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Friday, September 14, 2007 5:26 PM

Is the U.S. printing money like mad?

Mish Moved to MishTalk.Com Click to Visit.

Curve Watchers Anonymous (a group that normally focuses on the yield curve) is asking a different question today: "Is the U.S. printing money like mad?"

That's a good question so let's take a look. For purposes of this discussion we choose to define "printing money" as an expansion of monetary base money.

(click on any chart in this article for a sharper image)

It may be hard to tell from that picture so let's take a look at year over year percentages.
Monetary Base %Change From 1 Year Ago

Expansion at under 2% annually and "Printing Like Mad" somehow do not seem synonymous. So let's take a longer term view to see if there is a difference.

Is that printing money like mad?

Heck, the U.S. is actually printing well below the CPI, and if one believes the Shadowstats CPI then "CPI inflation" must be coming from Mars as it sure as heck is not coming from "printing".

Shadowstats CPI

I am not attempting to "diss" shadowstats. Nor am I a rabid fan. This puts me in direct conflict with extremists on both sides, but so be it. Instead put me in the group that says CPI inflation is somewhere between government reporting and shadowstats.

Yet based on housing one can easily make a case that the current CPI is actually way overstated at the expense of vast understatement of CPI inflation in prior years. This all depends on how one treats housing. And ironically enough, the more one points to prior housing price increases as inflation, the more overstated the CPI (and shadowstats) is today.

With that in mind, count me among those who say the current "equivalent rent" method of evaluating housing CPI totally sucks and is not all representative of housing price inflation. Furthermore, and this is key: price inflation is a lagging indicator. We are now seeing the effects of past monetary inflation tendencies.

But regardless of whether or not one believes any particular measure of CPI inflation, the above charts easily refute the often heard myth that the U.S. is "printing like mad". And ironically enough, the more one believes shadowstats, the easier it is to dispute the myth.

With that out of the way, comparisons between the U.S. and the Weimar Republic, Zimbabwe, or any other hyperinflationist regime are pure nonsense as the following articles show.

Hyperinflation in Zimbabwe

Please consider the article Zimbabwe: Central bank governor ordered to print money

Increasingly paranoid Zimbabwean President Robert Mugabe has ordered central bank governor Gideon Gono to breathe life into the Zimbabwe Mirror Newspapers group, "even if it means printing more notes".
Weimar Republic Hyperinflation

Following Germany's defeat in World War I, the government collapsed, and the Kaiser (king) was forced to abdicate. The economy and the country were in shambles following the loss of the war and the new government attempted to work its way out of the mess by printing money.

When the initial injections of newly printed money failed to work, the government's response was more of the same. The result was an inflation that was so bad that prices were literally increasing by the minute.

The image shown is from 1923-1924. It shows a woman burning money as fuel in her wood burning stove. It took less paper money to generate heat than it did to buy wood to heat the stove.

The money as fuel image as well as a tribute to Ron Paul can be found in Hyperinflation in Post World War I Germany

If and when anyone sees U.S. citizens burning money to heat their homes, please immediately send me a wake up message that the U.S. is "printing money" like Zimbabwe or the Weimar Republic. Until then, save the analogies.

With U.S. printing running at under 2% annually, the current conditions are orders of magnitude more comparable to conditions in 1927-1929 (right before the great depression) than to the Weimar Republic or Zimbabwe. In fact, comparisons to the Weimar Republic or Zimbabwe are simply off the scale in silliness. Nonetheless, I hear them several times a day.

M Prime

People have been asking for an update of M' (M Prime) so here goes (with thanks once again to Bart at Now and Futures for producing the chats to my specifications). For those not familiar with M' please see Money Supply and Recessions.

A very brief explanation is that M' is the best approximation of "real money" in a fiat regime that anyone can find. Tightness or looseness of Fed policy can be measured by M'. In addition, M' will generally tend to track base money supply as shown above.

M Prime 1968 - Present

M Prime 1995 - Present

Using either Base Money Supply or M Prime as evidence of tight monetary policy the Bernanke Fed is actually quite tight. Using either as measure of monetary printing (base money supply should be used for this), once again the Fed is actually quite tight.

M3 Reconstructed
The following chart also thanks to Bart at Now and Futures.

Typically, claims of "massive printing" and comparisons to the Weimar Republic are made in reference to M2 or M3.

But M2 and M3 represent credit transactions which are vastly different from monetary printing. Please don't take my word for it, I would rather you take the word of someone who up to now thinks hyperinflation is likely, Gary North as presented in Monetary Statistics.
In a detailed report to my Remnant Review subscribers in April, 2007, I compared the four major monetary aggregates as predictors of price inflation. Only M1 was remotely accurate over the last four decades.

Mish has come up with a new aggregate, which he calls M-prime. He symbolizes it as M'. Using Shostak’s article as a guide, he argues that M' is superior theoretically because it does not include any credit transactions, i.e., "sell this asset and get money." I agree with his assessment.

Then he presents some charts on the success in predicting recessions by using M'. He says that 6 of the last 6 recessions were called accurately, with two as false signals: 1985 and 1995. This, if true, makes M' the best indicator of the five monetary aggregates.
Gary North and I have opposite opinions as to where we are headed. Nonetheless I think either of us could argue the position of the other quite well. Mr. North is one of few from the opposite camp who has even bothered to make an attempt to understand what I am saying. I deeply appreciate that.

I believe, perhaps mistakenly so that I could argue his point of view in a debate and do reasonably well. But beliefs being what they are, Gary North has his and I have mine. That said, they are not totally divergent. For instance we both like gold. I am sure there are many more agreements than that. Perhaps it would be interesting to see a list of what Gary North and I agree on. Let me see what I can do on that subject.

In the meantime, let's stop the comparisons between the US and the Weimar Republic? They are orders of magnitude off base.

Mike Shedlock / Mish

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