Wednesday, February 8, 2012

Mitchell 17991 (1): The Least of My Concerns

The opening paragraph from the Billy Blog of 31 January 2012:

I was reading the recently published January 2012 Monthly Bulletin from the ECB yesterday. It provides a massive amount of interesting data about the developments in the Eurozone plus analysis. The descriptive analysis is fine (this went up, this went down) but the conceptual analysis leaves a lot to be desired. This is an institution that still talks about reference values of broad money as a policy target to control inflation. Basically, that idea has no application in our monetary system. But that aside, the release of the latest M3 data tells us how bad things are getting in the Eurozone and do not augur well for the coming year, despite the up-beat forecasts for real GDP that the ECB are still providing. The latest ECB data shows how bad things have become in Euroland.

"Broad money as a policy target to control inflation" is not high on my list of important economic topics. I have already quite thoroughly (I think) demolished the evidence that printing money causes inflation. So I'm not going to focus on that topic, even though it is the focus of Billy's post.

But this post of Bill Mitchell's, like so many of his posts, is extraordinarily dismissive of the economic thoughts and arguments with which he disagrees. Basically, the idea has no application he says. Granted, the topic of his post is to explain his point of view. But now I am stuck having to interpret his explanation in light of what I already know -- and what I know is that Billy simply dismisses arguments he doesn't like.

Graph #1: Some Mostly Parallel Lines on a Log Scale

The two lowest lines on Graph #1 are two measures of inflation, the CPI and the GDP Deflator.

The yellow line that starts at 1947, that's GDP. All the lines below the yellow one (except the lowest two) are money measures -- M1, M2, MZM, M3, and the monetary base. The blue-green line above GDP is total credit market debt owed, TCMDO.

All of these lines are basically parallel to each other and basically parallel to the path of inflation. Any one of them would give you an idea of inflation's path. Not that any of the money measures is a really good indicator of inflation, but they do show the trend.

So if the ECB wants to look at M3 money and use it as an indicator of inflation, well, they're not entirely out of the ballpark. It's a bit of an over-simplified approach but hey, the lines are parallel.

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