Sunday, November 20, 2011

On your mark! Get set!! Decline!!!

And if it matters -- and it matters more than anything -- the decline in the quantity of circulating money was the cause of the economic problem, and the decline of income was a result.
18 November 2011

Graph #1: Showing the Decline in the Quantity of Circulating Money since 1946

Graph #2: Showing a Slowdown in Real Income Growth since about 1970

Graph #2, from Krugman, from a post somehow linking "the Reagan Non-miracle" to the slowdown of inflation-adjusted income growth.

Krugman's graph shows a slowdown starting somewhere around 1970. The decline of circulating money began in 1946, a generation before that slowdown. The slowdown of income cannot have been the cause of the decline of money.


Gene Hayward said...

Are these two graphs you show opposite sides of the same coin? (M1 relative to output) (Debt per Dollar graph)

If less M1("Cash") over time purchases more "stuff" (first graph) then is this gap made up with the debt created in graph number 2?

Sorry for the neophyte question. Just wondering if these two graphs were combined would they tell a worthy story... :)

Jazzbumpa said...

What you have here is an apple and a beach ball. There is no intuitively obvious connection between these two plots.

If you want to make it coherent, you are going to have to weave a compelling narrative.

That's a lot different from showing a graph or two and making otherwise naked assertions.

Remember that output has increased over the time span - though at a decreasing rate of growth.

Flip M1/output and output/Mi can be thought of as the efficiency of money (new concept I just made up.) Since 1946, it has soared!

I see a break point in the M1/output graph, right at 1980.

Reagnanomics has impaired the growth of money efficiency.

Less efficient money has gravitated to the already wealthy, because productivity became decoupled from worker compensation.

As a result, labor's share has declined.

And the gap between mean and median income has widened.

What's your narrative?


Clonal said...


On the median family income, the increase since 1982 has come by working additional hours per family, and not by an increase in hourly wages. The hourly real wage in 2009 $ has been stagnant at around $16/hr

The Arthurian said...

Hi Gene,

An increase in private-sector debt (relative to federal government debt) pushes the cost of issuing money onto the private sector. It also pushes the income from issuing money into the private sector, but that income is liable to stay in the financial sector, only coming out at interest. That further increases the accumulated cost of issuing money onto borrowers, most of whom are in the private sector.


If you combine M1 relative to output (which is M1/GDP) with Debt per Dollar (which is Debt/M1) you are liable to get one of two things:

1. Something with an "M1 squared" term. That's pretty interesting, but I don't know what it is, and finding out is not at present high on my list. Or

2. Something where M1 gets divided out of the formula, leaving Debt/GDP.

Debt/GDP is used all the time by economists and (at the micro level, where we replace "GDP" with "income" and "Debt" with "Individual Debt") by bankers. The ratio has its uses, but it was quite obviously not adequate to permit people to foresee the onset of crisis and Depression.

I see the Debt/GDP ratio as a useful measure of credit efficiency but apparently no one else does.

If we try to use Debt/GDP to evaluate the burden of debt, as is done today, we miss the insights provided by looking at spending-money. Specifically we miss insights regarding changes in what it costs to use money over the course of a year. In an economy with a high reliance on credit, the cost is high, of course. In an economy with a low reliance on credit, that cost is much less.

If we rely on Debt/GDP we overlook the factor cost of money.

The Arthurian said...

So it is worse than Graph #2 shows.
Why am I not surprised???

The Arthurian said...

we can use your narrative. We just have to work my concerns into it.

C'mon buddy, take a bite of the beach ball!

Your "Efficiency of Money" is Excellent! But view it in the context of credit efficiency.

The Arthurian said...

Jazz: "I see a break point in the M1/output graph, right at 1980."

Agreed. (See mine tomorrow.)