Thursday, 30 April 2015

The Road to U.S. Poverty: Don't Get Blinded by Monetary Expansion

More money, paper and electronic, available in an economy does not make the people living there better off. If more money actually could achieve this feat, politicians would long ago have ordered the banks and the central banks to transfer more money to all to please the electorate. 

What an increased quantity of money does do however, other than ensuring that some (the early receivers) gain at the expense of others (the late receivers, those on fixed incomes etc) is pushing all sorts of economic aggregates and price indices higher than they would be absent such monetary inflation. 

So what happens if we strip out the money supply growth from GDP?* Here are the reported nominal GDP numbers,

...and here are the same numbers adjusted for the money supply growth...

...which shows the U.S. economy is heading in the wrong direction. Looking at the year on year (y/y) percentage change, the chart below shows output as measured by GDP has contracted nearly every quarter on a y/y basis since Q3 2011. Note also the 2008/09 contraction which bottomed at a 13.5% y/y decline in Q2 2009 (nominal GDP contracted only 3.2% in that quarter: which of the two do you think better reflects reality?). 

Smoothing out the the annualised change to a ten year basis gives us the following result:

But wait. There are today 25 million more Americans than ten years ago. Turning the above chart to a per capita basis tells us...

...that the U.S. economy is heading rapidly in the wrong direction and has done so since at least the mid 1990s. 

This adverse economic development in the U.S. might also shed some light on the ever decreasing purchasing power of personal income which certainly can (will?) lead to the average income earner struggling to make ends meet. 

Just as both Nominal and Real GDP numbers are not accurate measures of economic growth (due to insufficient data, as it only measures final output etc), or lack thereof, the adjusted numbers suffer the same weakness. In addition, not all money supply growth necessarily ends up in items forming part of GDP. However, assuming this relationship is fairly steady over time, and the fact that increases in the money supply will by itself drive GDP up and as an increase it the quantity of fiat money in an economy has nothing to do with wealth, it's perhaps not unreasonable to conclude that the adjusted measure helps explain economic developments better than both Nominal and Real GDP.