Saturday, March 10, 2012


Among the popular series listed at FRED at the moment:

M2 Money Stock 7 hours ago
M1 Money Stock 7 hours ago

So, I clicked M1.

Graph #1: M1, the quantity of spending-money or money in circulation
It goes up. And it goes up especially on the right, in the recent years. And you know, somebody will likely grab this graph and holler about imminent inflation. Again. Or maybe they will show that M1 has been growing at 20% for the last six months now...

Graph #2: Rate of change of M1 money, near 20% for some time now
...and holler about imminent inflation.

Hey, I don't make predictions. I'm not saying we *won't* get inflation. I'm not saying we will. What I am saying is that I think it's silly to grab one fact and start drawing conclusions.

One fact: M1 money has been going up.

So it has. Now, let's go get one more fact. Let's get GDP, and compare M1 money to the size of the economy, like this:

Graph #3: The size of circulating money, relative to the size of the economy, since 2008
Turns out, M1 money has increased from less than ten cents of money per dollar's worth of GDP in 2008, to 12 cents in 2010, to 14 cents now. That's an increase of 40 or 50 percent since 2008. So yeah, the quantity of money has gone up. Shall we panic and holler about inflation?

Not yet. Because we're just looking at the crisis years. The unusual circumstances. Maybe this increase is altogether unusual. I need to know more.

I want to look at M1/GDP for all the years that FRED will show:

Graph #4: The size of circulating money, relative to the size of the economy, since 1975
There -- there on the right. There is that low spot, where the ratio was down below ten cents of M1 money per dollar's worth of output. And after the low spot, the increase up to 14 cents.

And if you look back to the left along the 14-cent line, you can see that we were at this level before. We were at this level in 1990, and also in the early 1980s just as Paul Volcker was bringing inflation down from those double-digit increases of the 1970s.

And then as inflation came down in the 1980s, the money/output ratio shows a small hump (before 1985) and a big hump (between 1985 and 1990) and another big hump starting around 1990 and peaking around 1994. And then the really big decline that takes us to the year 2000.

That big decline occurs at exactly the same time that the Federal budget came into balance during the Clinton years. Money was taken out of circulation by the Federal government, and used to pay down debt. So there was less M1, so the line goes down.

Before the early 1980s, the graph shows a decline from something over 17 cents of money per dollar's worth of output. But this graph only goes back to 1975.

To see farther back in time, I had to switch to a different data series. The M1NS series takes us back to 1959. And you can see that from 1959 to the early 1980s, there was a more or less continuous decline in the quantity of money relative to output -- 28 cents in 1959, half as much twenty years later:

Graph #5: The size of circulating money, relative to the size of the economy, since 1959
By the way... Pretty much all the while the quantity of money was declining there, the rate of inflation was increasing. In graph #6 below, the red line shows the price level as measured by the CPI. You can see prices curving up, faster and faster from 1965 to the late 1970s when the money/output ratio was falling below 22 cents to 20 and ultimately to 14 cents of spending-money per dollar's worth of product. It is as if there was not enough money to buy the stuff we produced, but prices kept going up anyway, so policymakers kept pushing the quantity of money down more and more...

Graph #6: The size of circulating money relative to the size of the economy, and prices
...except at those odd humps.

And over there on the far right, in the bottom corner, the money ratio finally fell below ten cents, and then we had the sudden crisis that nobody saw coming. And then policymakers decided to push the quantity of money back up to about where it was in 1980, apparently.

And despite all that, for the whole time, prices kept going up.

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