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Money Supply Growth, GDP, and Kel Kelly

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ThreeTrees posted on Thu, Mar 8 2012 12:49 AM

 

I was fooling around with the Fed's data transformations and came up with the below graph.  I thought it was cool so I thought I'd share.  Please critique my reasoning.  

I submit that growth in US GDP is becoming increasingly dependent on the expansion of central bank credit. (Credit for this goes entirely to Kel Kelly as I generated this graph working off his articles, that is, if I've done his theory justice :P ):

 

A few assumptions:

First, MZM according to investopedia

A measure of the liquid money supply within an economy. MZM represents all money in M2 less the time deposits, plus all money market funds.

I chose MZM as my measure of the money stock because today's banking system relies heavily on securities exchangeable for cash more-or-less on demand to collateralize debt (like in the highly liquid government bond market).

Again from investopedia: 

Portfolios are comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments.

Money market funds are composed of what von Mises would call fiduciary media and for all intents and purposes is used to bid up asset prices.

Second, GDP.  (I know most of you disparage stats like GDP but hear me out.)  As I'm sure most of you know GDP is essentially a tally of all incomes of all individuals in a country in one year (in this case the United States).  This means that GDP rises two ways, 1) the (nominal) value of some or many of the transactions increases and/or 2) the number of transactions occuring during the year increases.  

Now, the velocity of money as calculated at the Fed is GDP/MZM which means Velocity rises if the numerator is increasing or the denominator is decreasing.  Conversely, and much more relevant to the above graph, Velocity falls if the numerator is decreasing or the denominator is increasing.  And if Velocity of money is falling while GDP is rising then we know a priori that it is at least partially because MZM increased.

Thus I submit that rising GDP with falling velocity means growth is being increasingly supported by expansion of fiduciary media.  Through open market operations like QE the Fed has indeed "eased" credit conditions and consequently raised the nominal prices of economic transactions (inflation) as well as increased the number of transactions per year.  This is evidence that we are not in a "virtuous growth cycle," and furthermore, even if somebody wanted to debate the presence of inflation they would logically have to concede the point on number of transactions per year.

 

"...I feel, for instance, that I have the right to do anything I please. But, if I do something you don't like, I think you have the right to kill me." -George Carlin
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Very well done. smiley

Together we go unsung... together we go down with our people
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