Sunday, October 16, 2011

Money Measures in Context

A recent remark by Ashwin points out that

Too much "innovation" has happened and the Fed's control of money supply has essentially vanished.

I agree with that, certainly. We are all Kosh. I just don't agree that the situation is "irretrievable."

Graph #1 shows the various money measures since 1959. Base money is the blue line at bottom.

Graph #1
Graph #2 shows the same money measures, plus total debt as measured by TCMDO:

Graph #2

All the money measures got squashed down substantially to make room for the debt. But what Graph #2 does not show is any sort of proportional relation between debt and the money measures. I rectify that in Graph #3:

Graph #3
Base money is the green line running along the bottom at 0%. TCMDO debt is the brown line running along the top at 100%. The other lines are the various money measures. The highest of these money measures is M3, which ends at 2006 when the Fed stopped counting it. It is as though the Fed recognized that it had lost control of the money supply, and just gave up trying.

Development Notes & Methodology for Graph #3:

I want to think of base money as the minimum, and total debt as the maximum. And I want to look at the quantity of money (M1, MZM, M3, whatever) within that range.

I had to fiddle with sample numbers on a spreadsheet to see how to do this. (Keep in mind, I have no idea whether the numbers will turn out to show what I expect them to show. I'm coming at it blind.)

I want to put total debt across the top of my graph, and base money across the bottom. So the range of values, the up-and-down dimension for my graph, will be the difference between total debt and base money. If there is one dollar of base and ten dollars  of debt, the range-value is 9 and I will have to stretch or compress it to fit the graph. If (in a different year) there is $5 of base and $500 of debt, the range value is 495 and again I will have to stretch or compress it to fit the graph.

So the range value will be part of my calculation.

Also, I know that the baseline for the graph is the base money number. Base money is not zero, of course. But I want to show it at the zero location (across the bottom of the graph). So I know I will have to subtract the base-money number from whatever value I plot.

For base money, this will give me zero-values. That's right. And for total debt, it will give me a value equal to the range (total debt minus base money) which is 100% of the difference, which is also right.

(It is easier to do math with numbers than with words. You may find the spreadsheet less confusing than this description of my process.)

Anyway, that is all there is to the calculation. For each year figure a range-value (max less min, or total debt less base money). Then figure a factor-value (100 divided by the range-value). This determines how much each value will have to be stretched or compressed so that the maximum will come out at the 100% level on the graph.

Finally, for any money-value, subtract the base money number for that year from it, and multiply by the factor-value. That's it.

So, if B is the base-money number and T is the total-debt number and N is the money-value you want to plot, the calculation is: (N-B)*(100/(T-B))

The sample values I used to work out the calculation ended up looking nothing like I expected. There's no reason they should, for my sample values for base money used "add one to get the next value". And my sample values for total debt were "square the base-money number and add one". And like that.

The Excel spreadsheet.


Jazzbumpa said...

OK. You've normalized each monetary measure to the difference between total debt and base money.

Is that a relationship that means anything?

Since total debt outstrips any of the money measures, and has consistently grown faster, graph 3 looks pretty much the way you should have expected it to look. I guess the 1983 break point for M2 and M3 is not an obvious expectation, but it's only a detail.

Why did you want to look at money measures this way? What have we learned?


The Arthurian said...

Well, I wanted to look at it.

The 1983 break point probably matches up with what you say about faster debt growth since Reagan. But as you say, it's only a detail.

The Arthurian said...

The "break points" seem to be:
For M3 the 1982 recession.
For M2 the recessions of the 1970s.
For MZM the near-recession of 1966-67.
And for M1, somewhere before 1959.

Keynes wrote about drawing the line between money and debt at any convenient point. At the zero level I have AMBSL or money, and at the 100% level I have TCMDO or debt. Between them I have drawn some lines.