Base money, 1918-2016, on a log scale:
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| Graph #1: Base Money (AMBSL) on a Log Scale |
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| Graph #2: General Trends in Base Money Growth |
When base money runs flat for a while, as it did in the 1920s, conditions arise which require massive increase, as in the 1930s and '40s. After that increase, base money can run flat again for a while, as in the 1950s.
Another example: Money took a turn around 1960 and started to increase. It increased for a good long time. Then around the year 2000 somebody took it into their head to gradually flatten out base money again. They created a nice, gradual curve to achieve the flattening. Then, all of a sudden, conditions arose which required massive increase. Just like in the 1930s.
(For the record: Yes, it was the flattening that created the crisis.)
After you get massive increase, base money can run flat for a while. That's what happened after World War Two. It is happening again now. We know it worked after World War Two. We don't know if it will work now. I think it will work, and predict vigor. Everyone else seems to think otherwise.
That's fine. I don't know what will happen. I'm reading my graphs and saying as loudly as I can what I think the graphs are telling me. But I could be wrong. Maybe the massive increase since 2008 wasn't massive enough. Maybe going flat now is bringing the economy down again. Today's graphs offer no hint. Yesterday's graphs tell me the massive increase was adequate.
After you get an adequate massive increase, base money can run flat for a while. But after a while, the lack of increase in base money seems to create big problems that require another massive increase in the money. This is important. This is something we need to look at.
After you get the massive increase, you don't have "too little" base money any more. You get economic vigor -- that word, again -- and economic growth. And then, after a while if you flatten the money (or just leave it flat) you get the big problems and you need the massive increase again.
What's missing from this picture is private debt. The growth of base money and the growth of private debt must match. If this does not happen, if private debt grows faster than base, eventually times get hard. And after that you have a crisis. The solution, which is massive increase in base money, solves the problem by reducing the private-debt-to-base-money ratio.
The solution appears to work reliably. But some people don't like it. They don't want the quantity of money inflated.
Hey, if you want base to run flat, then you have to make private debt run flat. If you want private debt to increase, you have to make base money increase. The secret is that the two must stay in proportion.
The two must stay in proportion. Knowing this, you would want to seek the debt-to-base ratio that gives the best economic growth. And you would then want to change base and debt together, so they grow at a rate that keeps prices stable. That way, you cover all your bases: growth, and price stability.
5 comments:
Arthurian monetarism
Prior to QE the amount of base money was purely a matter
of how much cash the public wanted.
Yes during the Depression the public didn't trust the banks and withdrew a lot of cash currency. Thus base money grew fast.
And yes after the depression that trust in banks returned and some of the cash flowed back and then after that the demand for cash started to grow again.
None of this has anything to do with any so-called monetary policy. It was entirely driven by what the public did in regard to keeping money in their wallets or in their bank accounts.
"Prior to QE the amount of base money was purely a matter
of how much cash the public wanted... It was entirely driven by what the public did in regard to keeping money in their wallets or in their bank accounts."
So Jim, you are saying that how much base money people had and how much debt people had were purely a matter of preference. And that was true before the crisis, say from 1990 to 2007 when everybody was saying they wanted to *reduce* their debt?
It was entirely personal preference? Fisher dynamics played no part in it? And the relative scarcity of money (relative to debt) played no part?
I was saying that how much money people had in their wallets and how much debt people had are separate issues and mostly unrelated. I don't see any connection.
I searched for the word base in your article and found nothing that suggested the article says anything at all about the monetary base.
"I was saying that how much money people had in their wallets and how much debt people had are separate issues and mostly unrelated. I don't see any connection."
If there is no connection between changes in base and changes in accumulated debt, then the things that drive changes in base are not the only consideration when we think about changes in the debt-per-dollar ratio. We need also to ask what drives the accumulation of debt.
In broad sweep, our economic policies encourage spending (to encourage growth) and restrict money growth (to restrict inflation). But if we encourage spending while restricting money growth, we are encouraging credit use.
We also have tax policies that reward the payment of interest. Essentially, people are encouraged by this to have large and fairly new mortgages. Businesses are encouraged to have debt rather than equity. Such policies encourage accumulation of debt.
Our policies encourage credit use and debt accumulation. Our policies are the driving force behind the accumulation of debt. And we have no policy that discourages the accumulation of debt.
Our policies are the driving force, pushing the debt-per-dollar ratio ever upward and toward crisis.
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