Tahoe is Walking On: Inflation:Deflation Debate with support of Money Supply discussion (EconMatters)

Saturday, June 18, 2011

Saturday, June 18, 2011

By Ellen Brown

Debate continues to rage between the inflationists who say the

money supply is increasing, dangerously devaluing the currency, and

the deflationists who say we need more money in the economy to

stimulate productivity. The debate is not just an academic one, since

the Fed’s monetary policy turns on it and so does Congressional

budget policy.

Inflation fears have been fueled ever since 2009, when the Fed began

its policy of “quantitative easing” (effectively “money printing”).

The inflationists point to commodity prices that have shot up. The

deflationists, in turn, point to the housing market, which has

collapsed and taken prices down with it. Prices of consumer

products other than food and fuel are also down. Wages have

remained stagnant, so higher food and gas prices mean people

have less money to spend on consumer goods.

The bubble in commodities, say the deflationists, has been triggered

by the fear of inflation. Commodities are considered a safe haven,

attracting a flood of “hot money” — investment money racing from

one hot investment to another.

To resolve this debate, we need the actual money supply figures.

Unfortunately, the Fed quit reporting M3, the largest measure of

the money supply, in 2006.

Fortunately, figures are still available for the individual components

of M3. Here is a graph that is worth a thousand words. It comes

from ShadowStats.com (Shadow Government Statistics or SGS) and

is reconstructed from the available data on those components.

The red line is growth in the M3 money supply as reported by the

Fed until 2006. The blue line is the growth in M3 after 2006.