27 July 2010
In this month’s A View from the Top, I really wanted to step back and look at the grand picture of the overall price levels in the global economy. This discussion will basically give us an idea of whether or not our global economy is in an inflationary or deflationary mode. Certainly when you get into talking about price levels and how they’re moving that is when you begin to talk about inflation or the lack of it. What I’d like to do is start with the definition of inflation, which seems to be missed by so many individuals today. According to the Merriam-Webster’s (11th Edition) Dictionary, the definition of inflation is “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.”
In my opinion, the best gauge for the movement in general price levels in the world would be the Dow Jones-UBS Commodity Index. This Commodity Index is a broadly diversified index that looks at many different types of commodities. This index is well balanced, instead of consisting primarily of energy components. It is made up of the following sectors: 33% energy, 30.2% agricultural, 12.4% precious metals, 18.7% industrial metals, and 5.7% livestock. In this particular index, we have such items as crude oil, heating oil, natural gas, unleaded gasoline, lean hogs, live cattle, corn, soybeans, wheat, aluminum, copper, nickel, zinc, gold, silver, coffee, cotton, sugar, and soybean oil. So as we look at this particular index we want to look back on July 2nd of 2008 when commodities (in general) peaked. Then the index dropped substantially all the way to March 2nd of 2009.
Now how big of a drop was it to the bottom on March 2, 2009? The drop was about 57%. Since the index bottomed on March 2, 2009, it has gone up about 15%. From the initial peak of July 2nd until today (6/30), the index is down about 50% from its peak. In 2008, we saw this commodity index go down 35.58%. In 2009, it went up 19.82% and so far in 2010 it’s down about 12%. So as we look at general prices, we can clearly see that they are down substantially since July of 2008. Prices are down about 50% over the past two years and that is exactly opposite of what an inflationary economy sees.
So clearly as we look back at our definition of a inflation “continuing rise in the general price level” we can see that the first part of the definition is certainly not being fulfilled here in our economy. In fact we have the opposite of inflation and of course we know that to be what is called deflation. So now let’s look at the second piece of the definition which states that this price level is “usually attributed to an increase in the volume of money and credit.”
One of the less common gauges of the money supply is the M3 Money Supply, and the M3 Money Supply is made up of several different types of money:
(1) It’s made up of notes and coins, currencies in circulation. This is outside the Federal Reserve Banks and involves the Depository Institution. (2) It’s made up of travelers checks as non-bank issuers. (3) It’s made up of demand deposits. (4) Other checkable deposits which constitutes primarily a negotiable order of withdrawal accounts, depository institutions, and credit unions share draft accounts. (5) Savings deposits. (6) Timely deposits. (7) Large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets. So those are the components of the M3 Money Supply.
Since 2008 the M3 Money Supply rate of change has been falling and, according to the Shadow Stats website, a few months ago the M3 Money Supply actually began to contract. Back in 2006 the M3 Money Supply stopped being published or revealed to the public by the U.S. Central Bank. So we have to go to Shadow Stats to see what has really happened. As we go back to our initial definition of inflation, and look at the second part of it reads, “usually attributed to an increase in the volume of money and credit.” So we’ve seen the M3 money supply, since 2008, begin to slow down in its rate of increase and as of a few months ago it actually began to contract. So here again this is the exact opposite of what the definition of inflation is. By both parts of the dictionary definition of inflation we simply have seen the exact opposite and yet we still have people that want to believe that we have an inflationary global economy.
The most important component to the definition of inflation is “a continuing rise in the general price level”. Many dictionaries don’t even include what “usually” causes inflation and I wish this dictionary would not have included it either. It confuses some people. We have seen a decrease in the general price level and therefore we don’t need to worry about what “usually” causes a general rise in prices. And even if we did need to worry about the cause, the M3 money supply is decreasing in volume.
