Expansion of the Money Supply

Discussion in 'Economy' started by Toro, Dec 24, 2007.

  1. Toro
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    Toro Diamond Member

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    I recall someone sometime back question the assertion that the money supply had expanded at an extraordinary pace. As I find further posts, I will put them here.

    http://bigpicture.typepad.com/photos/uncategorized/2007/12/21/sgsm3.gif
     
  2. BaronVonBigmeat
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    BaronVonBigmeat Senior Member

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    16% growth in the money supply minus a (supposed) 2% growth in GDP should yield some pretty serious inflation. Which is what we've seen in just about everything--commodities, education, housing, health care. Ok, except maybe trinkets from China. They've held steady, although without the monetary inflation we'd probably be paying $10 for a pair of Nikes right now.

    My question is, do mainstream economists even have a clue what's going on? I argue these points with a guy on another forum, he is a graduate student who teaches an undergrad course on economics, specifically money and banking and so forth. According to him, M3 is meaningless, leaving out price hikes in gasoline, housing, etc. from inflation numbers is completely sensible because they are "volatile", there's nothing wrong with the way we calculate GDP, etc. It's like he hasn't even been trained in economics 101, he's been trained to be a good government bureaucrat who will collect cooked statistics and shill for whatever the official explanation is.

    Also I understand that M1 is just cash basically, but what is M2, MZM, and M3? And why would someone say that M3 growth is meaningless?
     
  3. Warner
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    They say the M3 is meaningless because they don't like what it reveals.

    Look at the graph on the lined page showing M1+M2+M3 money supply growth! (or look at the one in Toro's post - how do you get images into your posts?)

    Between 1945 and 1971 the US money supply grew 8 fold. In 1971 Nixon took the USA off the "Gold Standard". The Government no longer needed to back dollars with gold reserves. Between 1971 and 2004 the US Money supply grew over 8000 fold!
     
  4. BaronVonBigmeat
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    BaronVonBigmeat Senior Member

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    Well yes, of course, that's the bottom line; I was just wondering what the Official Party Line on the issue was. I remember someone explaining it, eurodollars don't matter, blah blah blah, but I didn't understand it to be quite honest.

    I've also read somewhere about how the huge amount of money expansion is directly related to the hollowing out of america's industrial base, although I didn't quite follow their explanation either. Both phenomena take off in earnest in the early 70's. Not to mention the statistics we've all heard a million times--ever since the early 70's, it takes two incomes to provide what one once did, real wages for average workers have been stagnant since the early 70's, etc. It begs the rather obvious question (which never seems to be asked in the MSM), "Well...what policy or law changed in the early 70's?"
     
  5. Toro
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    Toro Diamond Member

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    The idea of excluding volatile items makes sense when the long-term trend is flat. The problem with mainstream economists is that they haven't recognized the trend has changed. Or at least most of them had not until recently. That is because for most of their entire lives, commodity prices have been falling. In theory, commodity prices should equal the marginal cost of production. Thus, because the marginal cost for producing commodities had not risen until the last couple of years, and had fallen for three decades, economists have fallen into the trap of forecasting via the rear-view mirror.

    The other reason for excluding volatile items is if they do not filter into the broader economy. If prices continue to rise for food and energy and not for everything else in general, then economists view inflationary pressures are relatively benign.

    A very, very big problem with conventional economics is that they view "inflation" as changes in prices paid for goods and services. An Austrian view is that inflation is an overexpansion of the money supply. Thus, inflation may or may not show up in prices paid for goods and services. It may, as it has for the past 10 years, show up in asset prices. Thus, you have a stock market bubble. Then you have a housing bubble. Then you have a commodities bubble. And so on.

    It is a failure of conventional economics.
     

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