Say hello to inflationWritten by Dock David Treece | | firstname.lastname@example.org
For years we’ve been waiting, and now we need not wait any longer: Inflation has finally arrived. Our premise has been that with the economy recovering from the Great Recession of 2008 and with so many newly printed dollars now in the system, it was just a matter of time until we began seeing the first ripples of what would likely become a tsunami of inflation washing through the U.S. economy.
And now, it seems the water is rising.
According to economic research released by the Federal Reserve Bank of St. Louis, M2 money supply (and keep in mind, this is not the broadest measure of money supply, M3, which the Fed conveniently stopped reporting years ago) has grown by close to 7 percent during the past year. Granted, this is more measured than the 8.5 percent growth seen in 2012 and the 10.5 percent growth during 2011, but it’s still a relatively high growth rate.
During the same time, the United States’ nominal gross national product has grown by just 3 percent, even slower than the 5 percent growth achieved during 2012.
Inflation, as an economic term, is relatively subjective. Quite often, its definition varies based on the economic school of thought subscribed to by the person talking about it. Some point to money supply, others point to prices. However, one thing taught in just about every college economics course is that inflation occurs when money supply grows faster than the economy grows (as measured by GNP).
With money supply now growing more than twice as fast as GNP, the pace at which money supply is circulating (called “money velocity”) has been falling — more than 3 percent in 2012, closer to 5 percent the year before.
Since more dollars are circulating and the economy is now smaller compared to money supply, there are more dollars chasing the same number of goods. As a result, prices rise — this is the most common symptom of inflation, and the one the American public cares about most.
The real problems arise as velocity recovers during an economic expansion. As has been widely publicized — and politicized — the Federal Reserve has printed mountains of new money, reflected in the increase of M2 money supply. This growth in the money supply has outpaced economic growth, measured by GNP, so money velocity has slowed.
In other words, dollars aren’t turning over in the U.S. economy at the same pace they were one year — or two years or 10 years — ago.
However, as I’ve written before, the U.S. is on the verge of a major economic expansion. When GNP in this country begins to grow faster than money supply (assuming the Fed doesn’t begin pulling money out of the economy, forcing money supply to shrink, which is highly unlikely and would be potentially devastating for our economy), the velocity of U.S. money supply — with all those brand-new dollars — is going to accelerate. When that happens, American consumers will really begin to recognize the inflation already occurring.
Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and is licensed with FINRA through Treece Financial Services Corp. He provides expert content to numerous media outlets. The above information is the express opinion of Dock David Treece and should not be construed as investment advice or used without outside verification.