Saturday, October 15, 2011

A couple more glances

Graph #3 from 9 October (repeated here as Graph #1):

Graph #1: MULT back to 1959

Around 1974 there is a sudden drop in the blue line that reminds me of the end of the golden age. Forgive my color confusion, but I am repeating part of that blue line in red on Graph #2, below:

Graph #2: MULT from 1959 to 1980

That sudden drop occurs during (and immediately before) the 1974 recession. In red.

The blue line on Graph #2 shows annual rate of change of the red line, and you can see a steep drop in the blue that occurs at the time of the sudden drop under discussion.

On this graph you can also see a short flat spot in the red line at -2 on the left scale (though really, the right scale applies to the red line, and the number is 3.3). This flat spot occurs as the blue line jumps up from negative 3% growth to zero, for two or three years after the near-recession of 1966-67. I point it out because it's the only spot on the graph where the red line isn't trending down. It's the only spot where the blue line isn't averaging somewhere around -1% or less.

So then I got thinking about the bumps of the 1980s and '90s:

Graph #3: MULT from 1980 to 2000

They stand out, don't they? The tall blue peaks beginning around 1985 and again around 1992 show the rate-of-change associated with the bumps in the red MULT line.

A different look. The blue line on Graph #4 below is MULT (the M1 multiplier) for 1959-2011, trending down continuously except at those bumps we just looked at.

(The blue line here shows the same info as the blue-and-red line of Graph #1 above. And the same as the red lines shown on Graphs #2 and #3. More color-confusion on my part.)

Graph #4: MULT for M1 and MZM
The blue line, the M1 multiplier, is more or less centered on the level 1.0. The red line here, the MZM money multiplier, is pretty well centered on the level 2.0.

These are log values (as the vertical axis indicates), meaning this graph shows growth or relative growth. So I will say MZM money growth was faster than the rate of M1 money growth for the 1959-2007 period. (I was tempted to say "twice as fast" but that is not correct. MZM growth was about 30% faster than M1 growth during the 1980s, by my calculations.) Also, the MZM growth trend was not declining for the period before the crisis. The M1 growth trend clearly was.

I briefly mentioned the other day, that I think M1 was the "financial innovation" of the years before the Great Depression, and MZM the innovation of the years before the Current Depression. I think this graph supports that view, though I 'm not prepared to explain myself.

Maybe I should say that M1 and MZM are not themselves the innovations, but rather are tools created for the purpose of measuring the results of financial innovation.

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