Thursday, February 25, 2016

What happened in April 1995?

Graph #1: Everything Changes in April, 1995


Oilfield Trash said...


Retail sweep programs have been cited as a cause of the well-known distortion of M1 beginning in the mid-1990s. Retail sweep programs do not affect the broader monetary aggregates, because they all include savings deposits.

jim said...

Looking at the cash/M2,M3,MZM graphs it looks like something stopped happening in 1995. It started arpund the end of the 80's.

The Arthurian said...

I agree: Sweeps are probably unrelated to what the other graphs show. The M1 graph probably should not be included with the others. (But it was the change in the M1 graph that made me notice the changes in all the others!)

I agree: The change that *ends* in 1995 seems to have started in the 1980s. The M2 graph shows acceleration beginning in late 1989 ... uptrend beginning in late 1986. By eye, M3 shows the same.

By eye, all four graphs seem to show uptrend beginning in late 1986; all but M1 show uptrend ending in 1995.

The 1986 date makes a bell go off in my head. TCMDO growth peaked at the end of 1985. Perhaps ten years of slow debt growth resulted in slow growth of the broad money aggregates, making currency growth look rapid by comparison?

Looks like currency growth actually was greater at the time debt growth reached a low point.

jim said...

People tend to think of money as things that can be readily and dependably converted to cash without much friction. That is, govt backed currency is analogous to gold in a gold based money system. I think maybe Sumner carries this analogy to an absurd extreme.

Just out of curiosity I graphed total bank liabilities against currency

It shows the same sort of shape as the broad money to narrow ratio of currency to M2.

Then out of curiosity I added in US treasuries securities held by the public as included in broadest money and looked at the ratio.

These shapes I think are telling us something, but I don't think it has anything to do with how interest rates shape the preference for cash over other forms of money

Oilfield Trash said...


“Scott Sumner current claim that interest rates really do impact the demand for money”

I have a working theory that goes like this.

You have to think global.

Theory Theme “Crises Are Reflected in Aggregate U.S. Currency Data”

Currency growth was quite strong in the early 1990s, which coincided with the fall of the Berlin Wall and the collapse of the Soviet Union. After a brief lull, currency growth picked up again in the late 1990s, driven by crisis in Argentina in 1997 and then concern about Y2K in 1998 and 1999.

Whatever relationship interest rates have to subsequent economic growth is already contained in prior changes in GDP, unemployment and inflation. Interest rate changes are largely the results of prior measures of economic activity, not the causes of future economic activity.

It is not about interest rates it is about Economic uncertainty. You have to think about this phenomenon in the economic context that produces them. Scott thinks that monetary policy can define the economic context and when monetary policy fails we just need more of it until it works.

Scott practices IMO what Steve Keen defines as Ptolemaic Economics. In his models of the economy he sees the sun moving from east to west and concludes the sun resolves around the earth. When challenged, and he is a smart guy, he constructs Epicycles tweaks to maintain his core.

The more you call him on it the more Epicycles tweaks you get until a paradigm which is utterly wrong can actually mimic a tolerable level of accuracy.

The Arthurian said...

"... until a paradigm which is utterly wrong can actually mimic a tolerable level of accuracy."

And then they call it a model.

Oilfield Trash said...

Yes and below is something timely