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What happens if consumer debt > M1 money supply?
- Thread starter dividend
- Start date
Quote from dividend:
Hello. What happens when consumer credit outstanding is larger than M1 money supply? When I look at the Fed data it shows that "consumer credit outstanding is about 2.5 trillion but M1 is only about 1.4 trillion. (I hope I read these figures correctly.)
This is sort of an apples to oranges comparison and not necessarily useful in regards of what you are attempting to compute which is risk of ruin due to default (inability to pay of debt) at the national level.
One of the central problems is there are many other significant assets and liabilities and you are just analyzing two of them.
Here's an analogy at an individual level.
Let's say Person A has the following balance sheet:
$100 in a bank account
$25 in credit card debt.
Person B has the following balance sheet:
$100 in a bank account
$150 in credit card debt.
$50000 in a stock mutual fund
Even though Person B has a worse liquidity (aka Quick Ratio and Current Ratio which measures ability to meet short term cash flow needs), it is still sufficient. Person B has a much better balance sheet overall, despite a worse ratio of short term debt to short term assets.
I'm not quite following, but I would add another extremely important point to note that I left out for simplicity in my previous post.
If outstanding short term liabilities are $2.5 trillion, you only need to pay the interest and part of the principal payment for it to remain in good status on the loan, eg $400 billion or so.
You don't need to pay the entire outstanding principal -- that is the whole point of debt.
Thus having over $1 trillion this year in cash, with only $400 billion due, is more than sufficient.
If outstanding short term liabilities are $2.5 trillion, you only need to pay the interest and part of the principal payment for it to remain in good status on the loan, eg $400 billion or so.
You don't need to pay the entire outstanding principal -- that is the whole point of debt.
Thus having over $1 trillion this year in cash, with only $400 billion due, is more than sufficient.
I agree overall in terms of money supply and inflation. While there are various factors, money supply is huge.
In fact I will say I disagree with a majority of economists that the Great Depression was primarily a monetary failure.
I profoundly disagree; I think the Fed could of reduced money supply even further, say up to 4% a year further deflation (!!!!) and had an expanding economy -- at least within 3 years after the stock bubble bursting -- had macroeconomic policy been reasonable.
The reason I say this is there have been many economies, China is almost an example, where inflation has been fairly tame and productivity / real wages have skyrocketed. And even better example is most of the US history (wars excluded) 1776-1900. The US had virtually no inflation yet skyrocketing economic growth.
I disagree that you need money supply growth to encourage and increase economic activity, and I disagree that slow reductions in money supply adversely affect economies (under most conditions). My personal thoughts are that as long as true CPI inflation is within 3% or so either way, and isn't shifting more than about 4% +/- a year, it really doesn't matter (well ideally you'd have 0% true CPI long term averages but that is a minor positive).
I realize I'm not supporting this with much evidence, but I will just say you will occasionally see economies with deflation and very high sustained economic growth and this should be explained. My explanation is as long as inflation is reasonably well contained even slightly negative the answer is that it matter far less than people think.
In some very rare cases (perhaps Japan) inflationary policies in the medium term may be useful but even here you have to be very careful and more data points are needed I believe (and even the Japan case is not a positive one for this theory per se).
In fact I will say I disagree with a majority of economists that the Great Depression was primarily a monetary failure.
I profoundly disagree; I think the Fed could of reduced money supply even further, say up to 4% a year further deflation (!!!!) and had an expanding economy -- at least within 3 years after the stock bubble bursting -- had macroeconomic policy been reasonable.
The reason I say this is there have been many economies, China is almost an example, where inflation has been fairly tame and productivity / real wages have skyrocketed. And even better example is most of the US history (wars excluded) 1776-1900. The US had virtually no inflation yet skyrocketing economic growth.
I disagree that you need money supply growth to encourage and increase economic activity, and I disagree that slow reductions in money supply adversely affect economies (under most conditions). My personal thoughts are that as long as true CPI inflation is within 3% or so either way, and isn't shifting more than about 4% +/- a year, it really doesn't matter (well ideally you'd have 0% true CPI long term averages but that is a minor positive).
I realize I'm not supporting this with much evidence, but I will just say you will occasionally see economies with deflation and very high sustained economic growth and this should be explained. My explanation is as long as inflation is reasonably well contained even slightly negative the answer is that it matter far less than people think.
In some very rare cases (perhaps Japan) inflationary policies in the medium term may be useful but even here you have to be very careful and more data points are needed I believe (and even the Japan case is not a positive one for this theory per se).