Interference Pattern

In an update to mine of 9 November 2011 there is this:

Quick and dirty, a graph showing both the debt-per-dollar increase and the fall in money relative to output.

Graph #1: DPD and MRTO

Interesting, the way the two seem to interfere with each other, there in the middle.

I want to take a closer look at that interference pattern.

Let me use the version of M1 that includes "sweeps" this time. It's a more accurate measure of M1 money, I think.

Note: The relative position of the red and blue lines differs on the two graphs because

1. the start-dates for the M1 money series differ,
2. the values for the M1 money series differ, and
3. the blue lines are on the left scale, the red lines on the right.

So the nifty interference pattern that appears on graph #1 doesn't even look like interference on Graph #2. But now at least you know why.

Graph #2: Debt per Dollar (red) and Money relative to Output (blue)

Oh, this is excellent. The mid-1980s peak of the second blue hump just kisses the end of the second red hump. Makes it easy to see that during these humps, the two lines tend to move in opposite directions.

It's pretty clear also that before the early 1980s also, the two lines moved in opposite directions. Let's look at that.

The blue line shows the quantity of spending-money, compared to the GDP we bought at the prices we paid for it. Usually when people show the "money relative to output" (MRTO) graph, it goes up. That's because they compare the quantity of money to inflation-adjusted output. They leave inflation in the numerator, and take it out of the denominator. That pushes the line up, right along with inflation.

But as you can see in Graph #2, when you compare the money we spend to the stuff we bought at the prices we paid for it, the line goes down.

The quantity of money fell from more than 21 cents (per dollar's worth of output) to less than 14 cents, between the late 1960s and the early 1980s. Those years coincide pretty well with the Great Inflation, when prices tripled. Evidently, it wasn't the quantity of M1 money that caused the Great Inflation.


The difference between the two versions of money used in the graphs, the difference arises in late 1993. But it becomes significant -- noticeable on my graphs, say -- in mid-1995.

On both graphs the blue line shows a small hump in the early 1980s, and larger humps in the late 1980s and early 1990s. After that third hump the difference arises. Graph #2 shows a hump in the 2000s, while on Graph #1 the blue line falls consistently from the third hump to the 2008 recession.

Let me zoom in on the second graph now, to look at the 1975-2000 period. The period includes all three humps that fascinate me so, plus a little extra on each end.

Graph #3: DPD (red) and MRTO (blue) 1975-2000

One simple way to read this graph is to notice that whenever the blue line goes down, the red line goes up. It's true from 1975 to the start of the 1982 recession. And it's true from peak to trough of all three humps visible on the graph.

When the blue line goes the other way, when it goes up, the red line tends to slow its upward pace (1980 recession) or even to fall a little (both 1980s humps) but falls significantly, strikingly, only with the 1990-1994 increase in the blue line.

Now look back at Graph #2 and consider the fourth hump.

Coming out of the third hump the blue line falls until the 2001 recession. During that time the red line rises. The two continue to move in opposite directions.

Then from 2001 to mid-decade the blue line rises. But so does the red line. This contradicts the "opposite movement" pattern.

By that point the growth of debt was dominating everything.


One more point about the second graph.

That third hump in the red line -- not the crisis-related peak there at the end, but the nicely rounded hump centered on the start of the 1991 recession -- just above that hump is the horizontal gray line with 0.17 at one end and 17.0 at the other.

The red line shows how much debt there was for each dollar of spending-money in our economy. That's what the 17.0 is: For every dollar in somebody's pocket, or in their purse or their checking account, there was just about $17 of debt. $17 dollars of debt in this country for every dollar we use for spending.

And that was in 1991. Things got worse.

At the same time, in 1991, the blue line shows there was only about 14 cents of spending-money for every dollar's worth of output.

Before the late 1970s, and going back to the late 1940s, the quantity of money had been much higher. But money-growth was restricted to fight inflation for all those years, and we ended up with not much money with which to buy the things we make.

We couldn't use the money we didn't have, to buy things. So we borrowed money, and spent that. The government did it, of course. But we all did.

That's how we ended up with so much debt.