There is an article by Michael Pollaro saying that the money supply is firing on all cylinders.  It is an interesting article to read.  He talks about TMS or the True Money Supply which is a measure of the money supply developed by Austrian economists.

I have my own opinions on the money supply.  First, although a lot of libertarians didn’t like it when M3 was no longer published, I think M3 is overrated.  I usually follow the adjusted monetary base because it is the money supply that the Fed directly controls.  It is also important to follow the excess reserves held by commercial banks.  This was not an important statistic in the past, but it has become important in the last couple of years with bank reserves increasing in great amounts (over $1 trillion).

The charts for these two things are here:

http://research.stlouisfed.org/publications/usfd/page3.pdf

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=EXCRESNS&s[1][range]=1yr

Looking at money supply charts still cannot accurately forecast future price inflation.  They can help us take a good guess, but there are other variables.  First, price inflation does not happen uniformly.  Five years ago, we saw massive price inflation in housing.  Over ten years ago, we saw massive price inflation in the stock market, particularly in technology stocks.  The next thing we see go up may be gasoline, food, gold, or maybe all of them.  The point is that prices do not move up uniformly.  New money finds certain sectors and causes bubbles.

Another reason we can’t completely rely on money supply charts is because it is only one side of the equation.  The other side of the equation is the demand for money (also called velocity).  It is how quickly money is changing hands.  It is surprising that more Austro-libertarians do not talk about velocity.  If money is changing hands very slowly, then we can say that there is a high demand for money.  This means people are not spending as much.  This has the same effect as a deflation in the money supply.  It can offset monetary inflation and keep prices from rising.  I think this has played a big role in keeping prices down in Japan over the last two decades.

In the U.S., it seems that the demand for money has been higher since the fall of 2008.  People are trying to pay down debts and save money.  They are being more conservative with their money because of the uncertainty in the economy.  This has helped to keep price inflation in check, along with the massive excess reserves accumulated by the big banks.

If banks start to lend and the velocity picks up at the same time, we could see some massive price inflation.  We are not there yet, but it is something to keep an eye on.  It is probably the biggest financial threat that we face.