I’ve seen the series data for the St. Louis Adjusted Monetary Base posted by jeffmiller and hilker. The graph is scary. This post isn’t to disagree (it is scary), but it is to point out that it probably isn’t the best way to view the data. Here’s the graph in question (well, my re-creation):

One problem with the graph is that even large percentage changes in the 30s are impossible to see. Here’s the same data series graphed as percent change year-over-year.

Now, it is still clear that this printing is unprecedented, but we can see that there have been other periods of substantial printing as well. In fact, we can see that there was a substantial printing effort in the 30s, which was a drawn out deflationary period.

Another point worth considering is whether or not the Adjusted Monetary Base is the best data to be looking at. Take a look at the Currency in Circulation:

This represents the amount of money in the hands of consumers and businesses, but completely ignores money stored in financial institutions (including savings and checking accounts). Why might we like to look at this data? For one, the Fed looks at this data (although, putting our faith in the Fed is dangerous). More importantly, it has a practical value as well. When we measure the economy with GDP, we can formulate it as the velocity of money times the money in circulation. The velocity of money is how quickly the baker spends his money when you buy bread from him. This graph is the other component. So it’s actually useful. But, the graph is a lot less scary. And again, we can look at it on a year over year percentage change:

Suddenly, this doesn’t look quite as bad or unusual.

Now, I want to list some caveats.

1. GDP isn’t necessarily the best way to measure the health of the economy (and, in fact, I’d argue that no singular metric can be). I spent the weekend researching this, and will try to find the time this week to post on that. That sort of negates my argument that we should look at Currency in Circulation.

2. Inflation is a monetary phenomenon, and base money is very important. It’s just that it must be looked at with the willingness of consumers and businesses to borrow (and banks’ willingness to lend). If credit, marked to market, is falling, then money plus credit can be undergoing a net contraction, and we’re in a period of deflation. I’ve not seen a good data series that both incorporates credit and has it marked to market (right now, everyone is afraid to mark anything to market). Credit is roughly 10 times as important as the base money supply, because of fractional reserve lending. So, when you look at the scary graph, you can think of it as a graph of the risk of inflation. The potential is there (in spades). At some point, if borrowing picks up, and leverage is employed in multi-billion dollar transactions, then things could get grim. If debt increases slowly, then there’s a chance that the Fed can limit the damage by increasing rates and increasing reserve requirements. Of course, I have very little faith in the Fed doing the right thing at the right time, but I want to list it as a possibility.

3. If anything needs to be listed in a list of caveats, it’s the fact that we need to use the word “unprecedented” so frequently. Seriously, things are scary, and the reactions are just as scary. We know that without government action that things will be bad. Somehow, that caused everyone to hit the panic button. The problem is that we don’t know which government actions will make things better, and which actions will make things worse. Do we have any reason to assume that unprecedented tinkering with the money supply will make things better? We’re giving ourselves a lot of rope with which to hang ourselves later.