Tuesday, July 13, 2010

Zig, Zag, Zig

This is a graph from Paul Krugman's Inequality and Crises PDF. The trend-line rises to a sharp peak somewhere around 1933, then falls until about 1945, then begins another long rise.

This is my graph of (M2-M1)/M1, or Money in Savings relative to Money in Circulation. This is the graph that shows Monetary Imbalance. It rises to a peak around 1930, falls until 1945, then begins another rise.

This is my graph of Debt per Dollar, or DPD. This is the graph that shows excessive debt. It rises to a peak in 1933, falls to a low in 1947, then begins another long rise.

Total Debt (relative to the quantity of M1 money) follows a pattern very similar to Total Savings (relative to the quantity of M1 money). Both follow a pattern very similar to Krugman's Finance as a Share of GDP.

Savings are the raw material of Finance, and Debt is its product. The three graphs move together because of this relationship.

Should we so desire, U.S. monetary policy can control both the level of Debt and the preponderance of Finance, simply by controlling the relation between Savings and M1 money.

If you think it wise to get debt under control... If you think it a good idea to get Finance under control... Then you must reduce and stabilize the ratio of Savings to Circulating money.

Nothing else will solve our economic problem.


jbpeebles said...

I like the take on Savings as the raw material for finance. What isn't saved can't be available for investment.

The best examples of living this creed are the Asians, who live within their means and the powerful outcome is a society that can build industrial capacity in the short-term because its people don't spend.

Now I guess some like the Thais have a predilection to spend on imports, so we can't generalize. The Chinese however have been excellent savers. Rather than go through banks, their source of loans is actually predicated on multi-generational family support. So maybe the nuclear family and its transient needs have shaped our financial system--great for banks and consumption but hardly as solid as family savings. Why? the reason isn't purely financial: the Chinese can lean on family members, work in their shops and stores, etc.. The more recent Western financial crisis has been one of employment; non-traditional investment systems may encourage greater stability (although the Chinese will be increasingly vulnerable to the business cycle as they industrialize and families nuclearize.)

Your "Word with Linda" post attests to the absence of money to spend, I'd add a supporting idiom: you can't have your cake and eat it too.

I know it's a trite expression, but it expresses an absolute: that which is spent isn't saved. Now if investment is spending in the end, well, then, that supports consumption, which would appear on the surface to have an impact not dissimilar from simple consumption based on borrowing, a highly consumerist lifestyle. In the end though, investment dollars flow back to the initial investors, who are in the American case Chinese who lend to our financial entities or Fedgov. Who benefits? The investor should, and can build wealth over time. The spender only gains the transient benefit of buying something. This is good, yes, and provides paramount sustenance--or so marketers would have us believe--but the spending is hardly sustaining. In this respect, spending could be viewed as not investing for the future, or a rainy day.

The profiting investors (more and more often Chinese) gain the benefit of interest over the debt, which can generate additional income, savings, and investment, an increasing portion of which stays in China. Which system is better--saving or consuming? Well. every economy needs both and as it turns out saving is the gateway to investing which encourages spending, unless of course the gov't crowds out more productive investment in favor of squandering its spending on things like the war machine, which tend to be inflationary and not much of a spending multiplier. Or savings could go into huge gov't pools like in Japan, and languish at low rates of return, doing nothing to bolster growth.

And there's the vital issue of the debt governments incur if they don't tax enough (or spend beyond their receipts.) Government spending deprives people of the fruit of their labor, money which would almost invariably be better invested and spend if it weren't liberated by the tax man. Gov't borrowing goes a step farther, securitizing future tax receipts and burdening future taxpayers with interest on past debt, an odious practice in times of relative prosperity.

The Arthurian said...

Thanks, JB. I was pretty happy myself with that "raw material" sentence. But I had half an idea the other day, and your comment brings it to the fore: "What isn't saved can't be available for investment."

True enough... but if one dollar is saved, it can be used to create ten or twenty dollars of new loans. So how can it be that there's not enough money available to lend for investment?

Half an idea, as promised.