Monday, April 22, 2013

Two factors that are important for growth


Yesterday I quoted two paragraphs from Simon Wren-Lewis, expressing two ideas.

The first paragraph described a relation between "contraction in government spending" and the lack of economic recovery.

The second pointed out that a high level of government debt creates a barrier preventing the expansion of government spending sufficient to generate economic recovery.

I suggested that the way to deal with these two facts, assuming they are facts, is to reduce private sector debt. Private debt reduction accomplishes the same thing as increasing government spending: It reduces the ratio of private to public debt.

I don't get into why reducing that ratio is important; the reason probably has to do with sectoral balances. That's not my area. But I have shown repeatedly on this blog that reducing the ratio is an effective (read: necessary) way to boost economic growth.

I've also shown a relation between debt relative to circulating money and economic performance. You can't read this blog without tripping over my "Debt per Dollar" graphs.

What I'm saying is this: Two factors are important to growth. One is the balance between public and private debt. The other is the level of total accumulated debt relative to the quantity of circulating money.


So I was thinking about this. I have two factors, two ratios. The one is the ratio of private to public debt, something I've considered several times here. The other is the level of debt, per dollar of circulating money. I've looked at that a lot, too. But I never looked at the ratio of these two ratios.

1. The ratio of private to public debt:

Ratio #1: Total debt (TCMDO) less its Federal component, relative to Gross Federal debt.

2. The level of debt per dollar of circulating money:

Ratio #2: Total Debt, relative to Circulating Money
Blue: Relative to M1SL (excludes "Sweeps")
Red: Relative to M1ADJ (includes "Sweeps")

(I use M1ADJ, the honest measure after 1994. To display the maximum number of years, I show M1SL for the early years (1959 thru 1995).)

3. The ratio I've not looked at before, which is Ratio #1 relative to Ratio #2:

Ratio #3: The Ratio of Private to Public Debt, Relative to Debt per Dollar

Ratio #3 shows increase during the "golden age" which ended with the 1974 recession.

It shows decline from 1974 to the 1990s. The decline shows what Scott Sumner says: "I am not denying that growth in US living standards slowed after 1973". It shows what Ross Perot showed, back in 1992: decline for two decades after 1973.

The ratio shows increase from 1995 to the 2001 recession, a time when the economy's performance has been called a macroeconomic miracle.

The ratio shows decline thereafter.


The ratio of ratios goes up during the good economic performances from the 1950s to 1973 and from 1995 to 2000. Otherwise it goes down.

The ratio of ratios compares two factors that are important for growth: the ratio of private to public debt, and the ratio of debt to circulating money.

I really shouldn't have to write any more. This should be the blog post that ends all debate regarding economic performance. Study these graphs till the cows come home.

1 comment:

Gene Hayward said...

Whenever I read anything related to the money supply I think of you. Thank you for that! :)

I saw this except from a short blog entry discussing the movement of money from Money Market funds to Bond fund on what seems a significant scale and how it counts in one measure of Money Supply (Money Market) but not counted when it is in bond funds. I thought his closing statement might interest you AND i wonder how much impact this has on the money supply numbers you cite on a regular basis.

"One unintended consequence of this shift to bond funds will be perturbations in some measures of money supply. Money market funds traditionally have been included in certain broad measures of money stock (such as MZM) while bond funds have not. The definition of "cash equivalents" have now been blurred further. Just watch certain high-profile economists in the next few months mistakenly interpreting this "rotation" as a slowdown in the growth of US money supply."

http://soberlook.com/2013/04/rotation-out-of-money-market-funds.html