Money Supply

I'd read in a few et threads about the expansion of the money supply that the Fed has been undertaking and how potentially irresponsible that is. And I just looked in Barron's and saw the numbers for myself. (And looking at economagic.com, I can see it even more clearly.)

But here's what I don't get. There's only 3 ways for the Fed to increase money supply:

1. Lower discount, etc. rates.
2. Buy T-bills which puts money back into the system.
3. Change reserve requirement.

They haven't done #3 in recent history as far as I remember and they couldn't have been doing #2 with our deficit rising, right? And they had to keep lowering rates to avoid deflation?

So while I see the money supply's meteoric rise, I just don't see how the Fed is "responsible". Are we arguing that the Fed should have raised interest rates because the theory I heard is that that would have crushed the economy and the market?

Also, why does noone watch money supply anymore? It used to be arguably the most-watched macro # and now it seems like noone cares. Is this analagous to noone watching corporate earnings before the bubble?

Finally, if money supply has increased so drastically, why aren't we seeing a little inflation by now?

 

I know I asked about six different questions, but any insight that anyone can give on money supply in our economic situation would be much appreciated...

 

People do watch the money supply #, its just not as glamarous to talk about.

 

Yes, but that was another of my questions: is it out of favor in the financial press simply because it's not sexy or because it is increasingly out of favor? And if so, why?

 

The Money Supply for M2 and M3 has been dropping the past 3 months, pretty dramatically in fact.

 

Shoeshine, regarding the question as to why we have not seen inflation yet with this rapid money supply growth. The best answer I have ever heard came from Marc Faber; he believes that we can see a period of simaltaneous inflation and deflation. China is putting such heavy downward pressure on the price of any labor intensive, manufactored goods (PCs, phones, toys, clothes etc) that we are actually seeing price declines. However, more domestic, service oriented products such as: Insurance of any kind, Foods, Entertainment and such..will inflate. At the margin these cross currents seem to be canceling each other out as seen through the CPI, although the hedonics are highly suspicious.

And remember, the Fed wants inflation, asset inflation that is, in Stocks and Real Estate, and they have done a great job at that lately.

Here are some observations I have made just recently which seem to support Faber's argument.


1. 26% increase in parking at my train station
2. McDonalds raises prices 20% for a #2 value meal
3. Video Games rentals at Blockbuster are now a mind boggling $8
4. Obviously Movie theater prices always go up
5. I know that my company is looking at 15% year over year increases from Aetna
6. Oil and Gas consistently high at $33 and $1.50

Conversely:
1. Laptops now are as cheap as $700 for 2 Ghz
2. Clothing seems to be staying basically the same, with a downward bias if anything.
3. LCD prices are falling quickly, with the sharpest cuts yet to come.

 

We use to call it stagflation.

 

Okay, I can see his China argument. That makes a lot of sense. But with a falling dollar, won't the great majority of our imports begin increasing in price putting upward pressure on almost every imported good (excluding China where currency is pegged and commidity type markets like electronics). Maybe I'm missing something but we've got three significant things that should have fueled inflation: 1) tax cut, 2) increase in M[1-3] and 3) rising costs of imports. It's hard for me to imagine that China alone and these commodity-type markets could balance it all out....

 

You've got to remember where we are in the business cycle and how much slack is in production.

 

Shoeshine, I see your point. I am not a conspiracy theorist, however, the CPI is truly a joke and sometimes I cannot believe that markets actually pay attention to it.

I'm not sure how familiar you are with hedonics, but the goverment has fudged the numbers with this method by figuring if a products quality has increased along with its price, it is not really a price increase because the quality also went up. Thats fine, but the CPI is not a quality index, it is a prcing index; hedonics is lying plain and simple. For example, a Ford Explorer is now 10K more than it was 10 years ago, but it also has much more quality, lets say a starndard CD and power locks/windows/seats and remote keyless entry. The goverment sees this (and I am obviously using ball park numbers) as a scratch, because price and quality increased.

Instead of looking at the CPI and listening to the financial press, take a look at Gold and the CRB, and keep a really close eye on prices and your everyday expenses and then tell me we have no inflation.

Pretend you were in the market for a house, or health insurance, or gold bullion, and then tell me we have no inflation.