Sometimes it’s good to reread stuff!

[Eugene]

[quote=jpinpb]Rich – the chart you linked is M2 – Money stock. That’s what’s actually in circulation?! Then why are we not seeing inflation right now?[/quote]

It’s not exactly “in circulation”. If you have $10,000 sitting in an interest-bearing bank account that you pulled out of the stock market in 2007, that money is part of M2. Truth is, we don’t have any perfect measures of money in circulation, because the distinction between checking accounts (in circulation) and savings accounts (not in circulation) became too blurred.

That said, if we use M2 and we adjust for population, we’re only “missing” about 10% of inflation over the last 3 years, probably because of changes in consumers’ thriftiness.

[Eugene]

[quote=EconProf]Yep, “velocity” of the money supply, or the rate at which it changes hands, has slowed considerably, thus offsetting the growth in money supply, however measured.
The original monetarist, Milton Friedman, claimed velocity was fairly constant over time, which led him to state that money supply growth over a certain range of 2 to 4 percent or so each year, would lead directly to inflation. As Mish has so abundantly shown, this has not happened and is not about to happen. Too bad Milton is no longer around to defend, or explain, his thesis.[/quote]

Back in 1929, GDP fell 45% peak to trough, M2 fell 35%, so the velocity of money had to fall too.

Here’s a more recent chart

Clearly the velocity falls during recessions. This time, we also have a rebound in the personal saving rate (from 2% during late Bush years to 6% now) and that has the effect of suppressing the velocity.

Also, I doubt that Friedman expected the relationship between money supply growth and inflation to hold regardless of unemployment. If the velocity is constant, money supply growth leads to nominal GDP growth, but that results in higher employment before it contributes to inflation.

And Friedman did not live in an era of wild finance, when just the internal cash holdings of Goldman Sachs (which is, technically, not even a bank) account for something like 5% of M2. (edit: on the second thought, I’m not sure if Goldman’s holdings are part of M2. But the point is still partially valid.)

[Eugene]

[quote=EconProf]Yep, “velocity” of the money supply, or the rate at which it changes hands, has slowed considerably, thus offsetting the growth in money supply, however measured.
The original monetarist, Milton Friedman, claimed velocity was fairly constant over time, which led him to state that money supply growth over a certain range of 2 to 4 percent or so each year, would lead directly to inflation. As Mish has so abundantly shown, this has not happened and is not about to happen. Too bad Milton is no longer around to defend, or explain, his thesis.[/quote]

Back in 1929, GDP fell 45% peak to trough, M2 fell 35%, so the velocity of money had to fall too.

Here’s a more recent chart

Clearly the velocity falls during recessions. This time, we also have a rebound in the personal saving rate (from 2% during late Bush years to 6% now) and that has the effect of suppressing the velocity.

Also, I doubt that Friedman expected the relationship between money supply growth and inflation to hold regardless of unemployment. If the velocity is constant, money supply growth leads to nominal GDP growth, but that results in higher employment before it contributes to inflation.

And Friedman did not live in an era of wild finance, when just the internal cash holdings of Goldman Sachs (which is, technically, not even a bank) account for something like 5% of M2. (edit: on the second thought, I’m not sure if Goldman’s holdings are part of M2. But the point is still partially valid.)

[Eugene]

[quote=EconProf]Yep, “velocity” of the money supply, or the rate at which it changes hands, has slowed considerably, thus offsetting the growth in money supply, however measured.
The original monetarist, Milton Friedman, claimed velocity was fairly constant over time, which led him to state that money supply growth over a certain range of 2 to 4 percent or so each year, would lead directly to inflation. As Mish has so abundantly shown, this has not happened and is not about to happen. Too bad Milton is no longer around to defend, or explain, his thesis.[/quote]

Back in 1929, GDP fell 45% peak to trough, M2 fell 35%, so the velocity of money had to fall too.

Here’s a more recent chart

Clearly the velocity falls during recessions. This time, we also have a rebound in the personal saving rate (from 2% during late Bush years to 6% now) and that has the effect of suppressing the velocity.

Also, I doubt that Friedman expected the relationship between money supply growth and inflation to hold regardless of unemployment. If the velocity is constant, money supply growth leads to nominal GDP growth, but that results in higher employment before it contributes to inflation.

And Friedman did not live in an era of wild finance, when just the internal cash holdings of Goldman Sachs (which is, technically, not even a bank) account for something like 5% of M2. (edit: on the second thought, I’m not sure if Goldman’s holdings are part of M2. But the point is still partially valid.)

[Eugene]

[quote=EconProf]Yep, “velocity” of the money supply, or the rate at which it changes hands, has slowed considerably, thus offsetting the growth in money supply, however measured.
The original monetarist, Milton Friedman, claimed velocity was fairly constant over time, which led him to state that money supply growth over a certain range of 2 to 4 percent or so each year, would lead directly to inflation. As Mish has so abundantly shown, this has not happened and is not about to happen. Too bad Milton is no longer around to defend, or explain, his thesis.[/quote]

Back in 1929, GDP fell 45% peak to trough, M2 fell 35%, so the velocity of money had to fall too.

Here’s a more recent chart

Clearly the velocity falls during recessions. This time, we also have a rebound in the personal saving rate (from 2% during late Bush years to 6% now) and that has the effect of suppressing the velocity.

Also, I doubt that Friedman expected the relationship between money supply growth and inflation to hold regardless of unemployment. If the velocity is constant, money supply growth leads to nominal GDP growth, but that results in higher employment before it contributes to inflation.

And Friedman did not live in an era of wild finance, when just the internal cash holdings of Goldman Sachs (which is, technically, not even a bank) account for something like 5% of M2. (edit: on the second thought, I’m not sure if Goldman’s holdings are part of M2. But the point is still partially valid.)

[Eugene]

[quote=EconProf]Yep, “velocity” of the money supply, or the rate at which it changes hands, has slowed considerably, thus offsetting the growth in money supply, however measured.
The original monetarist, Milton Friedman, claimed velocity was fairly constant over time, which led him to state that money supply growth over a certain range of 2 to 4 percent or so each year, would lead directly to inflation. As Mish has so abundantly shown, this has not happened and is not about to happen. Too bad Milton is no longer around to defend, or explain, his thesis.[/quote]

Back in 1929, GDP fell 45% peak to trough, M2 fell 35%, so the velocity of money had to fall too.

Here’s a more recent chart

Clearly the velocity falls during recessions. This time, we also have a rebound in the personal saving rate (from 2% during late Bush years to 6% now) and that has the effect of suppressing the velocity.

Also, I doubt that Friedman expected the relationship between money supply growth and inflation to hold regardless of unemployment. If the velocity is constant, money supply growth leads to nominal GDP growth, but that results in higher employment before it contributes to inflation.

And Friedman did not live in an era of wild finance, when just the internal cash holdings of Goldman Sachs (which is, technically, not even a bank) account for something like 5% of M2. (edit: on the second thought, I’m not sure if Goldman’s holdings are part of M2. But the point is still partially valid.)

[Rich Toscano]

[quote=Eugene]
It’s not exactly “in circulation”. If you have $10,000 sitting in an interest-bearing bank account that you pulled out of the stock market in 2007, that money is part of M2. Truth is, we don’t have any perfect measures of money in circulation, because the distinction between checking accounts (in circulation) and savings accounts (not in circulation) became too blurred.
[/quote]

The money was never “in” the stock market. To the extent you “pulled [money] out” of the stock market, that means that you sold your stocks — which means that someone else took money from their bank account and gave it to you in exchange for your stocks. It just moved from their bank account to yours.

Regarding the concept of circulation, how is money in a checking account any more “in circulation” than money in a savings account? In fact, depending on how you are defining it, money is never really in “circulation” — that is to say, it goes immediately from one owner (in their bank acct or whatever) to another.

I was assuming by circulation, JP meant “money that is available to be spent in the economy.” Checking and savings accounts would both account for that.

I agree that there is no clear cut definition. The most logical one I have heard comes from the Austrians (regardless of what you think of their policy prescriptions, their views on money and credit make the most sense imno) — they define money as anything that is immediately redeemable at par. So savings accounts would count, but money markets would not (bc money markets are in fact debt instruments). It includes only checking accounts, savings accounts, and currency (plus a few other things but they only account for a tiny percentage of the overall supply).

Here’s a chart of the Austrian TMS fwiw… I haven’t updated this for a couple months but as of that point it was still growing at double digits YOY:

[img_assist|nid=13720|title=tms|desc=|link=node|align=left|width=400|height=272]

[Rich Toscano]

[quote=Eugene]
It’s not exactly “in circulation”. If you have $10,000 sitting in an interest-bearing bank account that you pulled out of the stock market in 2007, that money is part of M2. Truth is, we don’t have any perfect measures of money in circulation, because the distinction between checking accounts (in circulation) and savings accounts (not in circulation) became too blurred.
[/quote]

The money was never “in” the stock market. To the extent you “pulled [money] out” of the stock market, that means that you sold your stocks — which means that someone else took money from their bank account and gave it to you in exchange for your stocks. It just moved from their bank account to yours.

Regarding the concept of circulation, how is money in a checking account any more “in circulation” than money in a savings account? In fact, depending on how you are defining it, money is never really in “circulation” — that is to say, it goes immediately from one owner (in their bank acct or whatever) to another.

I was assuming by circulation, JP meant “money that is available to be spent in the economy.” Checking and savings accounts would both account for that.

I agree that there is no clear cut definition. The most logical one I have heard comes from the Austrians (regardless of what you think of their policy prescriptions, their views on money and credit make the most sense imno) — they define money as anything that is immediately redeemable at par. So savings accounts would count, but money markets would not (bc money markets are in fact debt instruments). It includes only checking accounts, savings accounts, and currency (plus a few other things but they only account for a tiny percentage of the overall supply).

Here’s a chart of the Austrian TMS fwiw… I haven’t updated this for a couple months but as of that point it was still growing at double digits YOY:

[img_assist|nid=13720|title=tms|desc=|link=node|align=left|width=400|height=272]

[Rich Toscano]

[quote=Eugene]
It’s not exactly “in circulation”. If you have $10,000 sitting in an interest-bearing bank account that you pulled out of the stock market in 2007, that money is part of M2. Truth is, we don’t have any perfect measures of money in circulation, because the distinction between checking accounts (in circulation) and savings accounts (not in circulation) became too blurred.
[/quote]

The money was never “in” the stock market. To the extent you “pulled [money] out” of the stock market, that means that you sold your stocks — which means that someone else took money from their bank account and gave it to you in exchange for your stocks. It just moved from their bank account to yours.

Regarding the concept of circulation, how is money in a checking account any more “in circulation” than money in a savings account? In fact, depending on how you are defining it, money is never really in “circulation” — that is to say, it goes immediately from one owner (in their bank acct or whatever) to another.

I was assuming by circulation, JP meant “money that is available to be spent in the economy.” Checking and savings accounts would both account for that.

I agree that there is no clear cut definition. The most logical one I have heard comes from the Austrians (regardless of what you think of their policy prescriptions, their views on money and credit make the most sense imno) — they define money as anything that is immediately redeemable at par. So savings accounts would count, but money markets would not (bc money markets are in fact debt instruments). It includes only checking accounts, savings accounts, and currency (plus a few other things but they only account for a tiny percentage of the overall supply).

Here’s a chart of the Austrian TMS fwiw… I haven’t updated this for a couple months but as of that point it was still growing at double digits YOY:

[img_assist|nid=13720|title=tms|desc=|link=node|align=left|width=400|height=272]

[Rich Toscano]

[quote=Eugene]
It’s not exactly “in circulation”. If you have $10,000 sitting in an interest-bearing bank account that you pulled out of the stock market in 2007, that money is part of M2. Truth is, we don’t have any perfect measures of money in circulation, because the distinction between checking accounts (in circulation) and savings accounts (not in circulation) became too blurred.
[/quote]

The money was never “in” the stock market. To the extent you “pulled [money] out” of the stock market, that means that you sold your stocks — which means that someone else took money from their bank account and gave it to you in exchange for your stocks. It just moved from their bank account to yours.

Regarding the concept of circulation, how is money in a checking account any more “in circulation” than money in a savings account? In fact, depending on how you are defining it, money is never really in “circulation” — that is to say, it goes immediately from one owner (in their bank acct or whatever) to another.

I was assuming by circulation, JP meant “money that is available to be spent in the economy.” Checking and savings accounts would both account for that.

I agree that there is no clear cut definition. The most logical one I have heard comes from the Austrians (regardless of what you think of their policy prescriptions, their views on money and credit make the most sense imno) — they define money as anything that is immediately redeemable at par. So savings accounts would count, but money markets would not (bc money markets are in fact debt instruments). It includes only checking accounts, savings accounts, and currency (plus a few other things but they only account for a tiny percentage of the overall supply).

Here’s a chart of the Austrian TMS fwiw… I haven’t updated this for a couple months but as of that point it was still growing at double digits YOY:

[img_assist|nid=13720|title=tms|desc=|link=node|align=left|width=400|height=272]

[Rich Toscano]

[quote=Eugene]
It’s not exactly “in circulation”. If you have $10,000 sitting in an interest-bearing bank account that you pulled out of the stock market in 2007, that money is part of M2. Truth is, we don’t have any perfect measures of money in circulation, because the distinction between checking accounts (in circulation) and savings accounts (not in circulation) became too blurred.
[/quote]

The money was never “in” the stock market. To the extent you “pulled [money] out” of the stock market, that means that you sold your stocks — which means that someone else took money from their bank account and gave it to you in exchange for your stocks. It just moved from their bank account to yours.

Regarding the concept of circulation, how is money in a checking account any more “in circulation” than money in a savings account? In fact, depending on how you are defining it, money is never really in “circulation” — that is to say, it goes immediately from one owner (in their bank acct or whatever) to another.

I was assuming by circulation, JP meant “money that is available to be spent in the economy.” Checking and savings accounts would both account for that.

I agree that there is no clear cut definition. The most logical one I have heard comes from the Austrians (regardless of what you think of their policy prescriptions, their views on money and credit make the most sense imno) — they define money as anything that is immediately redeemable at par. So savings accounts would count, but money markets would not (bc money markets are in fact debt instruments). It includes only checking accounts, savings accounts, and currency (plus a few other things but they only account for a tiny percentage of the overall supply).

Here’s a chart of the Austrian TMS fwiw… I haven’t updated this for a couple months but as of that point it was still growing at double digits YOY:

[img_assist|nid=13720|title=tms|desc=|link=node|align=left|width=400|height=272]

[Rich Toscano]

[quote=sdduuuude]Is inflation related to the money supply or the rate of change in money supply ?[/quote]

Just focusing on the money->inflation relationship (ie disregarding other things like velocity etc etc), the rate of inflation would be related to the rate of money supply growth, and the price level (not its rate of growth, the actual price level) would be related to the money supply.

[Rich Toscano]

[quote=sdduuuude]Is inflation related to the money supply or the rate of change in money supply ?[/quote]

Just focusing on the money->inflation relationship (ie disregarding other things like velocity etc etc), the rate of inflation would be related to the rate of money supply growth, and the price level (not its rate of growth, the actual price level) would be related to the money supply.

[Rich Toscano]

[quote=sdduuuude]Is inflation related to the money supply or the rate of change in money supply ?[/quote]

Just focusing on the money->inflation relationship (ie disregarding other things like velocity etc etc), the rate of inflation would be related to the rate of money supply growth, and the price level (not its rate of growth, the actual price level) would be related to the money supply.

[Rich Toscano]

[quote=sdduuuude]Is inflation related to the money supply or the rate of change in money supply ?[/quote]

Just focusing on the money->inflation relationship (ie disregarding other things like velocity etc etc), the rate of inflation would be related to the rate of money supply growth, and the price level (not its rate of growth, the actual price level) would be related to the money supply.

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