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Charting Inflastagdeflation


Inflastagdeflationists can all use money supply charts to state their case.


Prof. Depew's post on Inflastagdeflation in Wednesday's "Five Things" got me to thinking about how everything is in the eye of the beholder. Here is a quick recap of inflastagdeflation:

If you spend any meaningful time reading up on today's economic views, you will find three prevailing idées fixes. In order of dominance:

A. Inflation is understated. General price level measurements are manipulated, or failing, or are simply false; we are facing a dramatic buildup in inflationary pressures...

B. Inflation is yesterday's story. What we are experiencing now, is stagflation. Wages and incomes are stagnant, housing is slowing, the consumer is on the brink, and growth is slowing by virtue of the fact that producers have no pricing power in a credit-fueled growth environment...

C. Inflation? What inflation? Housing prices are deflating. Consumers are cutting back. Producers have no pricing power...

So, are we experiencing inflation, stagflation, or deflation?

The truest answer is yes, we are smack in the middle of inflastagdeflation with only the last remaining vestiges of this credit cycle allowing us to cling, somewhat desperately and precariously, to the "inflastag" part of the story.

It occurred to me that inquiring Minyans might wonder if it is possible to chart inflastagdeflation. Believe it or not, I think it can be done. For that, I turn to a series of charts that "Bart" at NowAndFutures updates monthly for me. In Kevin's order of importance:


Inflationists like to point to M3. Is it any wonder? Pick your poison. Not only is the actual number soaring, the rate of change is soaring as well. The inflationists say that the Fed has lost control of monetary expansion. Here is a chart to prove it.


Stagflationists will point to any number of things to prove their point. They think this occurrence is a repeat of the 70's and typically will point to oil. That won't work for true inflastagdeflationists who want to see the case state, the case based on money supply. Given that the Fed has conveniently tossed aside M3, let's turn our attention to M2.

There you have it. M2 is clearly soaring, but the rate of change is either falling or rising depending on where you want to draw the trendline. And what are we getting out of it? Certainly not jobs or houses, but we are seeing rising interest rates in spite of miserably weak housing. If that combination does not describe "Stagfla" what does?


Deflationists like to state their case based on the upcoming monetary collapse of credit. Once again, that will not cut the mustard with true inflastagdeflationists who want to see it in pictures; right here, right now. Tomorrow is not good enough.

For that we have to look at base money supply or better yet M' (pronounced M Prime) which is based on an Austrian definition of money. Typically (but not necessarily) deflationists come from an Austrian school of thinking. Please see Money Supply and Recessions for the theory behind M'.

Here are two charts of M' (with a third bonus chart following).

The chart shows that M' is barely growing. A chart of base money supply would look similar. This contradicts what the inflationists say about money supply soaring. Heck, it's barely budging. The rate of growth has been falling like a rock since mid-2004. Inflationary? Hardly... at least not to deflationists.

Let's dig deeper and take a look at inflation adjusted M' (Real M').

Well how about that? Real M' has been falling and the rate of growth has been under or near 0% since mid-2005.

Keep in mind that most inflationists (and many deflationists) think that the CPI is horrendously understated. For those folks, John Williams offers an alternative measure of the CPI on Shadow Government Statistics.

The third (bonus chart) deflates M' by that alternate measure of CPI.

This last chart shows "Williams' Real" M' growing at negative 5%. Thus, creative deflationists can use their own (creative deflationist) measures of the CPI to state the case for "defla".

Eyes of the Beholder

Well there you have it: Inflastagdeflationists can all use money supply charts to state their case. The only problem I have, is the name: inflastagdeflation.

I think inflastagfladefla is a much catchier name with an additional huge advantage of sounding more like a disease. You have to admit, this economy sure seems sick, no matter which "fla" (or combination thereof) it has.

So, where are we and where are we headed? To paraphrase Kevin: "Here we are... smack in the middle of inflastagfladefla... with only the last remaining vestiges of this credit cycle allowing us to cling, somewhat desperately, precariously, to the inflastagfla part of the story.

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