Saturday, February 28, 2009

Money Supply, M2, Year over Year Change

Money supply is growing very fast. It has not yet had an impact on inflation. Delays in this effect usually take 12-18 months. The last trough in M2 occurred in December, 2007. Since then, M2 has been growing at an unprecedented pace.

It should be clear from the chart that the Federal Reserve Board has decided that deflation and the current financial crisis are more important that the risk of inflation.

Most forecaster see no inflation problem on the horizon. Many of these same forecasters didn't see a problem in housing. Of course, they failed to add in other components like consumer debt and the unprecedented leveraging of bank and Wall Street balance sheets.

I like to watch stocks like MOO to get a feel about inflation. Gold and MOO are telling a very different story than that being told on television.

By now you may have realized that the more things change the more they stay the same. This unprecedented growth in M2 will lead to a pick up in demand. It is only going to take a small incremental increase in demand for commodities to send the inflation indexes up. We already had a taste of this before the bubble burst.

A picture is worth a thousand words. You are looking at money stock. Think of it as fuel. Commodity prices should be rising soon--lets say in the second half of the year.