Wednesday, August 18, 2010

The Force of Gravity

Looking at the St. Louis Fed's MULT graph, used in my previous post, we see nothing but decline: a long, slow, gradual decline followed by the abrupt, sharp decline of the Paulson crisis late in 2008.

But MULT covers the years 1984 to 2010. I like to look at more years. I don't want to say nothing but decline because I don't know what happened before 1984. I've shown a lot of graphs with a turning-point right around 1980. Maybe the MULT graph would show the same thing?

So I did my own version of the MULT graph, using the data FRED provides for the period 1959-2010:

Nothing but decline. For the 25 years or so before 1984, a long slow decline. Then (discounting for now a couple interesting bumps there) a long, faster decline until the Paulson crisis. And then the shocking drop. Nothing but decline: Accelerating decline.

The money that the Fed creates is multiplied by economic activity. Let's say fractional reserve banking, or bank lending, multiplies the money.

How much? How much does it multiply the money? Good question. Around 1960 every dollar created by the Fed became about $3.50 of M1 money. By 1973 or so that number had fallen to about $3.30 or $3.35. But then the number fell faster and was a little below $3.00 in 1980.

Then two or three years of stability, and two or three years of increase. And then the number fell faster than before, say from 1987 to 1991. Then two or three years of increase again. and then the number fell faster than before, say from 1994 to 2000, to something under $2.

Then the decline tapered off and from 2000-2008 or so the number fell about as fast as it did in the 1970s. It fell to $1.60 or so. And then it fell again. Faster than before: Like a rock. To about 80 cents.

So we can say that the general tendency is for the number, the M1 money multiplier, to fall faster and faster. To accelerate downhill. As if gravity was at work on it.

And we can also say, frankly, that the really really fast decline of the Paulson crisis, the decline there in 2008, should have been easily predictable, because it was all downhill.

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