Friday, 27 January 2012

Graph of the week: Italian M3

Here’s a graph I picked up from Tyler Cowen last week, which he found on the Telegraph blog. Here’s the original source - the report from Banca d'Italia (the report is in Italian), pg. 7:

Banca d'Italia: Supplements to the Statistical Bulletin, 2012

The graph is entitled 'Italian contribution to monetary aggregates of the euro area' (percentage change over 12 months).

It is showing a significant downturn of Italy's monetary growth. In addition its GDP is predicted to fall for a further 1.5% this year, which is not surprising as the entire scenario reminds me of the Friedman and Schwartz argument on the reasons behind the Great Depression in the US. 

Friedman and Schwartz identified a series of errors made by the Federal Reserve in the late 1920s and early 1930s. Each of these mistakes led to an undesirable tightening of monetary policy and ultimately led to declines in the money supply which could be accounted for the drops in prices and output that occurred subsequently. They speak of several mistakes the Fed made, the most important one being the tightening of monetary policy in 1928 that continued until the stock market crash, what was economically completely unjustified at the time when the economy was just emerging from a recession, commodity prices were declining and there were signs of rising inflation. Such a reaction from the Fed occurred as a response to the instability of stock market prices but such tight monetary policy pushed U.S. into an even bigger recession. “The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October 1929. In other words, the market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it. Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930.” (Friedman, Schwartz, original 1963)

Btw, in the US, the money supply went down by a third from 1929 to 1933 (see first graph), so even though Italy's M3 decrease isn't as severe (at least not yet) it is a clear signal that something could  go terribly wrong in Italy in the next year or two. 


  1. At least Bernanke learned that one lesson from the depression, there is no decrease in the US money supply. In fact we probably have too much.

    1. And yet, there's still no progress. Bernanke is stuck in a liquidity trap, and he's too stubborn to admit it