This is the concluding installment in my series examining how the most reliable economic indicators during the Inflationary Era, perform during periods of deflation. I have done this by examining the Roaring Twenties, Great Depression, New Deal, and the Post WW 2 deflationary recession. The reason for doing so is that we are now in the midst of the first deflationary recession in 60 years. Most indicators used by economists and pundits do not exist or have never been tested that far back in time. Indicators which may work during inflations may not work during deflations. Having set forth the data for you, today we show exactly how two such indicators -- monetary and interest rates -- panned out, and the implications of those conclusions to our present situation.

Previously in Part I of this series, I explained the need to re-examine economic indicators to determine how they performed in previous periods of deflation. In Part II, I looked at the year-over-year M1 vs. CPI indicator during the Roaring Twenties. That examination showed that, in the 1920s, the M1 vs. CPI indicator generally worked well, with two differences from the Inflationary Era: (1) if anything, the indicator slightly lagged signaling the start of recessions, and led signaling expansions; and (2) when M1 was not growing -- when it was stagnant or declining -- it did not signal expansion even though its YoY change was less negative than a CPI deflation.

III. Great Depression, post WW 2 deflation -- monetary indicators

In this installment I will look at the same M1 vs. CPI indicator during the Great Contraction and New Deal portions of the Great Depression, and the brief post World War 2 deflation of 1948-49 (the last significant period of deflation before now).

Before we examine the Great 1929-1932 Contraction, let's look at the Recesion of 1937-38 (as previously, YoY M1 is in blue, CPI is in red):

As with the Roaring Twenties, our monetary indicator works flawlessly here, with M1 declining below CPI in June 1937, only one month after the onset of the recession in May 1937, and exceeding CPI in August 1938, two months after its end in June 1938.

I. Introduction

The supporting data normally cited in the welter of economic commentary suffers from an important limitation. Almost all of those indicators date from the 1950s and 1960s onward. That is to say, they cover a period where there was not even one single deflationary event. All of their reliability comes from a period of waxing and waning inflation -- but always inflation. As we are experiencing the most significant deflationary recession since the Great Contraction of 1929-32 and the Post World War 1 deflation of 1920-21, the applicability of these indicators is very suspect.

This point was driven home to me when I saw a graph of one such very reliable post-war indicator -- the yield curve -- dating from 1929. The graph re-posted below, shows a relentlessly positive yield curve (short term rates are in green, long term rates in red).

If one were ignorant of history, one would have expected that with the exception of a couple of brief bumps, the economy would have been expanding nicely throughout the entire period from 1929-1950! Even during most of the "great contraction" of 1929-32, the yield curve was positive.

Consumer prices in November fell ( - 1.9%) non-seasonally adjusted. The YoY rate of inflation is now only 1.1%. In the last 4 months, prices have fallen ( - 3.4%), or at an annual rate of ( - 13.2%). I am accordingly updating my table of Deflationary Recessions:

Recession dates/ YoY, monthly deflation/greatest +/- change