Monday, September 5, 2011

It's full of bumps

Yesterday's post is part of a long-running investigation. I'm getting ready to tighten it up. Looking for related posts, I found Another Piece of the Puzzle, from 14 months back. It presents this graph:

Graph #1: Money in Circulation (July, 2010)

At the time, I pointed out "Bernanke's trillions" -- the increase since 2008. But the focus of my attention was

the big bump there in the middle, rising until about 1995, then falling. A big bump in the quantity of money. The bump grabbed my attention because of its timing: 1993-4-5. There was a mini-golden age in the U.S. economy from 1995 to 2004. The good years began in 1995, just as the M1 bump was peaking.

When I look at this graph now, I see five bumps in the money. Well, four and a half. The big one there in the middle, and the two before it that I talked about yesterday. That's three. Plus a smaller bump, centered on 2005, which was obviously not big enough to make a vigorous economy. And the start of a fifth bump, the Bernanke's trillions bump starting late in 2008.

Fourteen months later -- today -- the graph looks the same, except for Bernanke's trillions.

Graph #2: Money in Circulation (September, 2011)

The plump, round beginning of the Bernanke bump has turned and arched upwards. This bump is going to be a big one.

How Big Is Big?

But really, how big is it? Oh yes, bigger than the Reagan bumps. Bigger that the Clinton bump. And bigger than the Bush bump. But is it big enough to compensate for the economic failure of the past three years?

We must compare it to something. So, I will do again what I did yesterday, and compare the growth of circulating money to the growth of Disposable Personal Income:

Graph #3: Money in Circulation (red) and Income (blue)
Indexed for Comparability

The two trend lines are indexed, made equal at 1980, with an index-value of 100. This artificial equality allows us to see that the two lines increased at about the same rate for 15 years, reaching the index-value 200 together in the late 1980s, and reaching the 300 level within a few years of each other in the mid-1990s.

After that, the red line fell behind. Money growth fell behind. And by the look of it, Bernanke's trillions are nowhere near enough to bring the quantity of money back into proportion with Disposable Personal Income. Even after the significant decline of income that occurred during the 2009 recession, the quantity of money is far below the level of income.

The period of proportional growth -- roughly 1980 to 1995 -- was made possible by those three speed-bumps in the money supply that I talked about yesterday. And one of those bumps, the third one, led to the "macroeconomic miracle" of the late 1990s. That bump in the quantity of money was enough to keep the economy growing for the rest of the decade, despite the fall in the quantity of M1 money (relative to income) that occurred after 1995.


Clonal said...

Art any reason for choosing M1 and not M2 or M3? I would have gravitated to M2 as being more appropriate, since over the years, with bank deregulation, the line between checking accounts and savings/money market accounts has blurred.

The Arthurian said...

The blurring of that line is due to financial innovation, which is the the tool that makes the problem worse.

Anyway, base-money has these bumps, and M1 has these bumps, but money more distant from base-money does not.

Jazzbumpa said...

I have to say that "Bernake's trillions" is quite a misnomer, totaling under 800 million from 2008 to date.

Instead of indexing to some point in time, why not look at how the proportion (DSPI/M1SL)* has changed over time? I actually think it makes your point better. Though, OTOH your graph does not make it blatantly obvious that DSPI/M1SL has dropped from over 8 to under 6 in the last 3 years.

Another thing that makes a difference, I believe, is the skewed distribution of disposable income throughout the population, which aggregate numbers do not capture. (I divided by CNP160V)*

Looking per population gives a different perspective to your money bumps, too. After the early 90's bump, there's a significant drop until 2000. On that basis, the '01 to '05 bump was rather hefty, then there was a slight drop leadng into the '08 recession. But that bump, like the current one just fed bubbles, and did nothing for the real economy.


*I tried to link, but if there's a way to link to a trnsformed graph, I haven't discovered it.

The Arthurian said...

"Another thing that makes a difference, I believe, is the skewed distribution of disposable income throughout the population, which aggregate numbers do not capture."

Yeah this comes up far too often, I think because you have rejected the part of my underlying analysis that says the skewing was a result of policy (reaganomics) created to solve problems that became obvious in the 1970s.

You spend a lot of time arguing against the economic policies that brought us to disaster. I don't see the need to make such arguments. Reaganomics was an experiment that did not solve the problems it was designed to solve, but only made them worse. And it created imbalances along the way.

Bernanke does not create M1. Bernanke creates base money. M1 expanded far less than base money.
Anyway: Brewster's millions... Bernanke's trillions. It was obvious to me!

Clonal said...

Base money is created by the Federal Government deficits, and removed by a surplus. That is some of the learning from the MMT literature.

Now you know the reasons for the bumps. That would also explain why the bumps do not show up when using broader money. The existence of base money is what allows the banks to multiply the money supply.

Clonal said...

The problem with using M1 is that the Bernanke bump, which consists primarily of addition to bank reserves is unlikely to show any boost to the economy. In todays world, bank lending is never reserve constrained, but rather is constrained by the demand for new loans, and by capital requirements. The bank reserves do not end up as bank capital.

Thus the various QE's did almost nothing for recovery, while the stimulus government spending did.

The Arthurian said...

"Base money is created by the Federal Government deficits, and removed by a surplus... Now you know the reasons for the bumps."

So you are saying that if I look at a graph of the federal deficit, I will see the same bumps?


The money the Fed puts into the economy is not in the monetary base? I think this is a better comparison than M1-to-Deficits.

I admit, I didn't spent time tweaking the deficits chart to find the best-looking comparison. So, show me.

Clonal said...

OK Art,

Here you go

The above is aanual deficit in cpi adjusted 2009 dollars. I think your M1 numbers are nominal dollars

See also the accumulated nominal deficit

You will see the close parallel.