Tuesday, July 27, 2010

Of Money

Back in 1976 I had some "Don't Waste Your Vote" flyers printed up. This was when Jimmy Carter was running against Gerald Ford for President. In the flyer I said "Neither [candidate] represents or supports any policy or takes a stand on a single issue, except those each thinks essential to win the election."

That could be more true today than it was in 1976.

In the flyer I also said "No one has any money, but there is just as much money in circulation as ever there was." And that was dead wrong. There is not just as much money in circulation now as ever.

The economy is bigger now. We produce more and there are more of us now than in 1976, and there must be more money to compensate for these factors. But one can imagine the quantity of money growing exactly in proportion to the economy. And we can think of that as "just as much" money. And that is the right way to think of things in a growing economy.

By that measure, there is not just as much money now as there ever was.

Before the recent crisis, we had decades of inflation. And everybody knows printing money causes inflation. So nobody has to look at the numbers to know there is more money in circulation than ever there was before.

But when you look at the numbers, it turns out there is not more money in circulation than ever. There is less.

What numbers? The amount of spending-money we have in this country for one, and the total value of the output we buy each year at the prices we actually pay. Those are my numbers. Economists use different numbers. But then, economists have failed to solve the problem. They didn't even see the crisis coming, except 16 of them.

The amount of spending-money we have is the standard measure called M1 money. M1, according the the St. Louis Fed, "includes funds that are readily accessible for spending." M1 is spending-money, or money in circulation. It is the money we use to buy things, and the money we accept as payment. M1.

My other number -- the total value of output -- is output at the prices we actually pay, or nominal GDP, or just GDP.

Those are my numbers. My numbers show that spending-money has declined from 35 cents per dollar's worth of output (in 1951) to 25 cents (in 1962) to 15 cents (in 1979) to 12 cents (1999) to 10 cents in 2006-07. That's why nobody has money these days. That's why business is not so good. And that's why we use so much credit.

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