Milton Friedman didn't like too much money. But he also didn't like not enough money. In chapter 2 of Money Mischief he wrote:
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.
An insufficient quantity of money can cause a depression, Friedman says. If the "monetary base" grows too slowly it can cause a major
downturn. In fact, that happened twice in the past hundred
years:
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Graph #1: Growth Rate of the Monetary Base
The downtrend before the Great Recession runs from 2001 to 2008
This graph is from 2014, when each series at FRED could have its own start- and end-date.
This graph replaces mine from 10 Feb 2021.
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At Investor's Business Daily (27 Nov 2024) we read:
When Tesla (TSLA) CEO Elon Musk bounded onto the stage as President-elect Donald Trump's sidekick in the campaign's final stretch, the MAGA movement's anti-Washington mission suddenly broadened from taking down the "deep state" to slaying big government.
Putting up a target of at least $2 trillion in annual government spending cuts — one-third of federal outlays, excluding interest on the debt — Musk said living within our means would require that everyone "take a haircut." Accepting "temporary hardship," he said, would ensure long-term prosperity.
The carrot and the stick. Prosperity is the carrot, and a tasty one for voters whose primary concern is the economy. But a focus on federal debt will not solve the problem.
In the past month I have seen news articles wondering whether Musk meant a two trillion dollar cut in one year or ten. The consensus, among those articles, seems to be that two trillion over ten years is quite easily doable, and two trillion in one year is not doable. Now IBD is saying "at least $2 trillion in annual government spending cuts". That sounds like two trillion in one year to me. Apparently that's the plan, but I'm still not sure what Musk has in mind.
The Hill of 3 November 2024 reported:
“How much do you think we can rip out of this wasted, $6.5 trillion Harris-Biden budget?” Howard Lutnick, a Wall Street CEO and Trump’s transition team co-chair, asked Musk at the former president’s recent rally held at Madison Square Garden in New York City.
Without offering specifics, Musk said in response that he thinks “at least $2 trillion” in a brief moment that has since gained widespread attention online and drawn mixed reactions from budget world.
I got the impression from that, and from other reading, that Musk might not have been expecting the question and that the "$2 trillion" number was off the top of his head.
I think Musk painted himself into a corner with that number. Since March of 2024, President Biden has been selling a plan to cut the budget by $3 trillion over 10 years. If Musk says it will take 10 years to cut the $2 trillion that he's talking about, then his plan is a 98-pound weakling compared to Biden's. Musk can't go with $2 trillion over 10 years. He has to say he can do it in one year. Musk painted himself into a corner.
It's a dangerous thing, the slipshod planning of trillion-dollar budget cuts. Does Musk's ego prevent him from admitting that his $2 trillion estimate was premature? Sure, there was a lot of excitement at that Madison Square Garden rally. But I have to ask: Would it be better for Musk to go ahead and cut $2 Trillion in just one year because that's what he said amid all the excitement? Or would a cautious and carefully worked plan that avoids disastrous unintended consequences be the better choice?
I ask, because 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. And because cutting $2 trillion from the federal budget in one year might just create the monetary crisis that brings a major depression upon us.
Given the supermassive federal debt that we have already, using Keynesian deficit-spending tactics to extricate ourselves from that next great depression will be neither quick nor tidy.
Rolling Stone, 13 December 2023 has said:
During his third trip to Iowa this month, Donald Trump warned that if he was not elected president in 2024, the U.S. would see its economy plunge into a “1929”-era depression. His words arrived as the Dow Jones Industrial Average hit a record high Wednesday.
CNN, 9 January 2024 reported Trump saying "I don’t want to be Herbert Hoover. The one president – I just don’t want to be Herbert Hoover". CNN followed that up by reminding the reader of the history that had Trump so worried:
"The
US stock market crashed during former President Herbert Hoover’s first
year in office in 1929, which signaled the beginning of the Great
Depression."
Hey, I took Trump's concerns as electioneering when I first read them. But
maybe Donald Trump is as concerned about the fragility of the US economy
as I am, and more explicit about it. And I refuse to be the guy who, by dismissing Trump's economic concerns as political showmanship, brings on that next great depression.
But I do love irony. Rolling Stone dismissed Trump's worries about another Great Depression by noting that the Dow Jones Industrial Average recently hit a record high. That remark remind me of an exceptionally good economist named Irving Fisher, whose misfortune it was to say the stock market had reached "what looks like a permanently high plateau" and to say it "just nine days before the Wall Street Crash of 1929".
Do not put a lick of faith in Rolling Stone's dismissal of Trump's concern.
I should say at this point that the first thing I learned about Irving Fisher was his "permanently high plateau" remark, and that I spent most of my life not reading Fisher's work because of it. I don't want to do that to you. I recommend that you read the first three parag (or more) of Wikipedia's "Irving Fisher" article, and the first two parag -- plus Footnote 1 -- at Federal Reserve History's "Stock Market Crash of 1929".
One more brief but necessary tangent must be considered at this point. Musk wants to cut the federal budget. He says it will bring prosperity. That's not the way the economy works.
During the prosperity of the "Roaring Twenties," private sector debt grew faster than the federal debt. The prosperity lasted until excessive private sector debt choked it off. During the Great Depression and the Second World War, the federal debt grew faster than private-sector debt until private-sector debt reached a relative low that was low enough for prosperity to resume.
During the prosperity of the "Golden Age of Capitalism," private sector debt grew faster than the federal debt. And the prosperity lasted until excessive private sector debt choked it off. During the low productivity years of 1974-1994, the federal debt grew faster than private-sector debt until private-sector debt reached a relative low that was low enough for prosperity to resume.
During the prosperity of the "new economy" -- the latter half of the 1990s -- private sector debt grew faster than the federal debt. The
prosperity lasted until excessive private sector debt choked off the housing boom. In the years since the financial crisis and the 2009 recession, federal debt has grown faster than
private-sector debt, and will continue to do so until private-sector debt reaches a relative low
that is low enough for prosperity to resume.
Given that this is how the economy works, to again achieve prosperity it is private-sector debt that must be reduced. If instead we focus on reducing the federal debt, we push prosperity further out into the future. If that troubles you, I'm sorry.
On February 18, 1981, newly elected President Ronald Reagan said
It is our basic belief that only by reducing the growth of government can we increase the growth of the economy
Since that time we have tried and failed to reduce the growth of government enough to bring economic growth up to a satisfactory level. We have tried because we think, as Reagan thought, that excessive federal debt is the problem that hinders growth. We have failed because it is excessive private-sector debt that hinders economic growth.
On the graph below, the blue line shows our accumulating federal debt since 1970. The red line is an exponential, constant-growth-rate trend line based on the blue-line data for the years 2001 to 2023:
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Graph #2: Federal Debt 1970-2023 and the 2001-2023 Exponential Trend
From mine of 7 March 2024
The "below trend" data before the Great Recession runs from 2004 (or before) to 2008-09. |
Federal debt in the 1970s ran close to the trend line even though the trend line is based on data for the year 2001 and later. Running close in the 1970s suggests that the trend line is good, and not far from the actual trend of the federal debt.
In the 1980s and early 1990s, federal debt rose above the trend. In the latter 1990s it returned to the trend line, and in the early 2000s went slightly below trend.
Around 2005, the federal debt began to go increasingly below the trend line, until mid-2008. The increase after that date shows the federal spending response to the financial crisis and great recession created by the tight money.
Again: Between 2000 and 2010, federal spending cuts helped bring the federal debt down to trend, then below trend, and then further below trend. And then we had the financial crisis. I cannot yet prove to my own satisfaction that federal debt going below trend was the sole cause of the financial crisis and great recession. But there is no doubt that it was at least a contributing cause of those troubles. And Friedman did say "necessary and sufficient."
Graph #1 shows "too little money" with the monetary base as the problem. Graph #2 shows "too little money" arising from too little federal deficit spending. You gotta love the irony.
Neither graph shows private-sector debt.
If we continue to choose not to reduce private sector debt, then to achieve prosperity we will have to have federal debt increase more rapidly than private-sector debt. The more rapidly federal debt gains on private-sector debt, the less time it will take to achieve prosperity. That is how the economy works, despite what people say.
But such prosperity would come at a very high level of private-sector debt. The prosperity would not last long: The increases in private-sector debt that accompany economic growth will create financial costs that drain vigor and life from prosperity. The better solution is to focus our attention on private-sector debt and put all our efforts into reducing it.
Existing policy encourages us to accumulate debt. Instead, we need policy to help us accelerate the repayment of our debt.
To achieve prosperity we must reduce private debt relative to federal debt. To do this we could reduce private debt or increase federal debt, or both. But debt is costly, and the best option is always to reduce cost by reducing debt.
Our best option, therefore, is to reduce private-sector debt as rapidly as we can. That is what you need to know. When private-sector debt falls enough, prosperity will resume. Economic growth will be vigorous as in the latter 1990s, or better and longer-lasting if private debt starts from a lower level.
As private-sector debt falls and economic growth improves, there will be less need for federal programs that help people cope with a troubled economy. This means that a natural reduction in federal spending, rather than a forced reduction, is in the cards.
The graph below shows transaction money -- the money we spend -- relative to nominal GDP. Once again, the graph shows "too little money" in the years leading up to the financial crisis and great recession:
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Graph #3: The Quantity of Transaction money per Dollar's Worth of Output
The low before the Great Recession runs from 2004 to 2009.
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Fiscal and monetary policy cooperated, creating a substantial decline in the
quantity of transaction money, from the record low of 2000-01 to an even lower level
at which our economy could no longer function.
"... substantial decline in the quantity of money is a necessary and
sufficient condition for a major depression."
The evidence is overwhelming.
Please do tell President-Elect Trump and Elon Musk, and anyone who will listen, the things I have shown you today.
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