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Is my Fed/Inflation math right?

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DaveLV posted on Sat, Dec 4 2010 10:49 AM

Hi Everyone, I'm drafting a letter to my friends and family about the coming inflation, but I want to be sure I have my figures correct. Feel free to check my math and critique away.

Likely M3 pre-QE1 and QE2

The last known M3 was reported as 10298.7 billion by in Feb 2006. I wanted to make a ballpark estimate of what it would have "typically" been if there was no housing crisis. In other words, how much would they have continued to print on a typical year given the trends to that point.

After having plotted it in Excel, the straightest curve leading to 2006 started around 1999. So I took M3 from Feb 2006 [10298.7] and subtracted Feb 1999 [6134] to get [4164.7]. Since this was 7 years of M3, I divide by 7 to get [595]. Thus, we can assume the given trend of M3 expansion would have most likely been $595 billion a year.

I want to estimate what the M3 WOULD'VE been if QE1 and QE2 had never happened. I shoot for Feb 2011, thus adding 5 years of the $595 billion to get [2975] + [10299] = 13,274. $13.3 trillion projected for Feb 2011.


New M3 given QE1 and QE2

We know QE1 was 1.8 trillion. QE2 is $900 billion over this coming year. Thus Q1 + Q2 = $2.7 trillion.

If we take my above estimate to be correct, then QE1/2 is about 20.3% of the projected M3 (2.7/13.3) -- Thus, the Fed is adding a little more than 20% to our money stock. Are my calculations correct? Anyone have better numbers or math to work with?

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