Italy’s crashing money supply (Department of Yikes)

by on November 17, 2011 at 2:14 am in Uncategorized | Permalink

There is more here (though what can you really add?), hat tip goes to Nick Rizzo.

NAME REDACTED November 17, 2011 at 3:06 am

I did say money would be leaving Italy and heading to Switzerland. Do we have any swiss money stats?

Merijn Knibbe November 17, 2011 at 9:38 am

I checked the Italian Central bank stats – it’s indeed a bank run (and my bet would indeed be: Switzerland…). But that’s not the point: when Italian Banks can’t rely on the retail market anymore for their funding (people are actually depleting their deposits) they have to turn to the ECB. But people like Hans-Werner Sinn (probably the most influential economist worldwide at the moment, as he’s advising Angela Merkel) want to cut even that lifeline…. Don’t ask me to explain such ideas.

By the way dan111:- the increases of Italian M3 money were not vast in recent years – often less than half the Euro area average! And Rahul: the Italian Central Bank data contain all the information you’re asking for.

Silas Barta November 17, 2011 at 11:50 am

Yeah, if I were an Italian that heard all the talk about swapping Euros in Italian/Greek bank accounts for worthless new money (including talk from Tyler_Cowen!), I’d be emptying my account too!

It’s kind of funny to me, how people never consider what it says about their policies that they have to keep them secret in order for them to work. (“Oh no, we can’t *tell* the people we’re going to sodomize their bank accounts! Think of what they would do!”)

Andy November 17, 2011 at 4:01 am

How do you compute such a thing? I mean – what about New York crashing money supply??

Andrew' November 17, 2011 at 4:06 am

I could add axis labels. I’m pretty sure they don’t have negative money.

Rahul November 17, 2011 at 4:19 am

Isn’t it a percent change?

Andrew' November 17, 2011 at 4:38 am

Yes, I saw that a few seconds later. That’s all.

Silas Barta November 17, 2011 at 11:44 am

Yeah. So the graph basically says, “Italy’s money supply has been increasing 4-6% for past 7 years, but for half of 2011, it decreased at an annualized rate of 1-2%.”

And this is a scary development because … ?

Dominic J November 17, 2011 at 5:37 pm

Because money (growth) is closely related to nominal GDP (growth). Nominal GDP growth can be expressed as inflation + real GDP/capita growth + population growth. If Italy wasn’t growing well with 5% money growth, what makes you think taking 7% out of that is going to lead to smaller population growth and deflation? More likely, it’ll lead to falls in real GDP/capita.

wedding dresses November 17, 2011 at 4:17 am

I’m pretty sure they don’t have negative money.

Andrew' November 17, 2011 at 5:01 am
dan1111 November 17, 2011 at 5:32 am

I don’t understand why the proper response to this graph is “yikes”. It shows vast increases in the money supply in recent years, then a small decrease over the last six months.

Also, the linked article contains some surprising statements:

“In Italy, the European Central Bank has engineered the downfall of Silvio Berlusconi by playing the bond markets, switching purchases on and off to enforce compliance with its written dictates (‘La Lettera’), and ultimately allowing 10-year yields to spike to 7.45pc to drive him out.”
Really? Is this the accepted wisdom on Italy’s bond rates? I haven’t seen it reported anywhere (including in the discussion here).

“We are not that far from use of EU judicial coercion, and then EU police power, and ultimately EU ‘border troops’ – for those old enough to remember Soviet methods of fraternal assistance.”
Judicial coercion I can believe, but that is a long way from police power and troops.

How reality-based is this article?

Andrew' November 17, 2011 at 7:51 am

Think balloon and needle.

dearieme November 17, 2011 at 6:00 am

“How reality-based is this article?” It’s written by a chap who repeatedly forecast that the Euro would prove to be an enormous disaster, and was repeatedly called mad and bad because of it.

As for his fear that troops might be used under the pretext of restoring order – well that’s never happened on all of human history, has it?

NAME REDACTED November 17, 2011 at 6:12 am

They don’t need to. In the modern world we now have gigantic standing armies called “police forces.”

FooFighter November 17, 2011 at 9:41 am

The EU has a police force?

dan1111 November 17, 2011 at 10:05 am

Thanks for the information about the author. I didn’t know that.

As for troops being used to “restore order”, yes, I know that it happens. However, how often have mature, democratic countries devolved into totalitarianism? Predictions of this are common, but they have almost always been unfounded. They are usually just a way of making a harsh criticism of one’s political opponent. This seems especially unlikely with the EU, which doesn’t have any centralized military and only exercises limited sovereignty over member states. If he believes this is going to happen, he needs to show more evidence.

matt w November 17, 2011 at 10:44 am

The author, Ambrose Evans-Pritchard, was a prominent proponent of the idea that Vince Foster had been murdered, and that the Federal government had advance knowledge of the Oklahoma City bombing. Gauge his credibility accordingly.

Rahul November 17, 2011 at 7:10 am

I wonder why people use these “percent change” graphs so often when the point could be so easily (or perhaps much) better made using a net quantity plot.

As far as I can see, it is easier for most people to estimate a derivative change (if needed) from an integral than an integral from a set of successive derivatives. e.g. can one say how much money supply changed over, say, the last 5 years? Much easier to answer had there been an actual money supply plot. Leave aside the arguments that derivatives amplify noise and the “12 month” change is an arbitrary time window.

I can’t imagine analogous lacunae for the integrated plots but maybe there is? I’d like to know.

FooFighter November 17, 2011 at 9:42 am

+100%

dan1111 November 17, 2011 at 10:07 am

I think it’s often done for dramatization. This graph appears to show a massive decline. An absolute quantity graph would show a long, slowing increase, followed by a tiny decline.

Rahul November 17, 2011 at 12:12 pm

Exactly. No better ploy to evoke reader panic as the visual stimulus of some data-series falling off a precipitous data-cliff. And unscrupulous authors will resort to as many derivatives as needed to produce that evocative visual artifact.

Dominic J November 17, 2011 at 5:43 pm

So an image that shows a change (in the derivative) as a change (in the level of the graph) is a ploy? If 0% change in money supply was associated with a stable economy, I’d be far more willing to agree with you, but in most of economics, it is rates of change that matter.

Far more irritating to me is the “debt is at 100% of GDP” lines. Just say “12 months”. People get confused – one person I know (who knows I studied a little economics) once asked me if debt reaching 80% of GDP meant that his taxes were now 80%.

eric falkenstein November 17, 2011 at 9:13 am

What’s ‘Italian money’? As they are on the Euro, some explanation is needed. Otherwise, it’s like the New York money supply.

neil November 17, 2011 at 2:42 pm

If the quantity of dollars held by New Yorkers and stored in bank accounts held by New Yorkers were to decline in this way, it would strongly suggest that New York was headed for a recession. It’s possible for New York to be in a recession while Florida isn’t; same for Italy and, e.g., Germany.

Rahul November 17, 2011 at 2:59 pm

So if the amount of money in circulation reduces does that signal a deflation? With Euros passing effortlessly across internal borders how do European nations estimate their national money supply?

Florian November 17, 2011 at 9:32 am

I just can’t see a “crashing money supply” in this graph.

M3 still grew at 2% early this year and is now about -1,5%.
Best guess would be that M3 is approximately the same end of 2011 as end of 2010.
So no change in money supply and certainly no “crash”.

On the contrary: The 2004-2009 expansion of M3 of around 8% annualy can’t have been very healthy – and certainly not sustainable – in an economy that’s hardly growing.

Jeff November 17, 2011 at 11:26 am

The use of shading under the M1 line gives the visual impression that the area under the curve has some meaning, but it doesn’t. Another example of how not to graph stuff.

Rahul November 17, 2011 at 12:20 pm

It is intentionally dishonest; intended to convince the casual reader that Italy is running out of “something” quite fast. That very well might be but the area under this curve does nothing show this.

neil November 17, 2011 at 2:40 pm

First derivatives are lies! (Second derivatives are the rate of change of lies!)

Flattus Maximus November 17, 2011 at 3:55 pm

Tyler = Tool

To November 17, 2011 at 9:00 pm

Might be related to this

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