However, the U.S. dollar has fallen much in value since the end of World War Two. And all that time, the quantity of money in circulation was being suppressed. And all that time it was credit-use that added to the demand that was causing inflation. And all the while, the cost of using credit was creating additional upward pressure on prices. It was not printing money that caused inflation. The use of credit caused inflation.
If this is the case, then we should see a definite and specific correlation that is robust over time. The absence of correlation is straight-forward refutation of any claim of causation. To give a first look, I went to FRED and constructed a graph of YoY % change for two series: CMDEBT (Household Credit Market Debt Outstanding ) and CPIAUCSL (Consumer Price Index for All Urban Consumers.)
My reasoning is that if debt drives inflation, then the curves should move in some sort of similar pattern. We see this happening during a specific period. From the late 60's through about 1980, big increases in debt do lead to proportionally large increases in inflation. This period is highlighted by the red oval. But that is only one decade out of six. The rest of the time we find a great deal of contrary motion. I've thrown some red arrows on the graph to show this effect.
The period from 1990 to the current economic malaise is especially striking: a broad advance in debt spanning almost two decades while inflation wiggled quite a bit, but went absolutely nowhere.
Maybe this isn't the right way to look at it. I'm certainly willing to consider other evidence. But as of now, I'll say two things. First, the 70's were really different with regard to inflation - as I've indicated before with another potential inflation cause. Second, the idea that debt causes inflation, barring some other strong evidence to the contrary, is D.O.A.
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10 comments:
Start in 1947 with a very low reliance on credit. End in 2007 with a very high reliance on credit. Assume a more-or-less continuous increase in reliance over the period. (You can measure the reliance on credit by measuring total debt... relative to non-credit money.)
In the early years after WWII there was lots of spending-money. Money in circulation. M1 money. And it was *money* that caused inflation. Too much money chasing too few goods, as Milton Friedman said, who observed it at the time. And we can observe it in your graph.
But then the combination of rising prices and anti-inflation policy reduced the excess of money relative to goods, and by the early 1960s inflation was tapering off to almost nothing: One percent, about.
At the same time, our reliance on credit was increasing, and credit-use was beginning to have a greater effect. So you would expect to see a transition. You would expect to see similarity arising between the two trend lines. And we can observe it in your graph.
And then arose the political will to crush the inflation. Policies changed, as you know. But GDP growth was held back by the rising cost of debt and the growth of finance. And inflation was held in check by the coincidence of lower GDP growth and higher unemployment.
We can see it on your graph.
The continuing increase of the reliance on credit was offset to some degree by declining interest rates, but that was not enough to induce the kind of growth we had in the good years of low debt. For the whole of the Great Moderation, policymakers pushed interest rates lower and lower to get more growth. But the approaching lower bound hindered rate movement and made growth particularly bad in the Bush II years. And you know what happened since.
Accumulating debt doesn't just cause inflation, Jazz. Accumulating debt causes everything.
Art -
1) Put this: "Money in circulation. M1 money. And it was *money* that caused inflation" with this, "Accumulating debt doesn't just cause inflation, Jazz. Accumulating debt causes everything," and your narrative is incoherent.
2) Too much money chasing too few goods,as Milton Friedman said, who observed it at the time. And we can observe it in your graph.
No, we can't. We observe one inflationary spike in the early 50's, a blip leading into the '58 recession, and 2 temporary dips into actual deflation. If there is an inflationary story of the 50's, it must have detail and nuance. And since my graph tells us nothing at all about money supply, the MF reference is a red herring.
3) Define "reliance on credit" in a measurable way, and let's go measure it.
4) You would expect to see similarity arising between the two trend lines. And we can observe it in your graph.
Yes, in one unique and specific period.
5) And inflation was held in check by the coincidence of lower GDP growth and higher unemployment.
We can see it on your graph.
How can we see something on my graph that isn't on the graph? There is nothing here about unemployment nor GDP.
And if low GDP growth and high unemployment hold inflation in check, and money supply in the 50's determined inflation, as you say then, you have undermined your main premiss.
You are arguing from a commitment to a concept. I want to argue from facts and data. I have presented data which is inconsistent with your concept. You have presented a narrative that is inconsistent with your concept.
I don't know how to continue this discussion.
JzB
1. read my comment again. don't skip the first paragraph this time.
p.s. that first paragraph also answers your #3.
I didn't skip the first paragraph. But by the time I got to point 3, I had forgotten it. What is non-credit money? The currency component of M1?
Now, what about points 1, 2, 4, and 5?
More importantly, why do we have all this debt? Yes, wage suppression by central banks is wrong (per your "Parsing Waldman (2)".
But wage suppression by busting unions, adopting other anti-labor policies, manipulating the tax and regulatory codes to skew wealth to rentiers and away from labor and real capitalists is right. And therein lies the root cause.
Real household wages have stagnated for close to 40 years. For about half the population, family income is only barely keeping pace over that time because of two incomes.
That is a big part of why we have debt accumulation. Lax (or no) regulation of banking and non-value-added financial tail-chasing is most of the rest.
You can see this clearly in the share of total income (excluding capital gains!!!!) by the top 1%.
http://www.realitybase.org/journal/2011/10/5/if-something-cannot-go-on-forever-it-will-stop.html
In this picture, Monetary policy is decimal dust.
You will never find a cure by treating the symptoms.
JzB
Your #1 compares my "it was money that caused inflation" (in the 1950s & early 1960s) with my "debt causes [inflation]" (increasingly since the mid-1960s) and sees a contradiction there.
My first paragraph says we can "Assume a more-or-less continuous increase in reliance [on credit] over the [1947-2007] period".
It was money that caused inflation when the reliance on credit was low.
It has been credit-use that causes inflation since the reliance on credit has been high.
I don't see a contradiction there.
Jazz, would your chart look any different if the methodology had not had so many improvements and revisions?
john -
I don't understand the question. There are many ways of looking at time series data. I try to find the way that is the most revealing to whatever question is under consideration. As I said in the post, I don't know for sure that this approach is best. I'm willing to consider other suggestions.
Cheers!
JzB
Art -
Your #1 compares my "it was money that caused inflation" (in the 1950s & early 1960s) with my "debt causes [inflation]" (increasingly since the mid-1960s) and sees a contradiction there.
No. the contradiction is as indicated in my point 1 - between
A) "Money in circulation. M1 money. And it was *money* that caused inflation" and
B)"Accumulating debt doesn't just cause inflation, Jazz. Accumulating debt causes everything,"
If it's debt always and everywhere, as per B), then it can never be money in circulation, as per A. That is the inconsistency.
My first paragraph says we can "Assume a more-or-less continuous increase in reliance [on credit] over the [1947-2007] period".
Here is one measure of Debt/Dollar. Let me know if you like another one better.
http://research.stlouisfed.org/fredgraph.png?g=2E5
Sure the main trend is up, but I see 6 distinct regimes with very different debt/$ behavior:
ca. '52 to '65
ca. '65 to '75
ca. '76 to '90
ca. '90 to '00
ca. '00 to '08
The Great Recession
The assumption is not valid, except in some extremely broad brush way.
Note that the two main pre-Great Recession counter trend periods are the Kennedy-Johnson and Clinton administrations. Which is a part of why I say policy matters, and there is much much more than monetary policy in the mix.
But let's not loose track of your main point: It was not printing money that caused inflation. The use of credit caused inflation.
This remains unproven, and my challenge remain unanswered.
Cheers!
JzB
Jazz, sorry for taking so long to respond. What I was getting at is the methodology used in obtaining the data. Hasn't it changed? If so does that not enter into the graph. Or, has the fed gone back and revised all the data on the basis of the most recent revision or improvement? My sense of it is that the debt figures are good but the CPI-U figures are not as reliable. Your thoughts.
John -
You're asking good questions that I haven't pondered. I'm taking the data at face value.
Certainly, changing methodology and data revisions will have some effect.
I'm looking at long tern trends here, and hope that information is valid in that context.
Cheers!
JzB
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