Friday, November 4, 2011

Explain me this

Total (public & private) debt relative to the quantity of M1 money:

Total debt divided by the quantity of M1 money. 1916-1970. Showing a high at 1933 and a low at 1946-47.

Data Source: Historical Statistics (Bicentennial Edition)
  Total Debt: Series X 393-409
  M1 Money: Series X 410-419

Calculations: Excel, Google Docs, Open Office Calc.


Jazzbumpa said...

Interestingly (to me at least) Federal Debt/GDP falls dramatically after WW II.

Numerator grew much faster.

I suggest graphing Total Debt and M1 on a 2 line graph, normalized to 100 at, frex, 1933. I'll bet M1 grew a lot through WW II.


Greg said...

The more I think about it Art Im really not sure that debt per dollar is what we want to look at. M1 is simply a stock of money, its like the number of poker chips in a rack. Debt is more relevant to income. If all those poker chips are circulating fast they can support an enormous quantity of debt. It is the FLOW of income which we service our debt out of not the STOCK of our past savings.

Unfortunately everything we are doing now is taking income out of the economy and making it harder to service our debts. Even QE removes income by replacing a 3% bond with a 0.25% bond.

The Arthurian said...

Jazz: "Numerator grew much faster." Sure, but why? You are always coming back to policy. I thought you might point out that the 1933-1946 downtrend on the graph corresponds pretty well with the years of the FDR administration.

Maybe I have this backwards, but I think people complain when stock and flow are mixed. M1 is a stock and accumulated debt is a stock and debt-per-dollar is a stock-to-stock comparison. On the other hand, debt relative to income is a stock-to-flow comparison. A mixed comparison.

The relation between debt and income is exactly what lenders were going by, right up to the moment the crisis hit.

The relation of debt-to-income at the level of the individual borrower is a microeconomic relation. The relation of Total Debt to Gross Domestic Income is equal to the sum of the the parts and is still a microeconomic relation. It is not a macroeconomic relation.

The trouble with measuring "debt relative to income" is that income can easily be created by increasing debt. Something similar can happen with "debt relative to M1 money" but this can only happen under the guidance of policy. Thus debt-to-money is a macroeconomic relation.

It is easy to generate income by private borrowing (and spending) but that method increases debt as well as income. To me, rejecting debt-to-money in favor of the debt-to-income relation is closely akin to what you said: viewing it as debt owed to each other, and thus not a problem.

Finally, a question: How does money "move faster"? We cannot spend our income faster than we get it. But actually we can, if we use credit. I think the use of credit creates extra "instances" of money and allows for a given quantity of money to generate more spending, thus increasing velocity. So I have to say you are right that "If all those poker chips are circulating fast they can support an enormous quantity of debt." At the same time, the fast circulation is due to the enormous quantity of debt.


Greg said...

Income is the flow out of which debt is paid. Yes the banks based their models on income, however they did a terrible job of verifying incomes so there was no way to know if their ratios were within acceptable range.

In addition, all policies post collapse have been aimed at monetary aggregates (monetary policy) and not on income support (fiscal policy).

If you are going to base your models on income flows and then abandon that in the face of a crisis , you are not using very sensible policy.

The Arthurian said...

As it happens, Greg, M1 is the stock of money in circulation. You know, the stuff from which income is made.

Greg said...

According to investopedia M1 is;

"A category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts."

What this says about circulation or velocity I dont know. The only measure of circulation or velocity is GDP. The measure of people actually buying stuff.

M1 is simply a stock, a measure of currency coins and checking accounts.

M1 can be growing and GDP be zero.