Monday, October 13, 2014

A Look at a Lag


I gathered up dates and lags from yesterday's post and put them into a Zoho:



The dates are not properly spaced, but that's for another day. What's important here is that the lag arose, increased in size, and then decreased in size. The lag was like a response to some kind of disturbance. Of course -- to the Great Depression... But causes also have causes, and I might be tempted to argue that the Great Depression was a disturbance created by excessive financialization of the economy of the time.

Gasp.

7 comments:

jim said...

The monetary base is mostly currency in the hands of the public.

During the 1920's the monetary base didn't grow much because the public was content to leave their money in the banking system. In the 1930's the public was not at all content to leave money in the banking system and the growth of the monetary base was largely due to the fact that lots of people tried to take their money out of the banking system in cash.

Another time you can see this sort of unusual growth in the monetary base was the last quarter of the year 1999 when the public withdrew large amounts of cash due a lack of confidence in banking as a result of the the Y2K scare.

This graph shows how closely changes in currency in the hands of the public and the monetary base follow each other:
http://research.stlouisfed.org/fred2/graph/?g=NqN

In general, it appears that people withdraw more currency out of banks when the economy is bad and then the monetary base and currency go up and when times are good more cash is deposited and the monetary base and currency don't grow as much or shrink.

So assuming we accept the fact that growth in the monetary base has a delayed effect on inflation what would you recommend be done about that? Should there be policy changes that keep people from taking money out of banks in currency? What would that policy look like?

The Arthurian said...

"So assuming we accept the fact that growth in the monetary base has a delayed effect on inflation what would you recommend be done about that? Should there be policy changes that keep people from taking money out of banks in currency? What would that policy look like?"

Don't be silly! I have not even hinted at any such policy.

Don't you think it's interesting that the pattern of similarity is lagged in a sort-of measurable way? And don't you find the lag itself interesting?

jim said...

The most interesting increase in the monetary base is in the 1929-1933 period. That increase was woefully inadequate. At first the Fed and the banking system resisted the public's demand for currency. That was like fighting fire with gasoline - the effect was to increase the public's desire to get their deposits converted to currency and that brought the banking system and the economy that depended on it to its knees.

What I see in the 1930's is 2 periods of severe deflation. The fact that some years later there came inflation when prices went back to their previous levels is not surprising.

The inflationary periods that started around 1940 were due to WW2. The first spike in prices was quashed by price controls and rationing. The second spike and a couple of smaller reverberations that followed occurred when price controls and rationing were lifted. It took a while for prices, supply and demand to stabilize naturally after they had been held artificially stable during the war.

Jazzbumpa said...

Much more important than leads and lags is that in 1930 the monetary base and inflation suddenly transform from parallel to sharply contrary motion.

An didn't Marcus mention some time ago that economists don't look at the monetary base?

I think Jim is pointing out that it's not a particularly meaningful measure.

I think you're chasing a will o' the wisp.

Cheers!
JzB

The Arthurian said...

Jim: "The fact that some years later there came inflation when prices went back to their previous levels is not surprising."

Prices are like homing pigeons, then?

I don't dispute your facts, Jim (aside from prices that return to their 'natural level'). But I find it remarkable that the two FRED series trace the same pattern so closely, with such a well-defined lag.

Maybe price controls and rationing appear to have been effective because they fit the lagged pattern so well....

Jazz: "Much more important than leads and lags is that in 1930 the monetary base and inflation suddenly transform from parallel to sharply contrary motion."

When those two separated like that, that's what created what turned out to be a lag. BTW the motion is not at all "sharply contrary" if you factor in the lag. It's like you missed the whole point of what I've been saying.

"And didn't Marcus mention some time ago that economists don't look at the monetary base?"

Lucky thing I'm not an economist: I can look at whatever I want.

"I think Jim is pointing out that it's not a particularly meaningful measure."

Perhaps the Monetary Base was more "meaningful" in the 1918-1960 period?

"I think you're chasing a will o' the wisp."

Not "chasing". Just "looking at". And if I only wanted to look at what everybody else is looking at, I wouldn't have a blog.

jim said...

Art wrote:
"I don't dispute your facts, Jim (aside from prices that return to their 'natural level')."

I said prices returned to their previous level. Meaning there was no inflation. Prices stayed below the 1920 level for 25 years until after WW2. From 1920 to 1960 prices on average increased something like 0.5% per year. That 40 year period had much lower inflation than the rest of the 20th century.

The Arthurian said...

Jazz: "An didn't Marcus mention some time ago that economists don't look at the monetary base?"

Is there an echo in here?

Found it!