Another Piece of the Puzzle

While I was gathering numbers for yesterday's post, I ran across this graph:

It's a picture of weekly values of M1, or spending money. Money in circulation. On the right, in the middle of the fat gray bar, you can see Bernanke's trillions.

What I thought was interesting about this graph was the big bump there in the middle, rising until about 1995, then falling. A big bump in the quantity of money. The bump grabbed my attention because of its timing: 1993-4-5. There was a mini-golden age in the U.S. economy from 1995 to 2004. The good years began in 1995, just as the M1 bump was peaking.

Look at the bump from a different perspective. This graph shows annual change values for the M1 numbers:

M1 money growth zig-zags all over the chart. But the low point around 1989 and the high point around 1993 -- there, where it looks like it's giving you the finger -- identify the increasing money-growth that produced the M1 bump. And the upper half of the downtrend after 1993 helped to fill out the bump. After 1995 when the zigzag line drops below zero, the bump curves downward.

So we have a large increase in the quantity of M1 money, from 1989-1995, followed immediately by ten years of good economic performance. But that's not all we have. As the "golden age" link (above) shows, we have a significant drop in debt-per-dollar between 1990 and 1993.

A significant drop in debt-per-dollar at the same time that the number of dollars was rising to create the bump. You could say that the growing quantity of money was the cause in the DPD drop. I say that was part of it, but only part of it. Debt also fell during those years, or grew unusually slowly.

In 1990 and By 1991 the tax code changed. The personal tax deduction for interest expense was eliminated. As a result, people cut back on credit use. That, combined with accelerating M1 growth, created the wiggle in the DPD.

So we have a decline in credit-use, and an increase in the quantity of money. And after 3 or 4 years of that, we get a "golden" decade. Coincidence? Not in my book.

To me, it's Arthurian economics: Reduce the reliance on credit, increase the quantity of money, and accelerate the repayment of debt. In my book the events noted above, leading to a golden decade, are evidence that Arthurian policies work.

Oh -- and look at the effect on the federal deficit:

The deficit maxed out in 1992, then got progressively smaller until we got that first surplus in 1998. And the surpluses increased in size for two years after that, peaking in 2000. That is eight years of continuous improvement in the budget picture.

Clinton? Gingrich? I don't think so. I think the tax-code change of 1990-91 combined with the M1 bump of 1989-95 did the trick. It gave us a golden decade. And it balanced the budget.