Saturday, May 14, 2011

Invert that thing

My 60 Times (3) post was evidently confusing. I was talking about money, but the graph showed total debt (relative to money). So before my coffee this morning, I thought: Well, let's invert it then.

The graph below shows four measures of money (relative to total debt).

The blue line shows base money. In 2008 there was less than two cents of base money for every dollar of existing debt. Even after the Bernanke spike, which is barely visible on this graph, there is less than four cents of base money for every dollar of debt.
'Four cents' is one amount of money; therefore singular, I hope.
Ah yes: Collective Nouns. One forgets.
The red line shows the ratio for M1 money. Again, less than four cents.

The green line shows MZM per dollar of debt. There is about 18 cents.

And the orange line shows the defunct M3: less than 25 cents per dollar of debt. And that's the big measure of money, M3.

All these measures show downtrend. None of them grew as fast as debt.

The solution to the debt problem, the solution we have used, is to keep inventing new measures of money, measures that include more debt, as if by calling debt 'money' we can eliminate the burdensome cost of debt.

My solution to the debt problem is to stop using so much debt, and to use in its place money that bears less cost of interest.

Here ya go: Let's say there's a cost associated with base money. (Apparently there is.) Now let's think of M1 as the first layer of debt on top of base money. (Surely we have layer upon layer of debt.)

The interest cost of each dollar of M1-money includes the base-money interest cost plus the 'first layer' interest cost. This money is more expensive than base money.

Think of MZM as the second layer of debt, built on top of the first layer. The cost of layer two includes the cost of base-money interest, plus the cost of M1-money interest, plus the cost of interest on each extra dollar that is part of MZM. The cost of layer two is greater than the cost of layer one. The cost per dollar is greater, because each new dollar is built on a dollar that already had an interest cost.
And even if you personally have no debt, you still live in an economy that is full of debt. That debt affects the cost of the things you buy, and it affects the availability of the job you might want.
Think of M3 as the third layer of debt, built on top of the second. Again, each dollar comes with interest cost on top of all the previous-layer interest costs. Again, the interest cost per-dollar of this money must be much greater.

The entire white space of the graph runs from zero to zero-point-five of total debt. If you imagine that white space twice as high as it is, and picture where the top edge of that white space is, that top edge is total debt. And the cost of that debt is greater still.

And yes, you can say that all of this cost is somebody's income. Well yeah, that's why I call it a factor cost. It's why I say the factor cost of money competes with the factor cost of labor and competes with the factor cost of capital.

But labor is a productive factor. And capital is a productive factor. On the other hand, money is not a productive factor. Money facilitates production. So what we have is too much cost-of-facilitation relative to the costs of production. As a result, finance grows to crisis, and production remains stagnant.


Jazzbumpa said...

Much to do today, so only a brief comment. I haven't even read the whole post. I think Liminal's take on the cost of base money is highly suspect. Any argument based on Ricardian equivalence is highly suspect.

Further, he associated this cost with "removing" money from the base. If he demonstrated a cost associated with leaving it there, I missed it.

Bring a carload of salt when anyone throws Ricardian equivalence at you.

Gotta run.


LiminalHack said...

"If he demonstrated a cost associated with leaving it there,"

The cost is inflation.

If you abandon an inflation target, most all of the problems we have discussed go away.

Obviously other problems present themselves instead, as is the way with life.

Ideally inflation targeting would not be required, especially since it has been shown to be nigh impossible to achieve.

However when discussing credit and the management thereof, one needs to make ones assumptions about inflation control clear, otherwise there is no frame of reference within the current cultural backdrop.

As for Ricardo, one doesn't need to assume RE to see base money issuance has a cost IF you assume an inflation target. Even if the money is removed after the generation which has issued it have all died, someone still bears the cost of its removal.

Jazzbumpa said...

Liminal -

The cost is inflation.

You're going to have to show me how that follows. Having some specific stable quantity of money in the base seems totally unrelated to inflation.

You also seem to be suggesting that the cost of credit (and of inflation) is something akin to a dead weight loss. If, frex, the Gov't issues bonds and uses that (newly created) money to improve the infrastructure, educate the population, or make any kind of reasonable, rational investment, then there is a payback. If the business case is sound, then the benefits outweigh the costs. Do you negate that possibility, or am I reading you wrong?

I will grant you that using (long term) credit to pay for a vacation or big-screen TV is unwise.

In short, using credit to fund investment is not only good, it is VITAL to a functioning economy. OTOH, using credit to fund expenses is somewhere between risky and foolhardy. Using it to fund speculation is even more so.