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What goes around may be wrong: ‘three charts to email to your right-wing brother-in-law’

‘three charts to email to your right-wing brother-in-law’ « The Obama Diary (Photos, Videos, Words).
There has been a bunch of reposts of three charts showing the relative deficits and spending increases from Both President Obama and President Bush. While this gives great fodder for the let’s bash each other and show just how bad the other guys were crowd, the charts themselves are a waste of ink and lung power to debate.
While the charts, are interesting, and like most statistics represent the adage that,

“there are lies, damn lies and statistics”

popularized by Mark Twain and originally a quote from Benjamin Disraeli; they are irrelevant to the bigger problem. While we can argue about one president solving the budget problem and the other one making it worse, all were relying on the underlying bad economic engine to make it all right.
Those who have read my posts on the subject, know I believe there is a deeper problem. The massive increase in currency since 1972, which in my opinion has given rise to a national crisis of false and inflated values and costs for subsidized programs, health care costs and housing I believe, is the real problem. Perhaps, it is our own underlying valuation of our economy and our assets that are the problem?

M3 With 1972 Trend
m3 with 1972 gold standard trendline

Since we all seem to like charts, I will pose my own here. I am not posting this to assign blame, we have way too much of that going around. Nor, am I saying this is an infallible calculation – as I myself am not sure. I will leave it to others to wrangle with that debate. I am posting it to have you see what I saw as I was studying the rising costs of health care and started looking at other segments of the economy. I have a number of charts that will appear in my book. In the meantime here is the one that started me thinking.
This chart is relatively simple. It is the M3 (the total money supply calculated by the Fed) from 1900 up to 2010. From 2006 on the Federal Reserve decided to no longer report the M3, the M3 then had to be estimated.  There are a number of different estimates, their only variance is the shape of the curve after 2007. And they don’t make much difference in the current problems.
There was about $500 billion in currency in 1972. Today estimates put that number at somewhere between $10 trillion and $15 trillion. What doesn’t change much regardless of the trend, forecast or growth calculation you apply is what the projected economy would be if we had remained on the trend-line as it was prior to 1972. This line will project about $3 trillion on the baseline economy for today – assuming we had continued on the Gold Standard. If you factor in the gains we would still  likely have had in the technical sectors as a result of the investment in NASA, the curve shows additional growth to somewhere between $5 and 6 trillion.   This is still a far cry from the unbelievable 20 to 30 times we have multiplied the economy during this period.  Remember,  “lies, damn lies and statistics!”  I hope you treat this projection with the same scrutiny as all the others!
I am simply suggesting that we need to look deeply at this issue and diligently consider it’s effects if this supposition is even remotely correct!

11 Responses

  1. From what I can see, suddenly in 1993 the line goes vertical. Slightly rising in the early 70’s. I’m not sure if stastistics actually point to the reason or reasons. I personally don’t believe it is a monetery problem per se but instead a system and method problem wrapped up in basic concepts in the source of the revenue. Just my opinion.

    1. It is, in fact, the currency that is the problem. When we create products or work – new money is not created – the existing money is exchanged and theoretically the dollar’s value increases. Prior to 1972, it was very hard to increase the amount of money in circulation because each dollar had to have a corresponding value in trust of gold. Gold was a very scarce commodity. In part of our history it was not just gold that was the standard – the standard included other precious metals. Gold as a standard was forced on os and other nations prior to WWII as a method of supressing economies. The countries banks who held the vast majority of the gold reserves called the shots. It was, in effect, a form of economoic warfare.
      After the elimination of the gold standard, and a few discrete moves to cover the increases, we began to drive up the number of dollars in circulation.
      New money is created by the banks when you or the federal govt. borrows money. After 1972, in order to cover the new money being created; first we had to had the population stop saving and start spending and borrowing against credit cards. Debt is the prime driver of the franctional reserve lending system. Increasing the deblt increased the amount that the banks could lend at roughly a ten to one ratio – ten dollars more could be lent for every dollar that was borrowed. The best borrowing is from mortgages. So next the Federal Reserve and the banks had to get more mortgages on the books.
      When the bais creadit growth from regular borrowing was not enough to continue the justify the increases in currency needed to support the spending, we had to stimulate home ownership. This is the period when you see the hockey stick really turn up. During the Clinton administration, the bulk of the debt issues were covered by the rapid increase in the amount of currency. In order to do this with good fiscal cover we had to leverage the mortgages that were housed in the S&Ls. The process of getting rid of the savings and loans began with the change to the “Mark to Market Rule”(FAS 115 issued May, 1993). This change cripled the S&Ls liquidity so upon its passage many of the S&L’s becaome almost immediatly out of covenant. S&Ls were not banks and could not do fractional reserve lending so the assets were relativly idyl at just one to one.
      S&L’s had to rely on the future value of the assets held as leverage fto create new loans. When the Mark to Market Rule changed that number to reflect the asset value on the books to that of the existing point in time. They S&Ls all had more money lent than they had assets to cover. The S&L Crisis was born of this rule change. If the banks could get these mortgages then they could lend nine more dollars against them and the economy would really shoot up. Interestingly enough, this is exactly what happened. The rest is history!
      This is the big problem today in my opinion.

    2. Two other points. 72 we got off the gold standard. In the 80s and 90s we eliminated the savings and loans driving all mortgages to the banks and under the Fed Reserve system. And we eliminated the Glass-Steagle Act (Gramm–Leach–Bliley Act of 1999) allowing banks to gain control of investment banks. This is when derivatives came into being and the curve really curved.
      It’s not a Democrat or Republican thing, nor is it a liberal or conservative thing – it is a Ferderal Reserve – banking – thing! The Federal Reserve (a private institution operated by banks) advise the government. The government has listened for the past half century. One of the last presidents that was very sceptical of the Fed was Franklin D. Roosevelt the person that stimulated the creation of S&Ls to help keep them in check. Even FDR lost to the Federal Reserve when he needed money to finance the depression and the wars. While I think there are some in governmnet who knew what they were doing – most I think knew nothing. They just swallowed the kool-aid and did what they thought was correct according to the wisdom of the “smarter” people. And you know who the smarter people were now don’t you?
      If you teach everyone the same thing in school according to the same prescription, they will all think the same way. I can’t expect Bush, or Obama to stand against all of their monetary policy gurus. I do think that Clinton though had a clue. Again this is not stated to say he was wrong or complicit in the creation of this problem. I think overall he was simply trying to find a way to solve for the problem.
      Who knew? Who knows! We can all suspect, but this is not fixing the issues.

      1. Well said but may I add, that Andrew Jackson and Abraham were skeptical of “Those that controlled the money” Lincoln was assassinated, two attempts were made on Jackson. Let’s not forget JFK, he gave a speech warning of the NWO and was against the fed and was assassinated. Then the attempt on Reagan’s life by John Hinkley Jr. Reagan was against the Fed, Hinkley JR. was set up by his dad who was a good friend of Bush 41 former director of the FBi and CIA, and believed he should be president instead of Reagan having a second term. In Reagan’s own words (paraphrasing) I never thought I was hurt, or shot Iwas
        slammed in the back seat of the car, an agent on top of me, then a horrible pain, apparently shot under the arm the bullet lodged in his lung. Coincidence? JC

  2. One large problem is the fact that the consumer does not for the most part pay directly for the service. The consumer from which the money actually originates is often if not mostly blind to the cost before hand. Sounds too simple but few other industries operate in such a manner.

  3. the consumer is watching america’s got talent. tom’s right about the fed. of course it’s nether federal nor is there a reserve. the republicans are more likely to be a bankers friend, but obama’s treasury secretary is streight out of goldman-sacs. so yes they are all drinking the kool-aide. any addiction is a painful recovery, and the kids never learn.

    1. See the earlier Replys. I posted them from my iPhone and I should never do that. My spelling sux and is never improved by the iPhone as it replaces my words with correctly spelled – incorrect words…
      Also I modified some of the sections hoping to make the points a bit clearer.

  4. It is so very wrong for government leaders take money from its citizens, whether rich or poor, to fund whatever program they wish.,or to fund another’s economic standard.
    High taxes is one of the reasons our forefathers left their homelands to come here and establish America which is supposed to be a free country but whose freedom is disappearing bit by bit. It’s being taken from one and given to another. I believe if this is what we want that this should start it in the schools, beginning with the first grade. Individuals should get into the habit early.
    If one student makes and A and the other makes a C – the A student should drop down one point and give it to the C student. that would give them both a B.
    That’s how our nation is run now – this is the change Obama promised, however, it really didn’t start with him. It began with FDR

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