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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: GST who wrote (88489)	11/5/2007 8:14:20 PM
From: bart13	Read Replies (1) \| Respond to of 110194

We're off into semantics on defining "inflation to be money supply". We can dance around what money is and what credit is and what inflation is and whether CPI or CPI+lies is a valid measure of inflation too... But the data since 1875 incontrovertibly shows the very strong correlation between M2, M3 & CPI+lies. If you want to characterize a chart covering over 135 years and what it shows as an isolated view (and without providing any better answer or data) then be my guest. The bottom line is that chart and similar charts I could put together since roughly 1970 would show an extremely clear correlation between M2 or M3 and corrected CPI in the Euro area and yes - even Japan too. You can even see it in my world money charts on my Central Bank watch page. It includes a world chart including as complete a data set as I could find from the US, Euro area Japan & China. If there was as complete a data set for the Euro area or Japan as there is for the US, provide it to me and I'll show you the correlation there too - either by country or by all countries. And again, all I'm saying is that money supply is the primary item and that its not the only one... but if you want to interpret what I've said as only considering money supply, there's little more I can say.

To: GST who wrote (88489)	11/5/2007 8:29:42 PM
From: basho	Read Replies (2) \| Respond to of 110194

GST, you seem nearly as determined to push your take on these matters as Mish is his. No mean achievement. I don't see that the Japan undermines the case for a strong connection between monetary growth rates and inflation or deflation. The astronomical increases you mention have only been in base money. Broader measures of money supply (like M2 +CDs) have struggled to grow much at all despite the BOJ's best efforts. Many theories are advanced for this breakdown in the transmission mechanism. In the simplest terms, however, I think the bursting of the asset and credit bubble in 1990 (and the associated loss of confidence) brought two things in its wake: 1) When asset prices lose any sensible connection with their capacity to produce income (which can only occur on an economy wide basis as the result of a credit bubble), either they must fall to a point where they do or enough time must pass for incomes to eventually catch up. Because the markets in Japan were not allowed to clear, what might have taken a year or two has been spread out over 15 or more years. Until that point is reached (and probably well beyond since lack of confidence feeds on itself just as does overconfidence), the debt overhang (whose mirror image is a heavily expanded money supply) weighs on asset prices, restricts economic activity, reduces profitability and, of course, continues to undermine confidence. 2) In the face of these secular influences, both the ability and desire to borrow largely vanish. Most are far more concerned with reducing their debt and escaping the deflationary undertow. The "normal" base money multiplier therefore simply doesn't work. Hence the apparent conundrum of a "superinflationary" central bank policy and low to no growth in broader aggregates. It's the flip side of the trip up the mountain. Then, because animal spirits were in full cry, central banks hardly even need to accommodate the market's hunger for growth in debt in the latter stages. It carries on (as we've seen in recent years in the US and elsewhere) largely under its own steam. (That said, I have little doubt that the moment of truth for this credit bubble has been deferred a good deal by the fact that the PBOC and BOJ have in effect been underwriting and monetising US debt expansion). You're right to point out that the relationship between the money supply and inflation/deflation is complex and often, in the short term, non linear. Like Bart13, though, I think the evidence for a powerful, real and primary linkage between broad money supply growth or contraction and subsequent inflation or deflation in prices is real and strong. P.S. This article has a few interesting charts (and comments) on these sorts of issues in Japan. japanreview.net