If pictures are worth a thousand words, let me try this…

Thirty years of manipulating interest rates lower looks like this…


FRED Graph
As you lower interest rates, this is what you get… textbook…


FRED Graph
As you manipulate interest rates lower, you goose inflation thus peop0le not only spend their savings but they will also take on debt. Textbook Keynes.

Graph: Household Financial Obligations as a percent of Disposable Personal Income

As people take on more debt, their spending power is multiplied. Thus, as Steve Keen eloquently demonstrates in The Cavaliers of Credit, money supply must follow suit. Steve keen shows that money supply follows credit creation and not the other way around. In a debt based economy, that would be fairly intuitive.



FRED Graph

So, we’ve manipulated interest rates to unimaginable low levels, thereby depleting people’s savings and simultaneously encouraging individuals to increase their spending by taking on debt, thereby fostering an increase in money supply. Accelerating debt levels and money supply is what inflation is all about. The chart above shows that we’ve been expanding the money base at an average of 10% year on year.

Great.

So, what did we get for all the priming of inflation over the same period of time? This is what we got for our efforts…


FRED Graph
We’ve lowered interest rates, we’ve forced people to spend all their savings, we’ve forced people to go into debt at an ever quickening pace thus making people spend money they did not have, we’ve pumped the money supply at rates that on average were double the rate of GDP expansion and through it all, we’ve been able to push GDP progression at the dizzying speed of… drum roll…  5% year on year… barely….

To summarize, over a period of 30 years, on a year-on-year basis, we’ve put in a financial effort that is on average at least twice as great as the GDP progression we have fostered (NB – the financial effort is actually much greater than what I am illustrating because although my GDP figures take into account government spending, the debt figures do not take into account government borrowing… but you get the point… )
If that does not make you go: “WTF!!” then here is something that should finally make your Penny drop. Here is the kicker!!! This is what entire swathes of politicians and economists have failed to notice over the past thirty years…

Graph: M1 Money Multiplier

That there chart above, can be thought of as the efficiency of money or how many times each new unit of currency contributes to the expansion of the economy (because each coin or Dollar bill is used more than once in its life time so each unit of currency has a “multiplier” effect on the overall economy). That is, how much does each new unit of currency contribute to the expansion of the economy. What the graph above attests to is the exponential nature of the inflationary dynamic. The graph above attests to that pesky characteristic of inflation better described by the law of diminishing returns. In other words, it shows how you always need more inflation in order to bring about the same or greater rate of expansion of GDP. That is because as a government willingly adopts a fiat monetary system, then inflation is the implicit conditio-sine-qua-non of the existence of the system and the state. But as you encourage inflation artificially into a system, you decrease the value of the currency thereby bringing about higher prices.

Today the efficiency of money has fallen below 1. That means that “money” as contemplated by accepted Keynesian theory, has lost its multiplier effect.
So, having disregarded the efficiency of money for the best part of thirty years, politicians and economists are hell bent on doing more of the same only MUCH more in an attempt to bring about a modicum of GDP expansion.

What, you may ask, is our leaders’ solution?
Our leaders seem to think that if we create even more money than we already have and give all this new money to the banks as we already have, suddenly people will once again rush out to borrow this money to spend.

Here is the rub.

The price of risk insurance on financial instruments is still rising. The velocity of money is still below one. The savings rate has jumped higher than at any time in recent history telling you that people no longer wish to spend.

I would have thought this was your proverbial “writing on the wall” writ large.
Looks like I am wrong.
For more on the inflationary dynamic, you can read this post and many others on my blog.




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3 Responses to “If pictures are worth a thousand words, let me try this…”

  1. Fraud reporting « Guido’s temple of the absurd Says:

    […] By guidoamm As shown here, here, here and proven here with charts, and in many other posts on my blog, in a fiat monetary system, inflation is the reason […]

  2. guidoamm Says:

    If you have a link to that piece, I’d like to read it.

    I doubt it is firms that are “dissaving”. Commercial debt levels are still dropping. If Krugman had said that government spending is compensating for private saving then I would tend to partially agree. However, considering the numbers involved, the US and EU governments throwing US$15Trillion of cash and guarantees at a US$500Trillion mountain is hardly relevant. In an essay I wrote recently, you can see what I mean. Scroll down to “Where we are today” section at the bottom of the essay –

    https://guidoromero.wordpress.com/2009/07/02/inflation-deflation-fiat-money-currencies/

  3. Dirk Says:

    Paul Krugman posted a piece on his blog recently about the paradox of thrift. Actually, the US are not saving more, because households and firms are dissaving and thereby overcompensating the increased savings of households.

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