Sunday, December 12, 2010

Ignore M3 at your Own Peril

There are many measures of the money supply; M1, M2, M3, L.

And the question is, of course, what constitutes money?

Should 2 year CD's be considered money? They technically aren't legal tender, but can be used for collateral and technically are easier to barter with than say a house. Should stocks and other marketable securities be considered money which in times could be pledged as collateral or used for a down payment on a house?

I have not studied it much beyond occasionally thinking about it whilst running, but I do know that money, regardless of its form, has a tendency to sneak into prices if you let it get too loose.

Thus I found the following chart very interesting;

Suggesting that this;

is somewhat to blame for the high property prices and perhaps even securities prices.

It seems Derek Jensen was onto something.


Derek Jensen said...

Inflation is always and everywhere a monetary phenomenon. Awise man named Fredman once said that. and he's right

Anonymous said...

I don't understand why the last chart means anything. Wouldn't you expect stock returns to exceed that of the CPI over a long period of time? And wouldn't you also expect home prices to increase slightly higher than the CPI (although they seem to have increased more than normal recently)?

On another note, how did your date go? We were expecting a full report.

Derek Jensen said...

I would of course expect stock returns to appreciate faster than the CPI, but I don't think this is necessarily true for return expectations of housing. I would expect the real return of housing to be close to zero. Now, if you consider the implied dividend given by the rent-equivalent, then returns to housing are much higher.

For any investment:

% Return = (dividends + capital gain)/beginning price

The runup in housing prices is 100% due to the credit bubble we are in. Let's see what the Captain has to say.

Captain Capitalism said...

I'd say that for the S&P 500 part of it is due to the extra cash sloshing around the economy, in part brought on by government programs that give you an incentive to throw all your money into to stock market for retirement. That being said, yes, stock prices should grow faster than inflation as it is assumed competitive and profitable companies will be more efficent than inflation.

As for housing, yes, housing too should increase faster than inflation assuming your population is growing and there isn't any more land being made.

But the outlandish increase in property prices is beyond population increase. This is due to all the money sloshing around, increasing the supply of loanable dollars which drives interest rates to 6% for a 30 year mortgage.

This increases demand for houses as more people can afford more house. And this drives up property prices much higher (read inflation) than normally would have.

Sorry not to be more articulate, busy at work here.

Al said...

You're sounding rather Austrian.

Captain Capitalism said...

Did attend the Ludwig Von Mises institute a while back.