And now a few words from Milton Friedman

The Trump agenda, cut-cut-cutting the federal government, it's like we are married to it: for richer or for poorer, in sickness and in health, for better or for worse.

Milton Friedman wanted to say a few words:

Just as higher government spending can contribute to excessive monetary growth, so lower government spending can contribute to reduced monetary growth.

And also this:

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.

In recent posts we have seen the quantity of money running low, problematically low relative to GDP-at-actual-prices, and problematically low relative to accumulated non-federal debt. And not long ago we saw graphs showing

• the low quantity of "base" money as a recurring problem;
• federal debt running below-trend, contributing to the financial crisis and 2009 recession;
• and the effects of changes in the M1-to-GDP ratio.

Milton Friedman wants you to be cautious and careful, Donald. So do I.

 

Ah, and something I didn't notice until just now: 

• When non-federal debt went below-trend in the 1990s, the economy improved.
• When the federal debt went below-trend, 2004-2008, the economy tanked.

Coincidence? Sure, Donald. Keep thinking that, Mister I-don't-want-to-be-Herbert-Hoover.

Does Google's AI Overview have a creative mind?

Checking my work for a blog post, I googled was the US recession of 1982 severe

Yes, Gaio said, it was severe. 

 

Old responses from the AI Overview sometimes turn up in new Google search results, often in the "People also ask" section. Maybe Google archives the responses. I'm gonna test that theory by linking to Gaio's response to my question about the '82 recession.

It works. For now, at least.

 

Gaio said the 1982 recession "was the worst economic downturn since the Great Depression." You could probably find that said of most of the recessions since the Great Depression. But I got the confirmation I was looking for.

Gaio also gave some stats that I might want to consider when evaluating recession severity:

• The unemployment rate peaked at 10.8%...
• Gross Domestic Product (GDP) contracted by 2.7%...
• The prime interest rate reached a record high of 21.5%...

You'd think there would be a standard, accepted method (say, GDP contraction) for evaluating recession severity. But if there is, I never saw it.

Under "Other effects" Gaio lists more things I might want to use when evaluating the Volcker experiment:

• The recession led to homelessness.
• The recession contributed to the Latin American debt crisis.
• The recession contributed to long-lasting slowdowns in the Caribbean and Sub-Saharan African countries.
• The recession contributed to the US savings and loan crisis.
  

Yeah, I dunno.

The best part of Gaio's response was the statement about the causes of the recession:

The recession was caused in part by Paul Volcker's tight money policy to fight inflation. The recession was also affected by the Reagan administration's fiscal policy.

The recession was caused by Volcker's tight money, and affected by fiscal policy.

I don't suppose I can get away with assuming Gaio was relying on the subtle differences in meaning of "caused by" and "affected by". But I do like seeing tight money get most of the blame. Gaio's evaluation is correct, I think. And the AI view lends credence to Milton Friedman's view that

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression. Fluctuations in monetary growth are also systematically related to minor ups and downs in the economy...

But I cannot say what I just said: that "the AI view lends credence to Milton Friedman's view". The AI view is not original, objective thinking. Far as I can tell, it is always a compilation of what it finds on the internet. It expresses things very well, far better than I can, sad to say. But if I lay out a problem -- the growth of financial cost -- and present it as a long-term cost-push problem, and point out that cost-push hinders economic growth (while demand-pull does not), will Gaio assemble the components on his own, make the argument that Excessive Reliance on Credit has increasingly made inflation a cost-push phenomenon, and conclude that our inability to achieve decent economic growth is a result of Financial cost-push?

Maybe. But I don't think he can assemble the components and arrive at a new theory.

The Bills to be Paid, and the Money to Pay Them

Here's another transaction-money graph. M1 money. This graph compares the bills we have to pay to the quantity of money we use to pay the bills. This time "the bills" is all the debt in FRED's TCMDO, except the federal government component. I know a lot of people blame the federal debt for all our economic problems, so I'm leaving it out.

I thought about leaving out "financial debt" again this time, too, but bills are bills. If you got bills you gotta pay, you gotta pay them. And that takes money, even for those in the financial sector.

Again, the graph uses transaction money. M1 money. This time the graph shows debt relative to the quantity of transaction money, the money we use to pay down our debt.

Debt of All US Sectors except the Federal Government, per Dollar of M1 Money

Excel's exponential trend line is based on the gentle upward sweep of the blue line from start-of-data (Q1 1959) to Q4 1990. The blue line -- non-federal debt relative to M1 money -- goes below-trend beginning in Q1 1991, reaches a low in Q4 1993 and returns to trend around Q1 2001, then remains on-trend until around mid-2005. After mid-2005 the blue line rises above the trend line and reaches an economically disastrous peak in Q1 2008.

The blue line goes below trend in the early 1990s in part because the growth of debt slowed from Q4 1985 to Q4 1991 and remained unusually slow until 1997. Much of this slow growth of debt can be attributed to the Savings and Loan Crisis of those years; on the graph, some is due to a period of rapid growth in M1 money (and the debt-to-M1 calculation).

This graph of M1 at FRED shows unusual increase in M1 from 1992 to mid-1997; that increase supported the return of debt growth to the 10% level and probably helped end the S&L Crisis. Also, in my view, the unusual increase in the quantity of money was largely responsible for the economic boom of the latter 1990s.

Those good years of the 1990s? On the graph, those are the years when the blue line starts out below-trend, and runs rapidly uphill while getting back to trend. The way our economy is, the way economic policy makes it, the economy is only good when debt can increase rapidly, as it did from 1994 to 2001.

The trouble is, the more debt we have, the more difficult it is for debt to increase rapidly. I think people just don't want that much debt.

That M1 graph shows a similar but smaller unusual increase from 1986 to 1989, which no doubt helped the economy through the S&L Crisis; and smaller yet, an increase from September 1982 to September 1984, which smoothed the transition from the harsh recession of 1982 to Ronald Reagan's good economy of 1984.

Look again at the graph above, the graph of non-federal debt per dollar of M1 money. Increases in transaction money helped the economy survive the S&L Crisis and the unusually slow debt growth that accompanied it. Then, in the high-productivity-growth years of the 1990s, increases in transaction money supported economic activity and helped sustain those good years. In good times and bad, when the quantity of transaction money is insufficient, increases can help.

Not that the trend is trustworthy, but: In the 1990s the debt was below trend, and the economy was very good for a while. After 2005, the debt was above trend and our "old normal" economy died. 

Tight money. Visibly tight

Based on my rough estimate, repayment of principal for household debt runs on average about 5 percent of outstanding household debt each year.

Let's say the number is 5 percent for domestic nonfinancial debt in general.

Let's also say we don't borrow money to pay down our debt. So then we must be using transaction money for those payments. M1 money. M1 is the money we receive as paychecks. Pocket money. Checking account money, if anyone still pays by check. The money we use to buy all the output in GDP, except when we buy on credit. 

 

Paying down debt destroys money. So let's look at the quantity of M1 money after we subtract the 5 percent of domestic nonfinancial debt we pay off each year, and look at what's left in M1 as a percent of GDP:

M1 (less 5% of Domestic Nonfinancial Debt) as Percent of GDP

As you can see, transaction money was so tight between 2000 and 2010 that the repayment of 5 percent of the principal would have drawn M1 down to a number below zero. If you want an explanation for the cause of the financial crisis and Great Recession, this is all that you need.

Transaction money is the money we spend. Too much of it causes inflation. But not enough of it is a problem, too. And it is probably safe to say that every recession shown on the graph was caused by a decline in the quantity of M1 money. For the 2001 recession and the "great recession" of 2009, it is undeniable.

I stopped the graph in 2019 because the Federal Reserve redefined savings to be part of transaction money in 2020, adding some $12 trillion to M1 overnight. The FRED graph of M1 shows it. I see this change, and all of the increase since 2010, as an admission by the Fed that they let M1 get much too low, apparently without realizing it. Yeah, they watch interest rates like hawks watch mice, but the quantity of money is another matter.

You remember what Friedman said, right? No, not the "always and everywhere" thing. This:

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.

The quote is from Chapter 2, on page 48 in my copy of Money Mischief. Look it up in yours.

 

The moral of the story: In a tight-money world, excessive reliance on credit is ultimately self-defeating.

And, no: Counting savings as part of M1 money does not solve the problem.

"Dodd-Frank under fire" (2017)

At the start of Trump's second, an old (February 2017) blog post at Twenty-Cent Paradigms is an interesting read: Dodd-Frank Under Fire

 

The Donald Trump Uncertainty Index

Economic policy uncertainty: Since 2005 there have been three times of high uncertainty in regard to economic policy:

1. A long period of abnormally high uncertainty during the financial crisis of 2007-08 and the so-called "Great Recession" of 2008-09, and until 2013 when uncertainty finally began to decline;
   
   
2. A shorter but extremely high period of policy uncertainty arising from the pandemic of 2020; and
   
   
3. A sudden rapid increase, from a low of 97.3 in October 2024 to near the 160 level (in November & December 2024 and January 2025) and then to the most recent (February 2025) level of almost 240 -- in all a sharp, rapid reaction to the November election.
   
   

The Economic Policy Uncertainty (EPU) Index since 2005

 

The Economic Policy Uncertainty Index since 1985:

https://fred.stlouisfed.org/series/USEPUINDXM

The jagged blue line indicates economic policy uncertainty. The Uncertainty Index appears to go high at times of recession. In addition there are a couple highs in the 1980s during the Savings and Loan Crisis, and the long-running high following the Great Recession, noted above.

 I added vertical dash-dot lines indicating November 1 of Presidential Election years:

• 1988: George H. W. Bush
• 1992: Bill Clinton
• 2000: George W. Bush
• 2008: Barack Obama 
• 2016: Donald Trump
• 2020: Joe Biden
• 2024: Donald Trump

None of these election-date indicators occur at  moments of sudden increase in the Uncertainty Index unless there is also a recession around the same time. None of them, that is, until the 2024 election of Donald Trump.

In the months since the Trump victory, the Economic Policy Uncertainty Index suddenly spiked upward, nearly reaching the 240 level in February, the third highest point on the graph after the pandemic-related cluster and the August 2011 high. The reaction was immediate, beginning in the month of the election.

An interesting statistic, given the current political environment.

 

For a bigger graph, click the graph image above. For an even better view, click the link below the graph to see it at FRED.

The Fred page links to an info page identifying three types of data used to create the index: news coverage, disagreement among economic forecasts, and, interestingly, "tax code expiration data".

FRED also links to the EPU home page, which displays a large selection of policy uncertainty graphs, including a global measure.

In addition, FRED links to Measuring Economic Policy Uncertainty, a 75-page PDF by Scott R. Baker, Nicholas Bloom, and Steven J. Davis.

Trump's Address to Congress

Tuesday, 4 March 2025

I wanted to watch Trump's address to Congress because I cannot tell from the fragments I see on CNN if Trump has a plan for the economy.

He does appear to have a plan. And he did say that fixing the economy is "among my very highest priorities" (to fix it, to improve it, something like that. I missed the word). But after that, the next thing I have in my notes is Trump calling the post-pandemic inflation "the worst inflation, perhaps ever, in the history of our country" which is a crock of shit. Trump does not have enough respect for our economy to tell the truth about it. As you know, I think the Employment Level data for the first month of Trump's second term was fake news. And as you can imagine, I am not happy that Trump wants to change the way GDP is measured.

Hey, the data for GDP excluding the government component is already available. If you want to take government spending out of GDP you can do it in seconds. At FRED, grab the GDP series and subtract from it the GCE series. Done. 

Oh, and at Vox, a good read: Economic growth is slowing — so Trump wants to redefine “economic growth”. The NY Times has Commerce Secretary's Comments Raise Fears of Interference in Federal Data.

Next, Trump blamed Biden for the price of eggs. Then he described his plan to fight inflation: "Reducing the cost of energy and ending the flagrant waste of taxpayer dollars."  How, sir, how are you gonna do that? Fire everyone you can fire, and drill-baby-drill? That's it, I guess. Nothing esoteric in that. But how does it fix the bird flu problem?

My note-taking was rushed, and my handwriting is illegible at best. My notes have Trump saying "by getting rid of fraud in social security we will cut grocery prices." I gagged on that line when he said it. Prices and costs are related. If not, then prices and profits are related. It shouldn't be hard to figure out the problem even if it is something other than bird flu.

And then, Trump promised to balance the federal budget. Note that he did not promise to avoid creating a Greater Depression in the process. That's my concern, the worst-case bad ending. And Trump is already messing with the GDP data, so you know he is worried also about the worst case. Trump doesn't want to be Herbert Hoover, and all that.

At one point Trump said he wants to make interest payments on car loans tax-deductible, "but only if the cars are made in America." That was interesting. However, by making loans less costly, deductible interest encourages people to go deeper into debt. And the problem with our economy, the biggest of all the problems with our economy, is that the private sector is already so deep in debt that we can no longer borrow enough to offset the cost of debt service and have enough left to boost the economy by spending it. This is the problem that needs to be solved. Making interest on car loans tax-deductible will not solve the problem. It will make the problem worse.

To be clear, federal debt is not the problem. It is a problem, yes; but the federal debt is not the cause of the private-sector problem. Federal debt, really, is a measure of the size of the economic problem of the private sector. Excessive private-sector debt is the cause of the private-sector problem. If we rely less on borrowed money and more on income -- if policy creates this change -- then a reduction of business interest cost can offset an increase in labor cost, with something left over to boost business profits.

I may regret saying this, but I think Trump is modeling himself to be our Caesar, ending the Republic and creating an Empire. He would be far better off, as would we all, if he modeled himself after Solon, the forgiver of debt.

In the Tuesday night speech, Trump mentioned a lot of new investment. In my notes I have him saying "$1.7 trillion of new investment in just the last few weeks." A sentence or two later, that new investment spending turned into announcements of plans for investment "in the US instead of in China". Not sure I got that last quote right, but I got the gist of it. 

If Trump wasn't lying about that investment, good. I could probably set aside my concern about a Greater Depression, and I would be happy to do that. But he lies all the time, so I can't trust him on the big new dollars of investment. I will look into it, after I finish these remarks. I wish I could do better. But he's the one that lies all the time, so it's on him.

In my notes, just before my note about the new investment, Trump called his first term the "most successful economy in the history of our country." Bullshit.

 

The next thing in my notes, after the grandiosity of taking credit for the most successful economy in the history of our country, is Trump saying

reciprocal tariffs begin April second.

Whatever tariffs other nations set on our products, we'll set matching tariffs on their products. That's kinda cute, in a way. More complicated than it sounds, I think, because we don't buy the same products from them that they buy from us. But it is cute. And it might be a way for Trump to negotiate the tariff rates to lower and lower levels over time. I think that might be what he has in mind.

Well, the speech went on for a while longer. He started introducing people from the audience and I started losing interest. But I waited it out to the end. And while I did, I wrote this in my notes:

Trump's plan for the economy seems to be tariffs, tariffs, and tariffs.

I didn't hear him say anything about finishing his first-term project, the wall between the US and Mexico to keep foreigners out. His second-term focus is evidently on another wall, a different wall, a wall of tariffs intended to keep foreign output out. 

I oppose globalization, but I don't think tariffs are a good idea. I think the good idea would be to figure out why US economic growth is in long term decline, and solve that problem, the problem of excessive private-sector debt.