Does a reduction in M2 Money supply yields Deflation?

Discussion in 'Economics' started by Happy Hopping, Jul 13, 2010.


    Click the top link that says:

    Quarterly Review and Outlook, Second Quarter 2010

    From the Hoisington Mgt., they show the M2 money supply from 2000 to Jun. 21, 2010, and they are saying M2 is dropping. As such, they are saying we'll be having deflation soon

    But IMF economists as well as Greenspan in his July 2010 interview are both forecasting growth in 2010 and 2011, and greenspan said the current drop is just a soft patch.

    Only 1 side can be right, what's your guys take on this?
  2. where does he say M2 is dropping?

    he only says velocity is likely to decline and GDP will grow. that would actually imply that money supply will increase.
  3. look at the chart 5 on page 5. M2 is dropping from the beginning of 2009 to now.
  4. joneog


    Not necessarily, M2 - and traditional monetary aggregates in general - have less of an effect than people think. If you look at the crisis in 2008 M2 growth was solid and took off at the end of the year as the markets were going through a deflationary shock. M2 growth y/y is still positive and we've had very little price inflation. You're better off looking at things like credit supply, inflation expectations, excess capacity, import prices, base metal prices etc.

    The problem with M2 is that it includes small time deposits and retail money market funds which aren't money in my book, although many people think they are.

    Below are two aggregates that fit the definition of money better, imo.

    1)M1 + savings accts
    2)M2 Minus
  5. Daal


    Well, MZM is negative yoy
  6. joneog


    Because of the big drop in retail and institutional money market funds since the markets bounced. Most likely from people putting that money to work in riskier financial assets.

    M1 is still pretty strong and savings accts are growing at almost %14 y/y, which is all more "spendable" money and yet no price inflation yet.

    That's one of the problems with traditional aggregates, each one tells a different story.
  7. I like and agree with Hoisington's analysis. It doesn't hurt that these guys have been on the money with their calls for years.
  8. that chart does not showing M2 dropping. M2 has been growing since 2000 according to the chart
  9. blackjack is correct.
    I still think we're headed for deflation, and that will be regardless of what the growth rate is in this or other monetary aggregates. That will be because no matter what, it's going to be a long time before we get credit to be anywhere near as loose as it was during the housing boom. Net private debt isn't going to rise very much if at all anytime soon, and absent that, you're not going to get inflation; the main thing to watch for will be deflation.
    There's 305 basis points between here and zero on the 10 year Treasury. Given that there is no new net private debt looking to be securitized, a good portion of those basis points could easily go up in smoke from people putting money in them because there is no other place for the money to go.
  10. left to its own devices, the economy may very well experience price deflation, but the gov won't let that happen. it has shown that it's willing to do anything, including stealing from the next generation of americans, to stop it. everyone knows that bernanke believed contraction of the money supply made a recession into the great depression. and now he won't let it happen again -- at any cost. that's why i don't think we'll have sustained delation (ie, that lasts more than 2 months).
    #10     Jul 15, 2010