Gyroscopic Investing

In a previous thread, KShartle managed to get a discussion locked when he resorted to insults instead of explanations. I simply wanted to know which financial assets should be counted when forecasting future inflation.

Obviously, this is a fundamental question that needs to be answered before any debate on forecasting inflation can even happen.

From what I could gather, it seems KShartle and MDraf believed that only "Narrow Money" (high powered money or base money) should be used to forecast future inflation. After all, Narrow Money is our medium of exchange.

Unfortunately for them, economists who believe they can forecast inflation by looking at the money supply will use Broad Liquidity or MZM (previously M3) or a form of Broad Money when trying to model their forecasts — usually as part of some function that includes velocity, etc. After all, the overwhelming majority of our personal savings (bank accounts, money market funds, and T-Bills) are invested in highly liquid non-cash assets.

So, which is it?

Should we use Narrow Money or Broad Money when attempting to forecast future inflation? And be sure to explain why.

Why not just use the % change in a price index to determine inflation? By definition inflation is a broad change in prices.

melveyr wrote: Why not just use the % change in a price index to determine inflation? By definition inflation is a broad change in prices.

Correct. I meant forecasting future inflation. I'll update the original post now.

Gumby,

Your points in that other thread were great.  Kshartle went way over board in attacking you, IMO.  Figuring out "what is money" is absolutely vital to this conversation!!

I think an important point to figure out for ourselves is "are non-legal-tender promises to pay money?"  Also, your links and posts of other people's thoughts are nothing to shy away from. If an idea is better (or differently) communicated by someone in an article, post away buddy!!

Austrians want to be able to present you with an equation that shows a the wrong number divided by the wrong number and that the result equals inflation.

I think a lot of those forms you mention are money, obviously (cd's, mmfs).

But to dig a bit deeper, promises to pay from the federal government (issuer of base currency) are fundamentally different than private promises to pay, where we know they're going to have to go but for the dollar somewhere.

They want to have it both ways...

They want to be able to scream from the peaks of Mount Galt that the government is cheating, manipulating its own bond market.

But then they want to say "treasury bonds aren't money, they're a promise to pay." 

Bull crap... We know its a rigged game and can see through it and basically just consider tbills money.

Hell, Harry Browne even realized this when were in diapers.

They want to simultaneously claim that the fed is " printing money" and "manipulating interest rates by buying bonds," when it's the very fact that they're pulling these bonds off the market that makes it such a non-event, and since the bonds are known to be of that treasury variety, it really means they're not really "printing money" either. You could say they're manipulating rates, but as you've said, what's the natural rate to borrow money when you print the stuff??  Probably somewhere near the natural price I could sell a nuke to the government for if I built one .

If I woke up tomorrow and found $1 billion in t-bills in my TD ameritrade account, I'd quit my job and go spend money (potentially very inflationary).

If I woke up tomorrow and noticed my TLT had been converted to cash.  If probably call and complain.

Whether a financial asset is money or not, in the end, it's just another financial asset on our balance sheet. Add more of those nominal assets, especially if there's not a corresponding liability created somewhere else in the private sector, and you're increasing people's nominal purchasing power.

I really wish the government would make treasury bonds/bills legal tender so we can just end this argument once and for all... Because for some reason that one single point is tripping up a lot of people.

Agreed. And again, we are only talking about "highly liquid" financial assets that define our own savings and purchasing power. Which is more powerful for determining your purchasing power? The money in your pocket? Or the "highly liquid" money in your savings account and money market fund?

melveyr wrote: By definition inflation is a broad change in prices.

Oh if only we could all agree on that! 

Gumby wrote: Agreed. And again, we are only talking about "highly liquid" financial assets that define our own savings and purchasing power. Which is more powerful for determining your purchasing power? The money in your pocket? Or the "highly liquid" money in your savings account and money market fund?

It's amazing how simple it is but getting ourselves out of our own preconceptions of what money and debt are essentially requires us to unlearn a few very stubborn lies we've taught ourselves.

moda0306 wrote:

Gumby wrote: Agreed. And again, we are only talking about "highly liquid" financial assets that define our own savings and purchasing power. Which is more powerful for determining your purchasing power? The money in your pocket? Or the "highly liquid" money in your savings account and money market fund?

It's amazing how simple it is but getting ourselves out of our own preconceptions of what money and debt are essentially requires us to unlearn a few very stubborn lies we've taught ourselves.

Exactly.

And truth be told, up until the 2008 crisis, it was really easy to be convinced of those preconceptions.

But, then this happened...

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...which caused this to happen...

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...and this happened...

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...which caused this to happen...

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And if you didn't take the time to reexamine conventionsl wisdom and your own preconceptions after those two events, you were left scratching your head.

Neither of those policies expanding narrow money caused any meaningful inflation to take place whatsoever. And neither policy caused any increase in purchasing power. The hyperinflationists and inflationistas were all wrong — and have been for decades.

Broad money — the highly liquid money in our savings accounts — is what gives us purchasing power. Narrow money is nothing more than the measure of our circulating paper notes and interbank reserves (our medium of exchange) and it has little bearing on our overall purchasing power.

So, I don't see how Kshartle or Mdraf, or anyone, can think that any kind of inflation forecasts can be made from looking at narrow money. It clearly doesn't work. And it's certainly not a logical measure of purchasing power. It would be like trying to determine the speed of a car by weighing the gear shift. Or better yet, like trying to determine someone's overall purchasing power by the amount of change in their pocket.