Wednesday, February 10, 2021

Wow. Just Wow.

Writing a new post. Going thru old stuff on my old blog. I came across Creatures of habit from 9 October 2016:

At my old job, before I retired, we did a lot out of habit. Whenever we got a new project to work on, the first question was always "What similar project did we do before?" We relied on previous projects to answer "How did we solve that problem?" questions for new projects.


Sometimes I wonder if the Federal Reserve makes decisions out of habit. When a problem arises do they ask "How did we solve that problem before"? It sure looks that way: Need to promote growth? Lower interest rates. Need to fight inflation? Raise interest rates. Need to promote growth? What'd we do last time? Lower interest rates. Already at the zero bound? Lower rates anyway ...

It also shows this graph, with my markups:

Graph #1: Growth Rate of the Monetary Base

The graph shows the growth of base money, the thing that the Fed was created to manage. It sure looks to me like the policymakers at the Fed are creatures of habit.

I like that old graph. But not enough to interrupt myself to write about it. I kept going thru my old stuff, looking for what I was looking for, some statement from Bernanke on policy. And that's when I came across AMBSL goes back to 1918 from 11 October 2011. 

AMBSL is one of FRED's measures of base money, the same shown in Graph #1 above. In the 2011 post I show a couple "base money" graphs, and describe the log view:

Slow growth until 1930. Rapid growth from 1930 to 1945. Slow from 1945 to 1962. Moderate growth from 1962 to 2007 (with a little droop at the end of it). And then, more-than-rapid growth after 2007, the Bernanke fix.

So I'm thinkin... Suppose the kink at 2007 is like the kink at 1930, the start of a Depression. And suppose the 1930-1945 money growth was the solution to the Depression. The question, then, is: How much more will the Bernanke fix have to increase Base Money, if a proportional increase is required now?

In other words: Assuming we had the same problem after 2007 that we had after 1929, and assuming we do the same thing, where will the numbers go? (Note that this question can be seen as a "creatures of habit" question. It wasn't. I had nothing else to go on except comparison to what happened before, so that's what I went with.)

The 2011 post continues:

We know from experience that there was a large increase in the quantity of base money and we (Ben Bernanke and I) think we know that the increase of base money was what fixed the economy and ended the Depression. So Ben is orchestrating a comparable increase of base money now. I want to know what will happen to the money supply if it increases by the same multiple now as it did during the Great Depression.

You with me?

In 1930, the level of base money was $5.879 billion. In 1945, it was $31.685 billion. That's more than a five-fold increase. The multiple is 5.39.

So. Suppose we take our base money from 2007 and multiply it by 5.39. That will give us an increase comparable to the increase we think fixed the Great Depression.

In 2007, FRED has base money at $850.529 billion. That's before the quantitative easings began. Now, take that number and multiply by 5.39 to see how much base money we might need to end this Depression: $4584.35 billion.

Obviously, I had to stop what I was doing and quote that last number, because it is pretty damn close to how things turned out. The graph at FRED shows AMBSL stopped climbing and leveled off at the 4000 billion level, or 4.7 times the 2007 number and only a little shy of my guess.

In October 2011 when I wrote the post, actually from mid-2011 to the end of 2012, AMBSL was hovering around the 2600 level.

Total assets held by Federal Reserve banks, a related number, leveled off at 4500 billion in 2015. 

These numbers are close enough to my uneducated guess that I have to wonder if policymakers have a plan, or if they have nothing else to go on except comparison to what happened before, so that's what they go with. Like creatures of habit.

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