So I was cleaning up my desktop ...
I save everything to the desktop so it's easy to find. Then every so often I go and move files to archive locations. I was moving files, putting things in some kind of order and making space on the desktop for more, when I came upon this graph again:
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| Graph #1: RGDP relative to Base Money, 1947-2015 |
The graph compares RGDP (a measure of how well off we are) to the money measure managed by policymakers. Meaningful numbers.
The graph shows that our economy has grown more slowly than base money since 1966. Or, that since 1966 base money has grown more rapidly than the economy.
But which? I looked at the numbers.
Between 1947 and 1966, RGDP increased 117%. Base money increased 51%. Real output grew 2.3 times as fast as base.
Between 1966 and 2015, RGDP increased 291%. Base money increased 7802%. Base increased 26.8 times as fast as real output. Wow.
RGDP grew a lot more in the second period than in the first. But the second period is a lot longer. If you look at output growth per day, growth was 5% faster before 1966 than after.
Base money growth in the latter period is huge. A lot of that has to do with inflation of course. Printing money causes inflation ... or if prices go higher, you need more money to maintain a given level of economic activity ... or both. But it is certainly true that the faster rate of base money after 1966 did not make RGDP grow faster after 1966 than before.
One might wonder whether more restrained money growth in the latter period would have resulted in more restrained output growth. That would be my guess. But many people would likely say restrained base money growth would have resulted in improved output growth. We'll set that question aside for now.
Instead, let us consider the whole picture. What would have caused the ratio to turn from increase to decrease? What would have driven RGDP growth down? And what would have driven base growth up?
My answers are simple: Policy drove base growth up. And the economic environment drove RGDP growth down. Am I skirting the issue by not identifying the problematic elements of the economic environment? Surely you know by now my answer is that the problematic elements are excessive private sector debt and the policies that drove debt to excess. For me, it all comes down to policy.
And what about the economic environment? That's easy. If the economic environment is good, the government has successfully promoted the general welfare. If the economic environment is not good, policymakers have fumbled the ball.
For me, it all comes down to policy.
4 comments:
To answer the questions that you raise about base money, you need to look at what Base Money is composed of.
More than 80% of base is currency in circulation. Almost all the rest is money held by banking system in vaults in order to meet the needs of the public for cash withdrawals. At least that was how base money worked in the US before 2008.
So why do the "policy makers" make Base money available to the public?
Because when they don't very bad things happen to the economy.
Look at Greece. The lesson learned there last June was that ECB has absolute control over every economy on the Euro zone. All they have to do is deny the banks access to Euro currency and that will destroy any Euro nation's economy. It took very little time for the Greek govt to knuckle under when that fact was made clear to them.
The reason people keep money in the banks is because they are confident they can convert it to base money whenever they want. If that confidence is shaken then the public tries to convert more of their deposits to cash and if enough people are doing that the economy collapses.
In other words policy makers are forced to supply the public with whatever amount of cash they want or suffer the consequences. Constraining the growth of base money is really not an option if you don't want economic collapse.
I would say a major contributor to an increasing demand for cash since the mid-60's is the war on drugs. It is said that in the 70's, Pablo Escobar was spending $1000 a week on rubber bands just to bundle the cash he was importing back to Columbia in trade for Cocaine.
"$1000 a week on rubber bands"
Powerful image!
You've got me looking at graphs again, Jim. (Thanks.)
Jim
"More than 80% of base is currency in circulation. Almost all the rest is money held by banking system in vaults in order to meet the needs of the public for cash withdrawals. At least that was how base money worked in the US before 2008."
HMMMM the FED defines Base Money as
"The monetary base is defined as the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).
http://www.federalreserve.gov/faqs/money_12845.htm
So currency in Circulation is currently less than 40% of the monetary base.
https://research.stlouisfed.org/fred2/graph/?id=AMBNS
Currently most of the Monetary base are being held as excess reserves created for the purpose of implementing QE. Which has nothing to do with the public's demand for cash.
"More than 80% of base is currency in circulation. Almost all the rest is money held by banking system in vaults in order to meet the needs of the public for cash withdrawals. At least that was how base money worked in the US before 2008."
That statement is correct. That's describes about what it was in the 1980's.
In 2007 about 94% was currency in circulation and 5% was vault cash and
about 1% was reserves held by the FRB. The 1% that was banked with the FRB was mostly used for transfers of vault cash among banks. If the physical transfer of cash and coin among banks could be carried out as swiftly (and safely) as the transfer of electronic funds that 1% would have been even smaller.
Today that 1% that was traditionally banked with the FRB has now grown to over 60% of the monetary base due to QE
Anyway the point is this: Art was ruminating on what policy changes could have been used to restrain the growth in the monetary base from the 1960's forward.
The only thing that could have been done would nave been to discourage the public from converting deposits to cash since that was the only force driving the growth. The public's desire for cash and the money the banks have to physically hold on site to meet that demand represents the lower limit of the monetary base. The evidence is pretty clear that the monetary base was held at very close to the lower limit before 2008. After 2008 the monetary base has grown to be at more than double the lower limit.
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