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ΓΏ Steve,
We're all rookies, but then again
sometimes we push for more insight than the professional commentary so widely
available on the internet.
For insight into my thinking in the
chart's construction, reported money supply is meaningless, in my opinion. If
the actual money supply remained unchanged as the population grew, over time
there wouldn't be enough money to engage in normal commerce. Similarly, if the
actual money supply remained unchanged as inflation occurred, again, there
wouldn't be enough money for commerce (but in deflationary situation, there
would be more than enough since its value is rising)... Alternatively, if the
reported money supply were rising 5% when combined population and inflation were
growing at 10%, we would have a deflationary money supply policy.
My chart adjusts for population growth and
for inflation. The latest data points in the chart equate to the latest reported
numbers (so as to avoid disorientation in discussing the latest data), but the
historical series is adjusted to reveal how monetary policy is truly
being implemented. Stated differently, on my chart, if monetary supply was being
maintained at a level perfectly consistent with inflation and population growth
(as if it were the perfect implementation of a target level), the money supplies
on my chart would be straight lines (flat if the policy were solely to
neutralize the effects of population and inflation, sloped upward if the policy
were to increase money supply over and above those factors, and sloped downward
to reflect a deflationary policy). Deviations from straight lines
reflect real expansions or contractions in the money supplies for any
number of political or economic micro- or macro-nuances.
Unique M2 and M3 on my chart are
effectively flat for the last 18 months. Unique M1 has a slight positive slope, but it is
fairly shallow.
As I see it, once one distills the
reported data down to this constant form, we can see that the FOMC at this
time is pursuing a flat to minimally expansionist monetary policy. So far,
we haven't seen most of the negatives that will result from the severe deficit
projection of the White House's fiscal policy, but it can only be a matter of
time. The bond market already is reflecting its recognition of the problem,
which is why I am short bonds.
Joe
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