This picture. The FRED Blog graph we looked at yesterday:
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| Graph #1: Quantity of Currency in Circulation Relative to GDP |
Here, let me ask the question this way: What stands out?
I'll give you a hint:
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| Graph #2: Same graph as Above, Except it Starts at 1960 |
Here's another hint:
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| Graph #3: Same graph as Above, Except it Starts at 1995 |
The graph is a plot of quarterly values. That means every three months there is a different value. And you can see easily that every three months, the line is just a little bit different than it was before.
Even the seriously large changes of the early 1950s, on Graph #1, occurred during very brief periods of time.
The anomaly is that the brief steps didn't happen in the years leading up to the Global Financial Crisis and the Great Recession of 2009.
The random walk uphill, which began in the mid-1980s, was interrupted by a purposeful walk downhill from 2003 to 2008.
A purposeful walk is an act of policy. The uninterrupted five-year decline visible on these graphs was an act of policy. It can be nothing else.
Actually, I showed you that decline before. It is visible in the growth rate of Base Money. As with the graphs above, the decline occurs during the decade before the Great Recession:
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| Graph #4, from mine of 14 October 2011. See also mine of 6 March 2014. |
It also occurred during the decade before the Great Depression.
You know, I wasn't gonna beat you over the head with this. I was gonna let it go. But then I bumped into Scott Sumner's Four things I believe. And Sumner's Thing One is this:
1. The Great Recession was caused by tight money at the Fed, and other major central banks. Period. End of Story.
I hate to say it, but he's right. But he didn't show the graphs, so I did.
Period. End of Story.
5 comments:
Hey Art
I just have to say that my instinct has been not to believe anything Sumner says. Not that he lies but he is just wrong in his models...... almost 180 degrees wrong in my limited experience with him. I admit right off I have a big anti Sumner bias.
I think one of the problems with that graph is the denominator......GDP. The ratio of currency in circulation to GDP at first blush seems to be a meaningless ratio, considering how little we actually use currency to transact. I also suspect that currency transactions today are much more likely to not be transactions that would be captured by GDP numbers. Now that wasn't true in the 20's I imagine. We have gone way further away from hard currency in todays economies.
Additionally I don't see how this helps us figure out how to solve the problems we are having. Are we to tell people to do more of their buying with cash (convert bank accounts to cash)to raise the ratio of cash to GDP? Isn't this sort of encouraging a run on banks?
Monetarists like Sumner seem to have this odd belief that cash has some type of mystical properties and they focus on cash a lot in their analyses and models.
Their are certainly lots of metrics form the 20s and 2000s that give us clues as to why we are where we are, but I don't think telling a story "The people just weren't carrying around enough cash " is the right one. Thats what Sumner means by tight money I think.
Art wrote:
"A purposeful walk is an act of policy. The uninterrupted five-year decline visible on these graphs was an act of policy. It can be nothing else."
Surely, it can be entirely due something else.
In the last months of 1999 there was a dramatic increase in currency in circulation and then in the first months of 2000 the quantity of currency declined as fast. Why was that? Because of the Y2K scare. People withdrew paper money from the bank in anticipation of having problems with electronic transactions. When the scare evaporated the paper money flowed back into bank deposits.
The amount of cash in circulation is entirely due to the preferences of private agents in the economy. When they prefer to hold more paper money, currency goes up and when they prefer not to, currency goes down.
In your graph, we see currency going up after 911 and going down an few years later and then going up again after the financial crash. The main role the FED plays in this is to distribute and pick-up the paper money from banks as is needed.
The story about "tight money" causing the recession is Wall Street propaganda. It is sad that you buy into it.
The facts show the type of lending that crashed and burned and is still dragging down the economy was characterized by one common feature - extremely high interest rates and fees. The credit that went bad had nothing whatsoever to do with low interest rates or tight money. The loans that are influenced by policy are not the ones that went bad.
The financial sector had fooled itself into believing that poor quality credit could be turned into gold by simply charging exorbitant amounts and spreading the risk with derivatives. And then all those bad loans crashed at once. And then when the whole scheme is exposed and laid bare as the Ponzi finance that it was, Wall Street comes up with the story that it was all the govt's fault. And that is the story that you constantly see in the media.
jim: "In the last months of 1999 there was a dramatic increase in currency in circulation and then in the first months of 2000 the quantity of currency declined as fast."
Where is that blip? What graph are you looking at?
Greg, do you also reject what David Glasner says?
"The point is that for at least three years before the crash, the Fed, in its anti-inflationary zelotry, had been gradually tightening the monetary-policy screws. So it is simply incorrect to suggest that there was no link between the policy stance of the Fed and the state of the economy."
Firstly, the Fed is ALWAYS anti inflationary. Its job is to fight inflation. Nick Rowe would say its job is to keep inflation steady and unchanging, so that it is predictable.
Secondly, in the jargon of Rowe/Sumner/Glasner, tightening monetary policy is not supposed to be judged by the direction of interest rates, a move in prices or credit growth, it is simply a change in the growth of "base money" as they like to say ( I personally hate that term because it is a gold standard term which should be forgotten... its obsolete and the wrong way to think about our monetary system in my view). Considering how small base money is relative to the size of the economy I think its a poor barometer.
Thirdly I don't believe anyone ever suggested no link between fed policy and the state of the economy. One might question the direction of the influence (I personally think the economy influences fed policy MORE then the fed influences the economy) or the magnitude of the influence but certainly there is a link. Monetarists think the fed can use the right kind of policies to get the exact result they want........ and maybe they already are..... but I remain unconvinced.
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