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Sunday, August 8, 2010

Proof That We Are Heading Into Deflation - Its all about M3 not M1

Below is a chart of the money supply.

You will note that even M1 is declining which shows the bankruptcy of Keynesian economics. With the trillions added to the national debt to stimulate and bailout the "good old boys" and well connected losers of the two administrations, it has not been enough to repeal the laws of gravity. Although, I suspect the administration will continue to flapp its arms wildly, especially as they get closer to the ground (reality).



Next, look at the below link:


Remember that what we use for money today is not just cash (M1), its cash and credit (M3). If you look at the bottom left two charts of M1 and M3 money supply, the shaded area shows the dollar amounts which are listed to the right of the charts. M3 is essentially M1 plus credit. Now compare the amounts. M1 currently stands at about 1.7 trillion while M3 currently stands at about 13.9 trillion (chart is logrithmic) or nearly 10 times M1. In other words M3 is composed of 88% credit and 12% cash. The administration manipulates M1 through its stimulus programs, which has an immediate inflationary effect and which also means that they are trying to avoid deflation by pumping up 12% of the problem while the 88% is currently defaulting and melting down. Deflation accounts for 88% of the final outcome and governmental inflation accounts for only 12%, which one do you think will win?

Finally, below are two articles well worth reading and understanding: 

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