Money Supply
Happy Memorial Day EconomyGuy readers.
Below you will find three graphs – Gold, the Norwegian Krona and Money Supply.
Gold – the first graph is the 2 year price history of gold, and it shows the clear, recent breakout of gold from its trading ranges.
Norwegian Krona – The second graph is multi-year graph of the Norwegian Krona (NOK) versus the US Dollar. The number on the left of the graph is the number of Dollars (for example, 0.16 means a single NOK is worth 16 cents.) You can see that the NOK has been gaining strength recently, and that it is well below its all time highs – making it easier to gain ground against the Dollar in the future compared to setting new highs.
I’ve selected the NOK to report on (rather than the Euro, or other currencies) because it is an underreported currency. Norway has large oil reserves in the North and Norwegian Seas. Norway has the national habit of “saving” its social security (national pension fund) contributions in real assets – as compared to the US method of spending every Dollar it receives (just like a Ponzi scheme.)
Other currencies that are considered strong today, compared to the US Dollar, are the Australian Dollar, the New Zealand Dollar, the Euro, the Swiss Franc, and the British Pound. I have not included the Chinese currency as its exchange rate is set for political reasons, and is not established by the free market.
US Money Supply – The third graph shows the “inflation” being created by the US government right now. The definition of inflation is “the increase in the money supply” and this graph all too clearly shows the massive increase in money supply that has JUST HAPPENED. This inflationary pressure is offset by the previously established deflationary pressures of decreased housing values, fallen stock/bond market values, falling commercial real estate values, potential future losses in the credit card debt market and student loan market, etc. My personal belief is that we are at the “breakeven point” where the deflationary pressures have been offset by the inflationary pressures.
Please note the massive growth in M1 on the third graph. The important point is the way M1 has shot straight up during the second half of 2008, and has stayed there in 2009. The annualized inflation rate is about 14% to 16% if the current money creation stays where it is for another 10 months.
The fall in M3 starting at the beginning of 2008 reflects the meltdown in US stock market values. However, M3 still has a positive rate of inflation.
While there are ongoing deflationary pressures, I also believe that the inflationary pressures being established by the US Treasury, the US Federal Reserve, and the US Congress (and being spent by the President) are starting to overwhelm the future deflationary pressures.
Consider this special Memorial Day report to be a warning from the EconomyGuy that inflation is in our future. Watch with me for the signs of inflation to start showing up – in the PPI and CPI, and then in other statistics (driven by Dollars, rather than quantity of things), and especially in the world commodity markets of oil, minerals, grains, etc.
Tom, Happy Memorial Day!
I agree that we are in a state of some equilibrium between inflation and deflation. The US dollar has been weakening the past few weeks.
However, I wonder about inflation since M3 has declined. Perhaps an interesting definition of money supply to consider is base money plus credit; since so much of our domestic economy is based upon purchases using credit. (RE, autos, boats, durables, etc.)
From a price perspective equities, real estate, and collectables (say 1964 Ford Mustang) are still decreasing in nominal price.
However, commodities and hard assets (e.g. gold, oil) are rising in price.
Thus, we might not call this stagflation but it might be close.
As a side note, I just had a credit card cancelled which has never happened before. Granted, it wasn’t a card we used but with two 700+ credit scores, normally we’d be extended additional credit instead.
David,
Your side note is very important. For folks out there that don’t understand how FICO is calculated, it is worth noting that it is extremely complex at the best, but there are somethings that can be generalized – especially for people with good credit.
Having a credit card disappear (one that you are not using, that is has zero due) decreases the overall credit available to you (as calculated by FICO). It you have large amount of loans, this could put your % loan ratio (loans divided by available credit) over 30% which is considered pretty bad by FICO, and your credit score could drop accordingly. However, if your ratio is below or well below the 30% ratio, there should be much affect on your score.
Tom
I loved bumping into your blog.