Tuesday, October 11, 2011

AMBSL goes back to 1918

FRED gives us this for base money (annual data):

Graph #1

That ought to make you uncomfortable. Even if you know better.

Here's a log look at the same data:

Graph #2

I'm not sure what the numbers on the Y-axis mean. But Graph #2 shows the growth of base money. Slow growth until 1930. Rapid growth from 1930 to 1945. Slow from 1945 to 1962. Moderate growth from 1962 to 2007 (with a little droop at the end of it). And then, more-than-rapid growth after 2007, the Bernanke fix.

So I'm thinkin... Suppose the kink at 2007 is like the kink at 1930, the start of a Depression. And suppose the 1930-1945 money growth was the solution to the Depression. The question, then, is: How much more will the Bernanke fix have to increase Base Money, if a proportional increase is required now?

We know from experience that there was a large increase in the quantity of base money and we (Ben Bernanke and I) think we know that the increase of base money was what fixed the economy and ended the Depression. So Ben is orchestrating a comparable increase of base money now. I want to know what will happen to the money supply if it increases by the same multiple now as it did during the Great Depression.

You with me?

In 1930, the level of base money was $5.879 billion. In 1945, it was $31.685 billion. That's more than a five-fold increase. The multiple is 5.39.

So. Suppose we take our base money from 2007 and multiply it by 5.39. That will give us an increase comparable to the increase we think fixed the Great Depression.

In 2007, FRED has base money at $850.529 billion. That's before the quantitative easings began. Now, take that number and multiply by 5.39 to see how much base money we might need to end this Depression: $4584.35 billion.

The last base-money number shown on Graph #1 above is just over $2000 billion. That's as of 1 January 2010. The most recent number from FRED is $2656.691 billion, for September 2011. So the number is still going up like crazy. And the number is still about two trillion dollars short of what we might need to end this Depression.

I gotta tell ya, Ben, I don't like where you're going:

Graph #3: Projection

And I gotta say, the alternative is to reduce private-sector debt.


Jazzbumpa said...

Art -

we (Ben Bernanke and I) think we know that the increase of base money was what fixed the economy and ended the Depression.

You're missing something here and it's pretty big. I'm quite sure Ben is not missing it. It was called the New Deal. That money did not sit in excess reserves drawing scant, risk-free interest. The government spent it building the Toledo Zoo and Downtown Library, and the football stadium at the University of Toledo. There might also have been one or two other projects across the country. Fiscal and monetary policies working together can accomplish great things.

FDR had overwhelming popular support and a cooperative congress that was serious about trying to solve the problems. Now we have a powerful minority that wants above all to make the President fail, and f**k the country - that's just collateral damage.


WV: slythee - a variety of Tove.

opit said...

I wonder if Jazzbumpa isn't confusing symptoms with the disease. Routine 'market reversals' are great for the super rich as leverage for 'profit taking' of distressed property sales. To think that such is deliberate and institutional is not such a stretch. After all - fraud is the backbone of the 'money supply.'