Monday, May 5, 2014

An Important Ratio

Nick Edmonds:

The quantity that is determined by bank lending is not money, but total bank debt. Money, our purchasing power, is just a subset of that and is not fixed by the amount of lending.

That's right. And the relation between the two quantities is an important one. The debt-to-money ratio increased from 1916 to 1970, except during the FDR years:

Graph #1: Total (Public and Private) Debt per Circulating Dollar
After FDR, our economy saw a golden age, followed by the end of those good times. But the debt-to-money ratio continued increasing until the crisis, except for a few years just before the good economy of the latter 1990s:

Graph #2: Total (TCMDO) Debt per Circulating Dollar
When the ratio is low and increasing, the economy is good. When the ratio is high and increasing, the economy struggles. When the ratio falls, whether by policy or crisis, it creates conditions for the return of the good economy.

Keep the ratio permanently low by creating policies that accelerate the repayment of debt, and we create the monetary conditions for a permanent quasi-boom.

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