Suppose we take this graph of the short-term interest rate and the calculation that makes a pretty good simulation of it for eighty years or more --
|Graph #1: The Interest Rate (blue) and the Result of Calculation (red)|
|Graph #2: Base Money relative to NGDP|
Oh -- but you know, the line reaches a local maximum in 2003 and then goes down till 2007. That downsloping dingus may or may not have caused the crisis and led to the big increase of the recent years. That's interesting, huh? Let's get rid of the dingus, too.
That leaves us with a line that ends in 2003. That's 22 years after the 1981 low.
Now I want to go back 22 years before the low, back to 1959, and I want to cut off all the interesting stuff that happened before then. This gives me a graph of Base to NGDP for the period from 1959 to 2003, with a low point right in the middle:
|Graph #3: Base Money relative to NGDP, 1959-2003|
I'm wondering what the activity was, that caused the change in the blue line, first running downhill, then up. Thought I'd take a look at the growth rates of NGDP and Base Money.
|Graph #4: M/PY (blue), Base Money Growth (red), and NGDP Growth (green)|
On the graph, in the years before 1981, when the blue line is going down, the green line is consistently higher than the red. Before 1981, NGDP growth is consistently higher than base money growth. That's why the blue line goes down.
After 1981, the red line is generally higher than the green. Base money growth is generally higher than NGDP growth. That's why the blue line goes up.
Okay, so the blue line tells us that NGDP grew faster than Base for the period before 1981, and Base grew faster than NGDP for the period after 1981. That's a fact. Taking it as a fact, now I have a question or two.
How come we had inflation before 1981, but not so much after 1981? How come it was said they were printing too much money (and this was causing the inflation) before 1981, when base money growth was relatively slow? And, how come we didn't get inflation after 1981, when base money growth was relatively fast?
There must be something wrong with the inflation story they tell.
Now, that is interesting.