We all know this chart:
But recently I was doing some research on the inflation/deflation debate. Many of you are probably familiar with Mish (Mike Shedlock for those playing at home) and his view that the US is firmly entrenched in deflation.
One of the cornerstones of his argument is that the inflationist argument only pays attention to aggregate credit. But "money" when thought of as a "financial commodity" has another component. If you imagine Australia or America to be a corporation and dollars our listed stock, the above chart is essentially "shares outstanding" not the inverse of share price.
So what does Mish propose as a better metric, superior to the above chart? He watched the "velocity of credit", a fancy way of saying % change relative to last reporting period (did lending go up or down and by how much). In the US this is actually published by one of the Fed branches on a semi frequent basis. Here is an example from the US:
After seeing that chart, I was very curious to see what velocity for Australia was. I ran it on a monthly basis with no smoothing to get a higher resolution and the picture comes across loud and clear:
During recessions, the velocity of credit decreases rapidly. Things tend to get very bad if the velocity turns negative. We can also note that during normal economic periods the movement of credit appears to oscillate in a healthy cyclical fashion. The differing magnitude of the two clearly visible cycles in the chart are probably attributable to a greater standing by Australia in financial markets globally (thus, tighter cycle).
The chart presented goes until the last reported period Dec 2010 and you can see a couple of dips there that seem to line up quite nicely with hindsight our own countries recessions. I wish the data presented by RBA went back further. Curious minds can find it all on their website.
I decided to post the chart here for the benefit of anyone similarly curious on such matters. I am also playing around with an idea of multiplying the first chart by AUDUSD (EDIT: or perhaps AUDGOLD), to see what it spits out so expressions of interest in the idea appreciated.
But recently I was doing some research on the inflation/deflation debate. Many of you are probably familiar with Mish (Mike Shedlock for those playing at home) and his view that the US is firmly entrenched in deflation.
One of the cornerstones of his argument is that the inflationist argument only pays attention to aggregate credit. But "money" when thought of as a "financial commodity" has another component. If you imagine Australia or America to be a corporation and dollars our listed stock, the above chart is essentially "shares outstanding" not the inverse of share price.
So what does Mish propose as a better metric, superior to the above chart? He watched the "velocity of credit", a fancy way of saying % change relative to last reporting period (did lending go up or down and by how much). In the US this is actually published by one of the Fed branches on a semi frequent basis. Here is an example from the US:
After seeing that chart, I was very curious to see what velocity for Australia was. I ran it on a monthly basis with no smoothing to get a higher resolution and the picture comes across loud and clear:
During recessions, the velocity of credit decreases rapidly. Things tend to get very bad if the velocity turns negative. We can also note that during normal economic periods the movement of credit appears to oscillate in a healthy cyclical fashion. The differing magnitude of the two clearly visible cycles in the chart are probably attributable to a greater standing by Australia in financial markets globally (thus, tighter cycle).
The chart presented goes until the last reported period Dec 2010 and you can see a couple of dips there that seem to line up quite nicely with hindsight our own countries recessions. I wish the data presented by RBA went back further. Curious minds can find it all on their website.
I decided to post the chart here for the benefit of anyone similarly curious on such matters. I am also playing around with an idea of multiplying the first chart by AUDUSD (EDIT: or perhaps AUDGOLD), to see what it spits out so expressions of interest in the idea appreciated.
