Saturday, September 10, 2011

A brief follow-up to yesterday's post

Yesterday's post leaves me thinking about the relation between Federal deficits and Base money. That relation is shown in the blue line here:

Before about 1960 I see in the blue line a flat (horizontal) trend at about minus ten dollars of deficit -- ten dollars of surplus, I guess -- for every dollar of base money.

From 1960 to 1982 I see a 45-degree line, a rising trend that brings us to about $100 of deficit per dollar of base money.

After that, a general decline that occurs
1. during the "bumps" in M1 Velocity (the red line), and
2. during the "macroeconomic miracle" and Clinton's balancing of the budget.

After the miracle years, the blue line again increases... until the recent recession.

The red line is M1 Velocity. I added that to the graph after I saw the pattern of the blue line. I think they are mostly similar: Increase until the early 1980s, then a significant change.

The biggest difference between the red and blue lines occurs after 1994 -- again, the miracle years -- when velocity goes *up* while the blue line goes *down*.

I think this is related to my rise and fall discussion, in some way I have not yet figured out.


nanute said...

Take a look at the M1 Multiplier. It is negative. This raises the question, in my mind, is it possible that when the velocity is below zero, are we adding a full dollar to the money supply, or is it a fraction thereof?

The Arthurian said...

I'm not followin ya. By "the M1 Multiplier" do you mean the red line on my graph here? This looks negative, by the left-hand scale but (as I failed to point out in the post) the red line goes with the right-hand scale and is positive... above the 300 level at its lowest point.

FRED's M1 Multiplier is not negative... Less than one, though. Meaning, yeah, a dollar added to the monetary base adds only about 75 cents to money in circulation. Or, one out of four dollars added to the base never gets into circulation at all. Or (more likely) money that IS circulating continues to travel at high speed, while new additions to reserves sit utterly idle.

I get it now.

Jazzbumpa said...

Is there some way to displace the red line to the right? It looks like the peaks and valleys lead those of the blue line - though not by a constant amount. It's rather close at 1980, way off mid-90's to 2000 and close again now.

Maybe you need an accordion axis. Or maybe the lag amounts mean something.

I also think the blue line is, at the very least, consistent with my 4 realms theory.


nanute said...

I think you meant to say that the FRED's M1 Multiplier IS negative. I'm not sure about the money that is circulating is traveling at high speed. It may be going in circles though. If the money doesn't multiply, there can't be any expansion of the economy. (I think.) Take away interest on reserves, try some real meaningful consumer debt forgiveness or increasing unemployment benefits and you might see some high velocity circulation. Not likely under current monetary and fiscal policy conditions. To borrow a phrase from Jazz: WASF