I believe this is a gross mischaracterization of how the system actually functions.
Where do these claims regarding credit domination of the system come from? Is it truth or fiction. From what I had seen it was nothing more than an article of faith, I had never come across any proof or support that this was actually the case.
Based on the claims, the "money supply" people must be alluding to is the supply of dollars in existence within the domestic non-government. This is pretty simple number to figure out…
…The total level of state money in the private economy should be equal to all public spending plus all private debt outstanding less federal taxes and net exports.
All we have to do is compare the two sources of spending over time to get a handle on their respective contributions to the "money supply" that is being alluded to.
The solution requires downloading some data from FRED and making some necessary adjustments because some datasets are annual amounts and some are accumulations or running totals. The data we need:
1. FGEXPND - Current Federal Expenditures (Annual totals, must be converted to a running total (a balance) to be compatible with TCMDO). This is equivalent to adding a balance column in your checkbook.
2. TCMDO - Total Credit Market Debt Owed. Straight from FRED, a balance.
3. FYGFDPUB - Federal Debt Held by the Public. Also straight from FRED, also a balance.
Why do we need FYGDPUB? Because TCMDO includes public debt, which we must subtract to get to the total private debt.
The first step is to prepare the data and enter it into a graphing program. Converting FGEXPND to a running total gives us a series I've called rtFGEXPND.
TCMDO minus FYGFDPUB gives us a private-debt only series I have labelled pdTCMDO.
Next, we have to sum the two series rtFGEXPND and pdTCMDO to get the Total annual spending series.
Finally I created a series that plots Private Debt as a percentage of Total Spending. Note that it is not necessary to subtract federal taxes or net exports from the series to get the ratio, they merely reduce the level of money supply not the ratio between public spending and private debt. The relationships in equation form are:
Money Supply = rtFGEXPND + pdTCMDO
pdTCMDO(%) = pdTCMDO ÷ Money Supply
The graph of the result is shown below:
Since 1970, credit has accounted for between 36% and 47.5% of the total number of dollars spent into the economy (and bad things happened at that peak), currently standing at just under 40% of the "money supply". My seat-of-the-pants observation is that a healthy credit/public spending ratio is centered at no more than about 40%.
At no time in the past 43 years has credit ever accounted for anywhere near 90% of the "money supply". It's an urban legend.