Friday, February 11, 2011

M3 vs. CPI (A Rorschach Test)

Let's look at the growth in M3 over the previous 5 years and compare that to the growth in the CPI over the following 5 years.

Click to enlarge.

From a Rorschach test perspective, what do you see when you look at the chart? I probably shouldn't tell you that I see satan's kite, lol. D'oh! ;)

The M3 data goes from 1959 through 2005. The CPI data goes from 1964 through 2010.

We'd expect some correlation here because as the money supply grows we would generally expect to see more inflation in the future. There isn't as much correlation as some would have you believe though. A growing money supply isn't enough to know what inflation will do. We also need to know how much actual stuff is being produced or has been produced.

Self Storage Acquisitions Too Hot to Handle?

In the second half of 2010 investors swarmed to the self storage industry, buying up businesses like they were on the clearance rack. And the 2011 outlook for the domestic self storage market has “bullish” written all over it.

Investors "swarmed" into an investment that has done amazingly well over the previous 15 years? We've certainly never seen that behavior before. *sarcasm*

The self storage market has a long and impressive 15-year history with an average of 16.52 percent return on investment.

There's been so much stuff produced that we don't even know where to put it all. We also produced an abundance of credit as seen here and here. In my opinion, too much stuff bought on too much credit makes deflation a valid ongoing concern.

If past history was all there was to the game, the richest people would be librarians. - Warren Buffett

Source Data:
St. Louis Fed: M3
St. Louis Fed: CPI


Anonymous said...

Mark have you been hacking Bernanke's PC again??

Mr Slippery said...

Money supply alone doesn't account for velocity. Dollars that don't get circulated, like those sitting as bank reserves may as well not exist.

It might be interesting to see the deficit as a % of GDP vs. CPI or maybe total credit YoY vs. CPI. I would expect some correlation there. If I had time, I would jump on those, but I need to get back to work.

Stagflationary Mark said...

It all comes down to satan's kite economics. ;)

Kite Fix Economics 101

So here is the situation… You lent your kite to your “buddy” and he went and landed it on a stick he didn’t see on the beach. Now your favorite 2007 kite has a two foot long tear down the middle of the canopy. So now what?

Stagflationary Mark said...

Mr Slippery,

"It might be interesting to see the deficit as a % of GDP vs. CPI or maybe total credit YoY vs. CPI."

I thought about it but I'm not sure what I'd even expect to see.

We've been getting more deficits because of the deflationary pressures.

A past rise in credit would seem to be not such a good way to predict future CPI. They'd correlate until they didn't (the deflationary bust).

mab said...


From a Rorschach test perspective, I see Halle Berry in her Cat Woman suit! ;)

Hey it's Friday. The movie "The Hangover" was completely juvenile, politically incorrect, vulgar, slapstick, cliche.........I loved it!

Stagflationary Mark said...



I very much enjoyed that movie!!

mab said...


On a more "serious" note, are you aware that prices and purchasing power have nothing to do with inflation? Just ask Mish.

Stagflationary Mark said...


Were you aware that the M3 has grown by a factor of 35 between 1959 and 2005? Meanwhile, gold has risen from $35 to $1300.

M3 explains everything!

Once companies understand this we can go back to business as usual.

For example, aluminum was 25 cents per pound in 1959.

25 cents x 35 = $8.75

Aluminum is only $1.10 per pound though.

Alcoa is being irrational. Somebody needs to tell Alcoa that they can raise prices by 700%. They are pricing that stuff way too cheap! M3 is the proof!

Sarcasm! ;)