Thursday, January 7, 2010

The Naughtful Naughties: The Money Supply

As seen in the comments on my previous post, my brother Mike has some pretty strong opinions about the ol' Federal Reserve System and the money supply. So, I reckoned I'd gather up a bit of historical macroeconomic data to see what I could find. That took a wee bit of time, so I'm not going to format and explain my source data in detail today, but I did want to pass along a couple of graphs that I put together.

I assembled a goodly batch of data from the past 50+ years. It was a worthwhile exercise, since one of the things I'd like to do in this Naughtful Naughties series is to put what happened over the last ten years into some historical perspective.

For today, I've chosen to look at five specific measures of change:

The Prime Rate -- The rate at which banks lend to favored customers. This is tied closely to the federal funds rate established by the Federal Reserve. (In retrospect, I probably should've gone directly to the federal funds rate.)

The Change in the Gross Domestic Product (GDP) Deflator -- This is a measure of inflation that is broader than the consumer Price Index because in addition to consumer products and services, it also includes government services and investment goods.

The Change in the Real GDP per capita -- The Real GDP measures the the total national output of goods and services in constant dollars. When divided by the total population it makes for a handy measure of our change in national wealth per person.

Federal Deficit as a Percentage of GDP -- Another possible source of change in the money supply. Is the federal government spending more than it takes in? (It usually is!) If so, it'll need to issue treasury bonds to make up the difference.

Change in M2 per capita -- M2 is the money supply measured in terms of currency, traveler's checks, demand deposits, other checkable deposits, retail money market mutual funds, savings, and small time deposits. It's a pretty good measure of the dollars that are available for use. I divided it by the total population to see how much faster the money supply grew than might be expected if it just kept pace with our population.

What did I come up with? Here's what it looks like (You can click on the image to see the full-size graph):

If the zigs and zags of that graph hurt your eyes, I also "smoothed" the data by taking some five-year averages. (So, the 1975 point has the average percentages for 1971-1975.) I often find that a useful way to see broader trends:

For today, I'm not drawing any conclusions. But I do think it's interesting to look at some of the relationships that seem to emerge among these sorts of measures that step back from the daily ebbs and flows of the financial news and look at the year-to-year changes, especially when you keep in mind what was happening in the economy during the various periods covered here.

Here are the sources for the data I compiled today:

Prime Rate (The US Federal Reserve)

Money Supply (M1 & M2 , M3 )(The US Federal Reserve)

Consumers Price Index (Bureau of Labor Statistics)

Gross Domestic Product (, which had a more convenient format than the federal tables I found.)

US Federal Deficit as a Percent of GDP (

1 comment:

  1. Love, love love this sort of hting. Do you do this just for me, honey?

    I'd love to get my hands on the Excel spreadsheet behind these curves...