Hmmm….

I’ve used this graph for a while as a reason to dismiss concerns about big inflation (or likened it to a coiled spring, depending on the mood I’ve been in). So when I read some alarmist headlines about growth in M2, I regenerated this image to see if there was any reason for concern. For the first time, I am not comfortable with the outcome. It is still early as far as the data is concerned, but the green line seems to be diverging from the red line. If this continues, and M2 growth accelerates, there could be genuine reasons to be concerned about big inflation.

Now, having provided an alarmist paragraph myself, I do feel obligated to point out that this may be but a temporary win for inflation. Inflation currently is winning. However, there are significant deflationary pressures (default, always default). Commercial real estate delinquencies are still growing, and there’s some real concern about state finances. Since debt is the most important aspect of the money supply, a turn for the worse in the bond market would make the growth in the base-minus-reserves meaningless.

(via research.stlouisfed.org)