Hysterianomics! Focusing on M2 Money Growth Is Misguided (Deficits and Debt Are What Is Scary)

This is a syndicated repost courtesy of Confounded Interest – Online Course Notes for Financial Markets. To view original, click here. Reposted with permission.

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I attended an investors presentation last week. Having given presentations to investors in the past, I thought I knew what to expect. I was dead wrong. The presentation was one chart, M2 Money Stock, and why the US economy is doomed because of rampant inflation. The sales pitch was to buy gold and other precious metals because the world is ending!! I just rolled my eyes.

Here is the chart (not their chart, but the same one from the Federal Reserve of St Louis).

m2moneystock

M2 is a measure of the money supply that includes all elements of M1 as well as “near money.” M1 includes cash and checking deposits, while near money refers to savings deposits, money market securities, mutual funds and other time deposits.

To be sure, The Federal Reserve has ramped-up M2 Money Stock, particularly starting with the Clinton Administration and Alan Greenspan’s Fed. I suggested plotting M2 Money growth and population growth on the same chart.

m2pop

But if we look at the same chart in Year-over-year (YoY) terms, you will see that US population growth has declined from 1992 to today. Yet starting in 1995, M2 Money Stock growth soared (although it has been declining over the past year).

m2popyoy

But what about M2 Money VELOCITY (M2 Money/GDP)? M2 Money VELOCITY peaked shortly after Greenspan’s Fed started to rapidly expand M2 Money Stock. But M2 Money Velocity has kind of died (lowest in recorded history).

m2gm2v

What about the “runaway inflation”? He made it sound like The Weimar Republic is coming next! I requested that he plot M2 Money growth YoY on the same chart as Core PCE Prices YoY (core inflation). M2 is growing at 4.7% while Core PCE Prices are growing at … 1.5%.

m2gcorepcep

Besides, if one is worried about inflation, you can purchase Treasury Inflation Protected Securities (or TIPS).

And The Dow just broke 26,000 for the first time!

m2gdow

The real problem is the growing Federal Budget deficits.

the-return-of-trillion-dollar-deficits-15-638

With exploding healthcare costs (as in Medicare), spending is rapidly diverging from tax revenue.

marc-goldwein-the-return-of-trillion-dollar-deficits-21-638

And with over $20 trillion in public debt, the US is facing hard decisions on spending and taxation.

M2 Money growth is NOT causing Weimar or Venezuela like inflation. But Gold is still a good alternative to Fiat currency.

Children playing with stacks of hyperinflated currency during the Weimar Republic, 1922

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