as much as the Fed would want.

Interest rates and labor costs are a huge difference from the 1970s [I'm not even convinced yet that there can be systemic inflation without rising labor costs]. Food and energy are excluded from core inflation but not from the CPI or GDP deflator. The money in circulation declines when borrowing goes down, not because of payments to China. Remember, the money is the debt and the debt is the money. Reductions in outstanding debt have the same effect as reducing the money supply, and offset the Fed's effort at stimulus. I know the government is running up a lot of debt, but private debt reductions and defaults are cancelling a lot of it out to some extent.

 

Thanks, I now have alot to think about. Over the weekend we are going to run up some personal debt to help the economy.

 

It's difficult to tell since the Fed stopped reporting M3 a few years ago. My guess is there are a large number of people who have de-leveraged their housing debt either through foreclosure, bankruptcy, short sale etc. Whenever this happens the value of the home also goes down so subsequent buyers, if any, don't take out as large loans.

On the other hand there is pretty good inflation taking place on day to day items. Localities are raising taxes, fees, etc on everyone, utilities are raising rates, and anyone who buys groceries will tell you right off the flabbergasting price increases that are taking place in the store.

 

This subject caught my interest but unfortunatly I'll be gone for a few days. Here's a link about M3 and deflation.
http://inflationdata.com/articles/2011/10/18/m3-money-supply-numbers-are-back-sort-of/ Is this the beginning of the end?

 

I tend to agree with the chart in the article that M1, M2, and M3 are all growing at present, and the comment that deflation is still a threat. But whether we have inflation, deflation or noflation depends on policy decisions that haven't been made yet, and how the economy reacts to them.

 

This is a dangerous supposition I believe. Since the Fed was created it has paid sizable dividends to the US government. Why else would we allow them to have the seignorage on paper currency? Since this profit will be impaired in the future, we have already committed to paying this money.

To me, the politicians simply mortgaged the Fed. This will be another bill our grandchildren will be responsible for unfortunately.

Chris

 

Because it lets politicians spend money without raising taxes. It's that plain and simple.

There is no such thing as paying a profit to the US government because there is no profit to be made off something that is created out of thin air. The interest that you state, that is there because of a overprinting of money, represents a hidden "tax" on the people who otherwise would not be paying it.

 

There is no commitment to pay. It would be a grave mistake to accept this. The normal, logical, and best solution is default. The concept that money must be debt-backed is not absolute. There would be no loss to the government because the dividends from the Fed would be offset by the stoppage of interest payments on the debt held by the Fed. People have been trained to think that the way things are is the only way they could possibly be. And this, of course, is wrong.

 

I would like to hear some opinions on why the Fed stopped making the M3 data available to the U.S public.
Makes one think, they are trying to cover something up.

 

M2 money supply isn't going down. It's actually accelerating recently.




Yesterday: US Money Supply Surges Surges 33% in 4 Months
http://www.zerohedge.com/news/us-money-supply-surges-surges-33-4-months-gold-follow


I do think we could be looking at deflation though (but don't count on it for food and energy) as the systemic banking problems in Europe, with debt owned by banks around the world including the US, could end up doing severe haircuts to asset prices and reduce the amount of value in existence.

 

yea looks like M2 is going back up... I guess it's like Silver and other PM's up, down, up, down...ect....
http://www.usdebtclock.org/