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.