I'm trying to educate myself on macroeconomic principles, because I believe they're more useful in making long-range predictions. And in light of our nation's recent bout of economic Tourette's, I'm trying to figure out what the long-range implications will be. At first glance, this seems simple - Washington politicians are wallowing around in more pork and corruption than ever, spraying trillions of dollars around as magic balm to soothe all our ills - sounds like textbook inflation, right? A few hundred billion here, a half trillion there ... what, didn't work? Banks still jittery? Here, have another $300 billion. The printing presses at the Fed must be smoking by now. Weimar Germany, here we come!
... but not so fast. The actual size of the Money Supply is shrinking, which is considered a classic symptom of deflation. After all, most money isn't printed, it's created electronically - by banks, allowing them to make loans out to businesses (and each other). The Fed's low-interest-rate policy of the past seven years created an environment of "easy money", and a swelling of the money supply, which led (in part) to the inflation in prices of things like houses. Now that banks aren't lending, and their obscene leveraging will likely be ratcheted back from 40:1 to something like 12:1, the amount of money in the system is going to decrease in the near future.
I'll continue to try and puzzle this out, but I'm open to comments, opinions, and education. What's going on? Inflation or Deflation?
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4 comments:
It depends on your definition of inflation...
If you consider the total money supply to be money plus credit, we're seeing a dramatic compression (deflation) as banks not only stop making new loans, but remove lines of credit, lower credit limits, etc.
Almost separately, I like to keep an eye on inflation expectations. You can approximate expectations by comparing the TIP (inflation adjusted treasuries) to TLT (20 year treasury bonds) to get a nice visual. As the line rises, expectations of inflation are increasing.
http://stockcharts.com/h-sc/ui?s=TIP:TLT&p=D&yr=1&mn=0&dy=0&id=p78371548674
Right now "the market" thinks deflation is winning.
TIP:TLT
Interesting ... so the overall money supply is, in fact, decreasing. Since government expenditures and commitments are increasing, I guess it would be fair to say that a much greater percentage of the economy will soon flow through the government - they'll be controlling a larger piece of a shrinking pie. I wonder if there's a particular indicator to measure this.
You may measure government expansion using your "wallet" by looking at taxes plus government deficit spending. Deficit spending is simply the auctioning of T-Bills, etc. But government debt is simply a claim against future taxes (or a debased currency or a combination).
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