Thursday, August 2, 2012

"But you know what? Just look at M2 divided by M1 instead."

Graph 1: M2 divided by M1. (Click for FRED source page.)
The ratio starts out low, and rising. That was during the "Golden Age".

When the Golden Age is over, the ratio runs flat until 1990.

After 1990, the ratio falls sharply for about three years. We've seen this decline before, in the debt per dollar graph.

Mid-'90s, the ratio takes off like a rocket. That was during the "Macroeconomic Miracle".

After the Macroeconomic Miracle, the ratio runs flat, hiccups, and breaks.

When the ratio is low, or relatively low, the economy grows well. But when the ratio is high or relatively high, the economy grows poorly and gives us trouble.

The ratio is an indicator of financialization. A lower ratio means less financialization.

Or again, the ratio is an indicator of financial slack. Higher is tighter.

Or again, the ratio is a gauge of the factor cost of money. Assuming that money in savings is put to use, a higher the ratio indicates a greater reliance on credit and a greater factor cost of money. Remember, the Factor Cost of Money depends not only on the rate of interest, but also on the rate of credit use.


The Arthurian said...

Everybody else in the world thinks the economy arises from people's actions, and that human behavior is the most important thing.

I think we need to look at monetary balances and imbalances. What I call "macro".

In the post I describe the ratio is relatively low or relatively high. You might expect me to be more specific. Nope, that's your department. If you want to know *which* Tuesday will be Black Tuesday, at what hour of the day, you can try to work it out with your behavioral crap and your human action and your rational expectations.

My point is simply that if we keep the ratio low and avoid the imbalances, there will not be a black Tuesday.

jim said...

Seems rather odd that you think the ratio of M1 to M2 has nothing to do with human behavior. If I move money from my checking account to savings account, I just changed the ratio. Didn't I?

And how are you going to "keep the ratio low". Does it have anything to do with giving away toasters?

What does "money in savings is put to use" mean? Do you mean it gets moved from savings to checking accounts?

The Arthurian said...

Hi buddy. Please note that I most specifically did NOT say "has nothing to do with human behavior." Everybody knows about human behavior. Did you think I do not? But people seem to ignore the changes to monetary balances that accumulate over generations, as a result of the human behavior.

I would ask *why* you chose to move money from one account to another. Perhaps it is for purely personal reasons. But perhaps it has something to do with the way you feel about economic conditions. Economic conditions change because of changes in monetary balances that occur over generations.

How would I keep the ratio low? I would adopt that goal as part of economic policy. You keep the toaster.

What does "money in savings is put to use" mean?
Perhaps that was not clear. I thought about the word "use" and used it on purpose, because it is related to the word "usury". What I had in mind was: lent out at interest.