Thursday, September 27, 2012

Codecogs, FRED, and Policy

I just found the Online LaTeX Equation Editor at CodeCogs.

There are reasons *NOT* to count money in savings when you figure the Velocity of money. For example, it is not in the spending stream.

But there are also reasons *TO* count the money in savings when you figure the Velocity of money. At the whim of the saver, for example, savings can move back into the spending stream.

Okay, so both M1 Velocity and M2 Velocity are important.

Right away then, I want to look at the ratio between them:

Oh, but that expands to this:

And that is the same as this:

And that reduces to this:

Okay. Let's look at that:

Graph #1: Circulating Money as a Portion of the Money Stock M2

When I was young, half (0.50) of M2 money was circulating. (In the 1950s, more than half was circulating.) Circulating money is the money we receive as income, and spend.

The circulating quantity fell, essentially uninterrupted until the mid-1980s. Then, an increase in two steps opened the door to the brief time that Robert J. Gordon called a "macroeconomic miracle" -- the good years of the latter 1990s.

Note that the ratio fell during those good years, just as it fell during the "golden age" which ended in 1966.

Note that the ratio continued to fall after the end of the "miracle" years, and after the end of the "golden" years. Policy encouraged or allowed these declines to continue when they were no longer helpful to economic performance.

Circulating money continued to fall until the Fed responded to the financial crisis.

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