Sunday, October 28, 2012

Seeing Blue

In McConnell 1975: How Banks Create Money I quoted from an old Steve Keen post, where he said that if the conventional model told the whole story, "changes in M0 should precede changes in M2." I thought that might be an easy thing to graph, so I looked at it.

I didn't yet find what Keen was talking about, but I did find something that I have talked about before.

The graph shows the monetary base (blue) and M2 money (red). Percent change from year ago, for both. It's a bar graph, with the bars so close together it looks like solid fill. The blue is mostly hidden. Except for a good chunk of the 1990s:

Graph #1: Base Money (blue) and M2 Money (red) -- Percent Change from Year Ago
Here, I zoomed in a little on that blue patch:

Graph #2: Same Data, but starting at 1986
So from 1990 to 1995 or '96, base money grew unusually fast as compared to M2 money.

Then I wanted to add one more series to the graph: Gross Federal Debt. On the graphs above, the numbers are monthly. The Gross Federal Debt series (GFDEBT) is quarterly. FRED wants all the series for a bar graph to have the same frequency, so I changed the Base money and M2 money series to Quarterly. Still didn't work, because it turns out that the Gross Federal Debt series is Quarterly, End of Period. FRED still would not let me do a bar graph, but it was okay with a line graph:

Graph #3:Base Money (blue), M2 Money (red) and Gross Federal Debt (green)
Percent Change from Year Ago for each
The red and blue follow the same patterns as on Graph #2. Blue is high at a bit over 10% in the 1990s while red is low, on Graph #3 just as on Graph #2. But now I have added the Gross Federal Debt (green). Same years. Same units: percent change from year ago. Changes in the Federal Debt are as high or higher than changes in the Base money. Now I want to look at that.

I got rid of the red line, to better compare the other two. And this time, instead of looking at percent change, I looked at change in billions of dollars for base money and the Federal debt:

Graph #4:  Change in Billions, Base Money (blue) and Gross Federal Debt (green)
There's no comparison. The blue line has shrunk down to almost nothing, while the Federal deficits fill the plot area. So which put more money into circulation, blue Base money or green Federal debt?

The gross Federal debt, no question.

And the 1990s were years of especially low inflation, and especially high productivity, so that incomes went up, output went up, and the Federal budget got balanced.

Thanks again, Clonal

1 comment:

Clonal said...

And because the Federal Budget balanced, and produced a surplus, the money in the system was unable to keep up with the high debt (private) and the 2000 collapse happened. This of course was followed by the real estate fraud bubble, leading to the GFC!