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February 13, 2012

First Sign of Inflation: Large Growth in M2 Money Supply

Last week, I was reviewing some numbers on our money supply and inflation. I was also looking at the government's income in relation to inflation (found something slightly more interesting that I will share in a later post). Basically, the M2 money supply is growing at peaks (10%+) only seen two other times since the late 1980s.

The above chart is a reflection of a monthly analysis of the M2 money supply. I took those numbers and divided them by their previous year's counterpart (similar to how CPI inflation rate is measured) and got those results. The other two peaks were late 2001-early 2002 and early 2009.

Year over year M2 growth has registered at over 9% for the past six months, which is longer than the 2009 spike and equal to the 2001-2 spike. How is this happening now? We believe this could be a reflection of the European debt crisis. The surge began in the same month as the debt crisis and would explain a massive shift from holding euro currency to dollars.

However, despite this, we are not prone to inflation. We are likely more at risk of entering what Milton Friedman called the "euphoria of inflation." This is where economic growth picks up, as does inflation, but inflation is essentially tolerated. Unfortunately, the euphoria ends when, like the 1970s, inflation rates begin to inflict increased unemployment and unmanageable costs onto the economy.

For those of you who have been calling for an inflationary future, this is your first sign. And for those of you who think that the government is worried about inflation, check out the below videos.

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