Saturday, July 3, 2010

Escape from the Planet of the Credit-Users

In yesterday's graph the quantity of spending-money falls to about ten cents per dollar's worth of output. When there are so few dollars circulating, it is hard to buy things, hard to sell things, and hard to put money aside in savings. Money doesn't facilitate well, when there's so little of it. The solution, the Arthurian solution, includes a doubling, more or less, of the quantity of spending money M1.

The obvious panic in your reaction arises from the potential for inflation in my plan. But there is no potential for inflation in my plan, for this reason: The plan also includes a reduction in our reliance on credit. I want to shift from money-that-costs-money-to-use to money-that-doesn't. I am increasing M1 money, but I am not increasing the stuff we use for money. I am changing that from mostly-red to mostly-green: From mostly credit, to mostly not credit. The change will reduce the factor-cost of money, and reduce structural inflation.

Everything that happens in out economy continues to happen, except, oh, say, business interest costs are lower, so that business profits are higher, so that economic growth is better; and business interest costs are lower, so that wages and salaries (and compensation of officers) can be increased, so that customers have more money to save and spend, so that economic growth is better.

This Google Docs graph uses FRED data from the St. Louis Fed. (Find them under THE ECONOMY:DATA in my links.) The St. Louis Fed says M1 "includes funds that are readily accessible for spending." This graph compares the quantity of spending money in our economy to the total purchase price of our GDP.

The graph is an update of yesterday's graph. Yesterday we saw M1/GDP drop fast-and-smooth from 1946 to 1980, the Keynesian half of the postwar period. Then during the Reaganomics half of the period, the M1/GDP trend continued to fall but the path was slow-and-bumpy.

Today's graph picks up at 1959, in the midst of the smooth Keynesian down-trend. And it continues out to January, 2010. Yesterday's graph ends at 2007, before all of the recent excitement.

See that little up-tick at the far right? Well, that's what Bernanke did for us. Bernanke's trillions, and the bailout, and the stimulus and all that. Perhaps you will remember this blue graph, with the big spike at the end that had everybody all upset:

That's the same event, the gigantic spike on the blue graph, and the tiny little upwiggle on my googleDocs graph. Yes, it was a big increase in "the monetary base," from about $0.8 trillion to more than $2 trillion. But the effect of that spike on my Google graph was almost insignificant.

I updated my graph because I was hoping that M1/GDP had climbed much higher. Ten cents is too low. Twelve cents is still too low. It should be about 20 cents. It wants to get there gradually, but it wants to get there.

And don't forget: The extra money in the economy will cause inflation, unless we invent some policies that get us using more money to pay off more debt. If we get those policies in place, our debt goes down. Our reliance on credit goes down. The factor cost of money goes down. And the threat of inflation goes away.

But I doubt Bernanke's plan calls for any reduction in our reliance on credit.

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