The amount of stuff you produce in a given period of time
AND
The amount of money you printed off in that same given period of time
It is very simple. I've alluded to it before back in 2006, but that is basically all inflation is.
How much you produce, versus how much money you printed to buy all that you produced.
If you produce A LOT of goods and you do not increase the money supply, well then the value of the the dollars that are already existing goes up, in that those are the only dollars that can buy all the goods in the economy. However, if you print off a ton of money, WITHOUT a proportionate increase in the amount of goods you produce in an economy, well that's MORE dollars chasing after fewer goods.
The second scenario is the one we face today.
With Our Lord Obama printing off money like there's no tomorrow;
with the compensatory collapse in RGDP growth (on track to decrease by about 6% this year) we have a very simple "numerator/denominator" relationship that bodes ill for the nation;
The numerator (money supply) is going up.
While the denominator (RGDP growth) is going down.
Which will result in inflation.
The question is how much and I say 14%. Simply because we've printed off 14% more money than we've produced goods. The numbers behind my figures are thus;
Below is a bit messy of a chart showing the annual YOY (year over year) change in the money supply (measured by M1) versus the YOY change in RGDP. The difference between the two is the yellow line which should more or less correlate with inflation, and the current day difference between our production and money supply is 14%, thus the prediction.
However, as you see below, this inflation has not yet materialized. The yellow line (now blue) when correlated against actual inflation numbers does show a strong correlation historically. However, this correlation dissolves the closer and closer we get to 2009, the last data point actually showing DEFLATION rather than the predicted 14% inflation.
Why the difference?
The answer; just wait.
Understand that inflation really is that simple. The more money you have chasing fewer goods will, MATHEMATICALLY, TO THE PENNY result in a very precise amount of inflation. It has to. The only reason it has not yet is because of two factors;
1. Asset bubbles- Investment assets such as housing and stocks do not go into the CPI/inflation calculation. This goes a long way in explaning the deterioration of the relationship between the yellow line and reported inflation since our last two bubbles have been in HOUSING and STOCKS. Had housing and stocks been incorporated into the CPI I guarantee you you would have had a much stronger correlation.
2. "Mopping up excess liquidity." - That phrase should be the "Saying of 2009." It's basically the government saying, "holy crap Batman, we got a TON of money floating around. If it gets into the real economy, we are going to have inflation that will make Mugabe look fiscally austere." Ergo, impotent measures such as "the Fed buying up all the toxic assets" or "issuing Fed bonds" or other such BS. Do what you want to "mop up excess liquidity" short of destroying dollars, those dollars are still there and will either make their way into the US economy (triggering inflation in the CPI) or remain in bubbles (housing, low interest bonds, etc.)
Regardless, in the end, this glut of money will inevitably make its way into the economy and will, by default, trigger inflation.
However, all hope is not lost. There is one solution to help resolve this weak dollar/inflation situation. We could boost the denominator of the Money Supply/GDP ratio. We could actually produce the GDP necessary to give those excess dollars out there some kind of value or worth.
Of course this would require lowering our corporate taxes below 40% to attact capital and investment here....and it would require lowering personal taxes so people once again have an incentive to work...and that would be assuming young Americans would be willing to work hard and long hours in productive fields such as computers, engineering or science which would require math...and practically nobody majoring in sociology or philosophy...and maybe the baby boomers could postpone retirement until they're 70 thereby shoring up the government finances...and people would have to take second jobs or maybe start a side business instead of watching American Idol...
You know on second thought, maybe it would just be easier to short the US dollar and invest in China.
10 comments:
I think if you lagged correctly you would see a better relationship. For example, the deflation we're seeing right now I think, among other factors is a result of the dip in the money supply proceeding the current surge. So, essentially, inflation trails the money supply by a year or two, so we'll see the inflation shortly.
Question to add a bit of complexity to this analysis: The American dollar is used as the currency-franca across the globe and as the actual currency in several states. Will this have a moderating effect on the anticipated inflation by sopping up some of that loose cash?
Personally, I don't expect to see the inflation show up until all of the consumer defaults in mortgages and revolving credit are winding down.
If Canada was doing what Obama is doing our deficit this year wouldn't be $50 billion, it would be $185 billion.
That's $185,000,000,000.
Well, Captain, I think you're in good company. Some feller named Laffer had a WSJ editorial today, pretty much saying we're in for heavy inflation and a stagnant economy on the order of the 70's - maybe worse.
Will we return to the "misery index"?
BTW, the 70's and early 80's sucked if you are too young to remember. "Whip Inflation Now" buttons, price controls and the "misery index". Ick.
We The People.. ..Are Screwed.
You seem to have overlooked both credit destruction & changes in the velocity of money in your analysis. I agree with you that inflation will be a problem, but not until the huge deflationary effect of shrinking credit availability is worked through.
We're shipping our inflation to China. It's the price they pay for accommodating all our debt.
When their willingness or ability to buy our debt diminishes, two things will happen:
1. Our trade deficit will disappear
2. Inflation will hit us with a vengeance.
I'm not sure, but if the Fed buys "toxic assets", that should add to money supply, not decrease it. That is adding liquidity because those assets are untradable.
Everything else, I agree with. Stagflation, here we come!
While I think we're in for stagnant growth in the coming years, that graph does not reflect real money supply growth in that it is not money in circulation, according to Tyler Cowen. He says it is merely a large shift in excess bank reserves. I didn't follow the discussion exactly cuz financial lingo is so impenetrable and I'm still learning.
One complicating factor is that the banks aren't lending that out, so the bank multiplier effect that allowed mass price changes prior to the Fed is dampened.
That said, if the Fed continues to emulate the Reichsbank, there will be significant inflation, and 14% is as good a guess as any.
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