The true money supply has grown to $2,731 billion:
The annual growth rate is currently at 13.62 percent:
As explained before, inflation and deflation within a certain territory are defined as increase and decrease of the total volume of money plus credit in that territory.
Probably the best approximation on the development of total credit outstanding in the US is the Federal Reserve’s so called Flow of Funds report’s data series “Total Credit Market Debt Owed“.
The long term series shows us the historical relevance of 2008’s credit event:
As I predicted before, I believe that the US has reached peak credit in 2009 and is now on a long term path of credit contraction. I would consider the 2010 bump an anomaly, one that was brought about and fueled by massive and unprecedented government stimulus and bailout programs, and a general yet tentative mood of things potentially looking up again.
As I also predicted, it will be those stimulus and bailout programs that will be aggravating the agony and sluggishness, and prolonging the duration of this necessary correction:
Neither is there any need to be surprised about the fact that all countermeasures taken by the government will turn out to be utter failures that will accomplish nothing but aggravate the crisis. For if the cause of the problem has been too much government intervention, then more government intervention will only add to it.
Zooming in, we can see that as of Q2 2011 (the latest quarter available in the data series) it looks like all these countermeasures have run out of steam and total credit has begun contracting again, from around $52,650 billion to around $52,550 billion, a contraction of roughly $100 billion:
I have recently come to realize, mostly based upon this article that the Treasury’s Supplementary Financing Program really seems to be nothing but another sort of checking account that the federal government holds at the Fed, in particular it is actual spendable money, not just a reserve balance that would still need to be loaned out in order to become spendable money. And as you can see, the Treasury does spend the money, since it obviously regularly draws upon that account, to the point where now the balance on there is zero again. Thus I will from now on include it when adding up the different components to come up with theTrue Money Supply.
Based on that we can see that the true money supply is currently at $2,592 billion, and that so far its been able to maintain its growth through 2010 and 2011 for the most part:
The growth rate is currently at around 6.19% and has been recovering from a low 1.28% around April:
During the period from Q1 to Q2 2011, which is the one we observed credit growth for above it has risen from $2,417 to $2,458, so by about $41 billion, which is less than the volume of credit contraction. And since then through now the money supply has roughly risen by another $140 billion (we’ll have to wait for the Q3 Flow of Funds report to see by how much this may or may not have been counteracted via credit contraction).
Overall it seems as though it is still a pretty close call between inflation and deflation, with inflation having certainly been the dominating force during 2010 and maybe also 2011, but slowly coming to a halt as credit expansion seems to have come to an end at this point.
We’ll have to wait and see what the next few months bring.
M1 in in China has most recently begun to fall:
The growth rate has now slowed to around 10%, coming closer to that in the US:
Money supply in China is slowing most likely as a result of contracting credit as a correction from prior government stimulus malinvestments.
As I said before, the Chinese housing bust is underway, the Chinese economy is headed for a severe recession, and that’s what the slowdown in the money supply growth rate may very well be indicating at this point.
The true money supply in December 2010 has grown to $2,345 billion, the annual growth rate has gone up to 5%.
As China’s economy overheats, inflation is the talk of the town these days:
In China, everyone is talking about inflation. Prices for food, raw materials and other commodities are rising, and that’s making people skittish.
Officially, prices grew at a 4.4 percent annual rate in October, the biggest jump in more than two years. But it’s striking how many people you meet in Beijing who say official statistics lowball the true inflation rate.
One economist I spoke with says inflation is probably running at twice the government’s estimate. A business executive I met says the same. He factors significant future inflation into any investment his firm makes these days.
And on the street it seems to be the same story. “I tend to agree with the housewives,” who are skeptical of the official inflation numbers, says economist Yu Yongding.
So why does China’s actual inflation rate matter? If forecasts are correct and China’s inflation rate levels out next year, then it’s full steam ahead for China’s economy. Factories will keep churning out goods. The building and investment boom will probably continue without pause.
But if China’s inflation rate climbs to 6 or 8 percent or higher, then the situation changes significantly. China’s central bank would continue to raise interest rates. The government might step into to control prices for grain or other commodities. It would probably be forced to rein all that money flowing out of the banking system that’s fueling China’s boom. Lenders would pull back.
And if all that happens, then the China miracle goes on hiatus, at least for a while. And the world will notice.
Some more data on Chinese money supply may help put things into context.
The Chinese money supply figure that is closest to my True Money Supply in the US is M1 as reported by the People’s Bank of China:
The money supply in China has easily tripled over the past 6 years.
And here is a comparison between the money supply growth rates in the US and China:
Money supply and credit supply have both been exploding in China, while money supply in the US has rather stagnated or at least grown a lot slower alongside contracting credit.
This is the main reason why I don’t think that the Yuan will remain strong against the US dollar for very long, and it is also why I don’t think the Chinese bubble can continue for much longer, but then … bubble often times last a lot longer than you’d expect.
The only way how the Yuan can maybe remain strong against the US$ for a sustained period of time, in my view, is if the PBC tries to cheapen the Dollar by selling reserves against Yuan, which in turn would exert an upward pressure toward exports from the US into China while having the adverse effect on Chinese exports, and thus hurt China’s politically powerful export lobby.
However, such a policy, too, would find its natural boundaries in the amount of Dollar reserves accumulated by the PBC.
The true money supply in July has dropped again slightly from $2,213 to $2,200 billion:
The annual growth rate remains below 2% at currently 1.82%:
Historically, the true money supply is a helpful indicator in predicting recessions and booms. A sustained growth rate below 3% tends to portend recessions, while one above 3% tends to result in speculative booms of one or the other kind.
In hindsight over the past 3 years, it looks like the true money supply has once again been a good guide in predicting mid term trends, in particular the recession of 2008 and the reflation of 2009 which has now obviously come to an end.
But fluctuations in the money supply don’t change the fact that deflation is here and has been here for a while, and it’s not going away anytime soon.