Saturday, June 19, 2010

M2 Money Supply Growth...

over the last 13 weeks, according to the Federal Reserve is at 0.0%.

Got that? The Fed is not printing any new money.

This should be a note of caution for those who are overly excited about gold at new highs. The strength in gold is the result of some extremely strong buying, the crisis in Europe is driving Europeans (especially Germans) into a gold buying frenzy and there are new buyers in the U.S., namely Tea Party people. But, regardless of how strong these two buying groups are, and they are very strong, they are also finite buyers. Big moves in gold occur when that infinite money printer the Federal Reserve is printing money. That is a not occurring at the present time. Until the Fed starts serious money printing (and I expect they will at some point), gold his very vulnerable to a violent downward price break. Long term gold holders should do nothing and simply ride things out. Short-term speculators need to be very careful here.

If you are sick and tired of me preaching about the zero growth money supply, here's former President and CEO of the Federal Reserve Bank of Dallas, Bob McTeer,with the same message:

What am I missing? I keep hearing people on financial TV say things like “The Fed keeps pumping out the dollars,” “The Fed keeps monetizing the debt.”

Then I go look up money-growth charts. I can’t find all this excessive money creation that is monetizing the debt and is about to create a breakout in inflation. Not M1; not M2.

In desperation, I went to the Fed’s H-6 money supply series and committed some arithmetic. As of April 2010...The seasonally adjusted annual rates of M2 growth were respectively -3.1 percent, -0.2 percent and 1.6 percent....

 To repeat the obvious, because others won’t, money growth is almost flat. Flat money growth does not cause inflation—especially when we have enormous slack in the economy along with rapid productivity growth and declining unit labor cost. We may get inflation in the next few years, but, if so, it will be based on money growth yet to happen. It hasn’t happened yet.


  1. The pop in the gold price could also be the sign of the growing lack of confidence in all other currencies. This is not hard to imagine considering every nation state is broke.

    Money growth is not needed for gold to rise when confidence wanes and existing dollar holders start dumping them.

  2. Correction: "This is not hard to imagine considering 'almost' every nation state is broke"

  3. 1) The fed does not control M2, banks and borrowers do.

    2) M2 minus (this excludes small time deposits which is not easily spendable money) is growing at almost %7 y/y

    3) Savings accts and checkable deposits are growing at %14 y/y and %12 y/y, respectively

    4) Broad money is falling because of the precipitous drop in Retail/Institutional Money funds and Time Deposits.

    5)Gold had its big "collapse" between March 08 and October 08 during which time M2 grew by almost %4 (over %7 on an annualized basis). In the 12 months leading up to the 2008 peak in gold M2 grew by %7.

    M2 tells you almost nothing about what the gold price is going to do. It tells you almost nothing about price inflation either.

  4. "We may get inflation in the next few years, but, if so, it will be based on money growth yet to happen. It hasn’t happened yet."

    He is lying in the last bit. There has been a lot of money printing alredy and its going to cause inflation. The thing is that all this money has not reached the market yet.

  5. Rob, you have been crying gold prices are going to crash since last year... Give it up already. You clearly don't understand gold dynamics and should go hang out with Bernanke.

  6. Well said Jon.

    Mr Wenzel, please just stick to reporting on economic news and keep your expert opinions to yourself.

  7. Anon@8:06am, if you can't handle contrary opinions, then stop visiting here and stick with reading Jim Sinclair. I'm sure it's all as simple as Jim says, and I don't want you bothered with actually having to think.

    Hugo, all the Fed did with that massive spurt of money printing in 08/09 was backstop asset prices. They stopped the massively deflationary effects of those financial assets being priced at their true market value.

    In other words, much of the inflation you guys are worried about ALREADY OCCURRED in the 2000-2007 timeframe. The Fed's recent actions were to stop the price collapse of those assets.