An Arthurian Plan

You might want to click this graph to see it bigger, and print out a copy to look at while you read. C'mon, do it for me. Print it out, mark it up, make it your own.

Debt Other Than Federal relative to the
Funds Readily Available for Spending

"Funds readily available for spending" is the money we ordinarily use to pay the bills. If you take money out of an IRA, for example, you have to pay a "penalty"; that makes IRA money less readily available for spending.

"Debt other than Federal" is the bills we pay.

When the line on the graph goes up, there is more debt for every dollar of money in the "readily available" money supply. In 1960 there was less than $5 of debt for every dollar of that money. Because money circulates, debt at that level was not much of a problem.

In 1960 the "velocity" of readily available money was something less than 4. On average, a dollar was spent between 3 and 4 times that year. That was not enough to pay off all of the debt we owed. (Remember, this is all of our debt except the Federal debt.) 

Fortunately, not all of that debt came due in 1960. If we paid off 10% of it, that's probably a lot. Back then, our debt wasn't so much of a problem.

The blue line declined noticeably in the early 1990s. After this decline, each readily accessible dollar had less debt to pay. It was like we had more money to spend. With our debt burden lighter, the economy picked up. The "tech bubble" gets all the credit for the good years of the latter 1990s, but it was the decline of the blue line that made those good years possible.

By the end of the year 2000, the blue line had returned to its pre-1990s trend, and that put an end to the vigor.

In 2008 the blue line peaked at almost $35 debt per dollar of readily available money. Money had to move damn fast, and we had to juggle the bills. But it was too much. The economy could no longer support the debt, and the house of cards fell. Remember John McCain putting his presidential campaign on hold and returning to Congress to deal with the crisis?

By the end of 2017, the blue line had fallen to below $15 debt per dollar of money. However, this was evidently not low enough to boost the economy as it had in the mid-90s. Instead, we had media people saying "2% growth is good growth". Those people are assholes.

At the extreme right side of the graph, during 2020, we see the blue line falling in response to covid conditions. I'm writing today to point out that this drop, from above 14 to below 11, is a bigger drop than we saw in the early 1990s. The current decline takes us from above the 1991 high to below the 1994 low.

With some luck, and perhaps if there is a "magic number" below which the debt-per-dollar ratio allows people to feel that they can again take on more debt, then when this covid thing is over we could find ourselves with a surprisingly vigorous economy.

I'm not predicting it (this time). I'm just pointing out the possibility.

Even if we do get surprising vigor, if the vigor is built upon the increase of our debt, then it won't last very long. After the second World War, the economy was vigorous for 20 years or more. But we started with debt-other-than-federal at a very low level, and when that debt got to a high level it brought the vigor to an end.

Also, this policy of reducing the debt-per-dollar ratio by just printing money makes me nervous. At some point -- like if the economy ever comes back from the dead -- inflation is gonna be a problem. The better solution is not to print more money, but to accumulate less debt. We need to pay down debt faster than we do. And we need policy to make it happen.

As you may recall from the time of the financial crisis and recession, paying down debt can bring on deflation because demand goes low. We don't want that because deflation drives incomes down and makes existing debt harder to pay. What we want is accelerated debt repayment, but not so much that it causes deflation. Plus we want to boost the quantity of money readily accessible for spending, just enough to balance out against the deflation and keep prices stable. Sort of like what happened in the 1990s... except we need to be paying down debt more quickly.

The blue line on the graph comes down when the Fed prints money. But that money doesn't necessarily end up in the hands of spenders. It didn't, for example, during the Quantitative Easing. That's why there was no massive increase in consumer prices, but a lot of "asset inflation".

The money has to actually be readily available for spending, meaning in the hands of people who are willing to do the kind of spending that happens in a normal economy. Not just "asset inflation" spending.

In the hands of consumers, the extra money would mean extra spending and greater demand. In the hands of business people it could mean an investment boom, job creation, and economic growth. Or it could mean only more asset inflation. I can't guess how it will go.

What we need, I think, is a policy more accepting of wage increases than we've had for 40 years. Bringing home more pay, workers become consumers who need to do less borrowing. Many people say we need less borrowing in the household sector and more in the business sector. This is a step in that direction. But the long-term goal is less debt everywhere.

By the way, when reducing the level of debt-other-than-federal improves economic vigor, there will be less need for some costly government social programs. And better economic growth will boost tax revenues. So it will be easier to reduce the Federal debt.

One final note: The label "funds readily available for spending" -- the description of M1 money at FRED -- no longer applies specifically to M1 money, due to a change in Federal Reserve regulations. (See mine of 12 January.) But for all the years before 2020, the above analysis is good.