15 Dec 2008

Oops, Base Growth Was Probably Higher in 2001 Than in 2002

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In my latest mises.org piece, I argue that the monetary base grew more rapidly in 2002 than in 2001, whereas Henderson and Hummel give the opposite impression.

After further review, I think they are probably right.

The problem is that the base whipsawed around due to Y2K and the 9/11 attacks. Look at the levels:

Now the Fed gives us the data by month. So when trying to figure out which year had the highest rate of growth, I first went through and took the annual average for every year. In other words, I got “the base level” for 2000 by averaging the Jan 00 through Dec 00 monthly base figures, and I got “the base level” for 2001 by averaging the monthly figures of Jan 01 through Dec 01. Then, I computed “2001 growth rate” by seeing how much bigger the 2001 average was, compared to the 2000 average.

Well, I’m sure Free Advice readers can see the pitfall in my approach. (Too bad I didn’t catch it until now.) If the base grew very rapidly at the end of 2001 (which it did because of September 11th), then my technique could allow some of that growth to spill over into the official growth rate for 2002. After all, even if the monetary base had stayed flat from December 01 through December 02, the average level in 2002 would be higher than the average level in 2001, and hence my method would (erroneously) indicate growth in 02.

So using my method, we find that base growth in 2001 was 5.6%, while growth in 2002 was 8.7%. However, if we do the year/year rate in December (which still isn’t perfect, but it’s a lot better than my method), then we get the Dec 01/Dec 00 growth rate at 8.6%, while the Dec 02/Dec 01 growth rate is a smaller 7.3%.

What’s ironic is that this correction both helps and hurts my case. On the one hand, it makes more sense that the base expanded more rapidly in 2001, when Greenspan did most of the rate cutting–the fed funds rate fell from 6.5% down to 1.75% in 2001 alone. On the other hand, the correction places that much more time between the ludicrous phase of the housing boom, and the “reckless” injection of base.

One last thing: What threw me with Henderson and Hummel’s claim was that they referred to the “year to year annual growth rate” in the base (my emphasis). So I thought they were referring to taking some kind of annual average, since otherwise the word “annual” is redundant. I.e., I think what they are referring to is that the Sept 01 / Sept 00 growth rate is 10.x%. But again, adding the word “annual” is redundant; I would normally just say that was the yr/yr growth rate in Sept 01, or “in 01.”

Notwithstanding that, it’s better for them to be redundant and right, rather than me being precise but wrong. To repeat, I correctly described how I got my numbers, but I said base growth in 2002 was higher than in 2001, and under any reasonable definition this claim is wrong. Oops, sorry guys.*

* Greenspan is still a fink.

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