Monday, December 11, 2017

Well that was quick!


Goldilocks is back -- The Economist, 17 October 2017

Time is running out on 'Goldilocks' -- CNBC, 5 December 2017

Sunday, December 10, 2017

Twin Peaks


It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Saturday, December 9, 2017

Quantum Unemployment


Call me the duplicator: See a graph, make a graph.

Look up Okun's Law, and this graph comes up:

Graph #1: Okun's Law. Source: Wikipedia
I always want to see how it works: What is the data? What are the units? Can I duplicate the graph? It's an automatic process. I don't decide that I want to do it. I just do it. I don't know why. But anyway, the data series are Real GDP, and UNRATE at FRED. The values are quarterly. The unit for GDP growth is "percent change", and the unit for unemployment is just "change" because it starts as percent. So yeah, I can do that.

Here's what I got:

Graph #2: Okun's Law at FRED
The horizontal black line on the second graph is the X-axis, not the trend. Ignore it. Look at the shape of the cluster of blue dots: high on the left, low on the right. A "best fit" trend line would run from high on the left to low on the right, just like the trend line on the first graph. So I'm satisfied: I duplicated the graph.

I even got blue dots! My dots are all the same color, all faint blue. Some of them look dark because they overlap. There are more dots in the middle of the cluster than elsewhere, and they overlap and it makes them look dark blue. If you look at the first graph, there are more dots in the middle of the cluster there, too.

So that's what I saw when I looked at my graph. And then I noticed something odd: My dots are all arranged in columns, with blank space between the columns. You probably noticed it before I did. It's like unemployment always makes a quantum leap from one level to the next, as you go from left to right.

The other graph doesn't show that.

No, I know what it is: FRED rounded the unemployment numbers to one decimal place. You can see it, from the way the columns are spaced. And sure enough, if you hover over the graph at FRED it shows the unemployment values rounded to one decimal place.

Damn, I thought I was on to something with "quantum" unemployment!

Friday, December 8, 2017

Ricardo's Law


Brad DeLong, back in 2010, looked into The "General Glut" of Thomas Robert Malthus. DeLong offers some thoughts, then follows up with "Malthus on 'glut': all the mentions I have found". Wow, what a great resource that is!

At one point DeLong has Malthus quoting David Ricardo:

If men ceased to consume, they would cease to produce.

Supply is limited by demand.

Thursday, December 7, 2017

Say's Law and Say's Other Law


From Chapter II of the General Theory by Keynes:

From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; meaning by this in some significant, but not clearly defined, sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product.

Supply creates its own demand.


From Book III of A Treatise on Political Economy
by J. B. Say:

production cannot be effected without consumption.

Demand creates its own supply.

Wednesday, December 6, 2017

Incompatible


Macro:

We cannot, as a community, provide for future consumption by financial expedients but only by current physical output.


Micro:

It is better to have a permanent income than to be fascinating.

Tuesday, December 5, 2017

In Low Orbit


The classical theory "is best regarded as a theory of distribution in conditions of full employment", Keynes said. "If the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment".

... Sorry. What?


They used to say, I see they still do, that an atom has one or more electrons orbiting the nucleus. Like moons orbiting a planet. But electrons sometimes jump to a higher or lower orbit. The "orbit" level for the electron is like the equilibrium level for the economy. That's the level where the electron (or the economy) wants to stay. But sometimes something happens to push the electron (or the economy) far enough away from its "happy place" that it doesn't go back. Instead, it finds a new level where it wants to stay.

When an electron changes its orbit level, they say, it absorbs or radiates energy. I say that when an economy changes its equilibrium level, it absorbs or radiates jobs.

When an electron jumps to a lower level it gives off energy. When an economy jumps to a lower level it gives off jobs. When it gives off jobs, there is less employment. When an economy jumps to a higher level it absorbs jobs, and there is more employment.

People have said the economy has a "new normal". They mean it has jumped to a lower orbit and given off jobs. This change created more "involuntary unemployment". The top "orbit" level for the economy, according to Keynes, is the "full employment" level. The lower orbits produce various levels of involuntary unemployment.

The classical theory only applies in high orbit, Keynes said.

Monday, December 4, 2017

24 years, Borio says. It's not a coincidence.


Zero Hedge 4 December 2017: BIS Issues An Alert: Tightening "Paradoxically" Leading To Excessive Risk Taking; Reminds What Happened Last Time:

Valuations in asset markets are “frothy” and investors are basking in the “light and warmth” of the “Goldilocks economy” ...

The Goldilocks economy? It's right on schedule. I've been predicting it since March 2016, the same month Zero Hedge told you "The world economy is on the precipice of another Great Depression."

Oh, and if asset markets are "frothy" it just means we need a small tax on asset market transactions. Or, if we already have a tax like that, it means increase the rate a little. Just like the Fed would increase interest rates. It's not rocket science.

The Zero Hedge post links to BIS Quarterly Review, December 2017 - media briefing where Claudio Borio says:

The expansion broadened and gained momentum. Above all, despite vanishing economic slack, inflation - central banks' lodestar - generally remained remarkably subdued.

Vanishing economic slack? No, it's way too early for that. Borio probably uses the wrong measure, like everyone else. Financial slack must be measured as the size of accumulated debt relative to the size of the circulating money which is used to make payments against that debt. Or accumulated debt relative to Federal debt held by Federal Reserve banks. Or accumulated debt relative to base money. Any measure that shows how far a dollar has to stretch to cover all the debt it has to cover.

Scott Sumner has often said the economy is bad because money is tight. He's right about that, but he doesn't know how to show tight money. To see tight money, look at spending-money relative to accumulated private debt -- or relative to total public and private debt. Look at narrow money relative to broad money. Look at the total cost of finance relative to the money available to make the payments. Work with me here.

Borio says:

Even as the Fed has proceeded with its tightening, overall financial conditions have eased. For instance, a standard indicator of such conditions, which combines information from various asset classes, points to an overall easing regardless of the precise date at which the tightening is assumed to have started. Indeed, that indicator touched a 24 year low.

I can show you the 24 years:

Graph #1: Credit Market Debt per Dollar of Circulating Money
This is my debt-per-dollar graph. The higher the blue line, the faster a dollar has to move to cover all the debt it has to cover. When the line goes up, money gets tighter. When the line goes down, the financial system gets more slack.

24 years ago it was the end of 1993 and the economy was just getting ready to start its "Goldilocks" phase. And things are just now ready to start improving, again.

BIS is right to worry, because the blue line on the graph is going to go up again until we get in trouble again. But we still have time to prevent a recurrence of the problem.

We need to make sure debt (especially private debt) does not accumulate too rapidly. That means people have to pay down debt faster. Instead of having policies that encourage people to accumulate debt, we need policies that encourage people to pay down debt. Instead of letting people deduct their mortgage interest, for example, give people a tax deduction for making an extra mortgage payment or two each year. You can even design the new policy to create the same amount of tax advantage as the old policy.

We must make debt grow more slowly. That's crucial. As a bonus, a policy that gets us paying down debt faster is a policy that fights inflation. Why should interest rates have to do all the work?

Oh, and it's no coincidence, that "24 years" thing.


H/T Tom Hickey

The trend of long term growth


Two images, not quite at random.

This, from Revisionguru, showing a rock-hard erectile trend:
 
And this, from CaixaBank Research, showing a more flaccid trend:
 
Economists always show the boner, but the other is more honest.

I think I'm done here.