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Money Supply Thoughts



August 28, 2010 – Comments (2)

There is still a divide in whether people think inflation or deflation, or price stability is coming.  I have been in the deflation camp, moving to the price stability camp as there seems to be a strong response to prevent deflation.

So, this morning I see a post from a few days ago on inflation.  It talks about how high commodity prices are, and relative to what we have seen with them in the past, they are high.

So, I go looking at a money supply chart,  which when the economy returns to reasonable leverage ratios should tell you what is actually happening to the money supply.  The money supply got way out of wack from grossly increased rates of leverage.  So, if I do a rough extrapolation back to about 1980 I see about a 400% increase in the money supply prior to the massive jump of the past year or two.  At this target rate of 2% per year, the money supply ought to have only increased by about 80% over the past 30 years.

Shadow stats tells us that the price index has been far higher then 2% for a long time.

I don't see anything to suggest that the commodities are priced like they are do to with a coming inflation, but rather, they are simply correcting to where they should be relative to long term events.

Not sure where, but somewhere I posted on commodities that we would no longer be seeing the price reductions due to improved technology because technology has reached the limits of the materials they can use and now commodity prices with increase with the money supply.  There might be a new cost saving technology developed, but most has been about bigger machines doing more work and unless stronger materials are invented, machines really can't get bigger.

2 Comments – Post Your Own

#1) On August 28, 2010 at 7:13 PM, FreeMortal (28.76) wrote:

Hi, just wondering, why do you look at just the monetary base, rather than M2 or M3?

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#2) On August 28, 2010 at 7:30 PM, dwot (29.67) wrote:

Because I was looking quickly and not thinking about M2 or M3.

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