Tuesday, May 10, 2011

60 Times

I find it useful to look at debt relative to the quantity of money. For money, I usually use M1 (which is spending-money). But even some of M1 is created by creating debt.

The monetary base is the smallest measure of money and is the one which the Fed directly controls. (And base money is created when the Federal Reserve removes debt from the economy.) So I thought to do a Debt-per-Dollar graph, comparing total debt to the quantity of base money.

The graph begins shortly after 1950 and shows continuous up-trend -- a continuous increase in debt as compared to money -- until 2008 or so, when the Bernanke spike drove DPD down to a level not seen since the 1970s.

Oh yeah, there is one significant drop from 1990 to 1994, which we have seen before and which I say was the necessary precondition to the golden decade which began around 1995. But other than that, there is no significant change from the up-trend, not in my lifetime. Not 'til the Paulson crisis, anyway.

When you do a DPD graph with M1 as the money measure, you see that debt peaked at $35 per dollar of money. But when you do the DPD with base money as the measure, this graph, debt peaks at $60.

Sixty dollars of debt, for every dollar of money in our economy. That's how we got into this mess. And remember, everything you see on these graphs is the result of policy.

And nobody saw it coming.

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