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Aug. 3 2010 - 9:20 pm | 1,568 views | 1 recommendation | 2 comments

Monetary Watch July 2010, Inflation alive and well with more to come

Contrary to the popular consensus, monetary inflation is alive and well and quite possibly set to accelerate.

The Austrian take on where we are and what’s next…

Where We Are

The money supply aggregates based on the Austrian definition of the money supply (TMS) surged in June, up 15.6% annualized on narrow TMS1 and 8.4% annualized on the broader TMS2.   Not too shabby.  And although TMS1 is only showing a 2.4% rate of growth year on year, the more important TMS2 metric, the metric THE CONTRARIAN TAKE views as the best overall measure of the money supply in the U.S., is growing at a very robust 10.6 % rate.

In other words, inflation is alive and well.

One would not know it by looking at M2, would they?  This mainstream money supply aggregate, the one so closely watched by the Federal Reserve, mainstream economists and investors alike, but in the opinion of the THE CONTRARIAN TAKE a grossly misleading measure of the money supply, is showing a year over year growth rate of a mere 1.9%.

Having said this, the growth in bothTMS1 and TMS2 has been decelerating of late, reflecting a Federal Reserve balance sheet that has clearly plateaued, particularly since March when the Federal Reserve ended its mortgage asset purchase program.

So then-  yes we have double digit TMS2, but where to from here.

What’s Next

First, lets start with the obvious.  While it is true that the Austrian money supply aggregates have been decelerating, the fact is the all important TMS2 measure is still running at double digit growth rates, and at growth rates still above the median of the last 10 years.  Simply said, there is a lot of inflation around, supported by a still huge Federal Reserve balance sheet.

What’s more, and more importantly, the prospects for even more inflation seem to be growing by the minute.  Indeed, given the Federal Reserve’s preoccupation with the relatively subdued nature of the popular price indices, the persistently high unemployment rate and the continued weakness in housing juxtaposed against the anemic growth in that faulty M2 metric, one could make a strong case that the next big move in TMS will be up.

The reason?

A FOMC worried silly about what all these metrics suggest; namely, brewing deflation, prompting the Federal Reserve to begin expanding its balance sheet in earnest once more.

Witness St. Louis Federal Reserve President James Bullard, a supposed hawk and voting FOMC member, calling for Q.E. II, before as he says the U.S. slips into a Japanese style deflation.

A position Federal Reserve Chairman Bernanke supports, you ask?  You bet.  One only has to read Bernanke’s account of the Japanese experience and what the Bank of Japan should have done about it to be assured that Bernanke is on side with Bullard – lock, stock and barrel.  Here it is in Bernanke’s own words.

Another round of Q.E. and another surge in TMS from its already high level, the CONTRARIAN TAKE surmises, may soon become fact.  You see, deflation hawk extraordinaire Chairman Bernanke and his new accomplice St. Louis President James Bullard will not for long be the only deflation-fearing, inflation-bent members of the FOMC.  Three new Obama-picked, and similarly inflation-bent Federal Reserve Board nominees, all fretting about those very same metrics, are about to be become permanent members of the FOMC – Dr. Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, Dr. Peter Diamond, a professor at the Massachusetts Institute of Technology (MIT) and Sarah Bloom Raskin, commissioner of financial regulation for the state of Maryland.

Perhaps a bit more short-term weakness in TMS to come, but don’t count on it for too long.  At TMS2 10.6% and counting, another round of Federal Reserve engineered inflation is likely to put a charge into the monetary aggregates.

Based on the monetary insights of the Austrian school of economics, THE CONTRARIAN TAKE offers up the latest monthly money supply metrics for the U.S., Eurozone and Japan currency blocks.

To see the entire monthly series offering – the latest money supply data for all three currency blocks, with full historical data and chart work, as well as supporting definitions, sources, notes and references – click here on Austrian Money Supply.

For a quick link to money supply definitions, sources, notes and references, click here on Austrian Money Supply Definitions, Sources, Notes and References.

For the logic behind the formulation of Austrian money supply, read Money Supply Metrics, the Austrian Take.


2 Total Comments
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  1. collapse expand

    yeah, keep this baby alive, but I don’t think you’ll get paid, have you heard? I am speechless :)

  2. collapse expand

    Q.- would you buy Silver Eagles if you had a hundred bucks to blow? Can Silver do what Gold is doing? thanks

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    About Me

    I am a retired Investment Banking professional, most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. I am a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor.

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    Followers: 33
    Contributor Since: January 2010
    Location:New York