Sunday, February 7, 2016

"Push Button, Get Mortgage"

And it's 2006 all over again.

Saturday, February 6, 2016

Gravitational Implosion

Long ago, when the economy was universally thought "good" except by cranks like me, I read something about hoarding that made a lot of sense.

The money you have hoarded away under your mattress lies idle, collecting no interest. And, in an inflationary economy, the value of your hoard gradually withers.

However, in a deflationary economy -- the economy created by excessive hoarding -- the value of the hoard grows.

Got it? The simple act of hoarding, in the extreme, is sufficient to collapse the economy like a black hole.

Friday, February 5, 2016

A Repeating Pattern of Money Growth that Repeatedly Ends in Catastrophe

Thursday, February 4, 2016

Durations and Standards of "Tightness"

In Revisiting the Causes of the Great Recession David Beckworth writes

the Fed was doing a decent job responding to the housing bust up until 2008. After that point it tightened monetary policy and catalyzed the reaction that lead to the Great Recession.

Beckworth describes two phases of the tightening:

First, beginning around April 2008 the Fed began signalling it was planning to raise interest rates ...

1. Forward guidance. Second, Beckworth says that in the latter half of 2008,

the natural interest rate is falling fast and the Fed fails to lower its target interest rate until October 2008. This is a passive tightening of monetary policy

2. The Fed did nothing.

First, in April the Fed still expected inflation; second, the bottom fell out and the Fed did nothing until October. That's Beckworth's story of how the Fed got tight in the second and third quarters of 2008, causing the Great Recession.

Commenting on Beckworth's post, Philip disagrees with Beckworth's tightening timetable:

The monetary tightening that caused both the housing crash and the Great Recession began in 2006 ...

Philip offers a graph in evidence; I'll offer one of my own in support of Philip's view. It shows two years of slow base growth before Beckworth's mid-2008 moment:

Graph #1: Percent Change from Month Ago, Base Money, Jan 2002 thru Aug 2008

Beckworth's post is a re-statement of an op-ed he wrote with Ramesh Ponnuru. David Glasner evaluates the views expressed in that op-ed on his blog, in How not to Win Friends and Influence People. Glasner:

Beckworth and Ponnuru themselves overlook the fact that tightening by the Fed did not begin in the third quarter – or even the second quarter – of 2008. The tightening may have already begun in as early as the middle of 2006. The chart below ...

In 2006? That's what Philip said. Here's Glasner's chart:

Base Money Growth 2004-2008.  Source: David Glasner
Here's how Glasner describes the chart:

From 2004 through the middle of 2006, the biweekly rate of expansion of the monetary base was consistently at an annual rate exceeding 4% with the exception of a six-month interval at the end of 2005 when the rate fell to the 3-4% range. But from the middle of 2006 through September 2008, the bi-weekly rate of expansion was consistently below 3%, and was well below 2% for most of 2008.

I don't read the chart as Glasner does. He sees base growth consistently above 4% for two and a half years (except for six months in 2005). I see base growth varying about a persistent downtrend:

Graph #3: Base Money Growth 2004-2008. Duplicates Glasner's Graph, Adds a Trend Line by Eye
I see persistent tightening.

Oh, and maybe I'm reading things into it, but David Glasner seems to think 4% is a good number, 4% to maybe 6%. He seems to think 4% is not "tight". As opposed to two or three percent. Do you get that from what he says? I do.

On what basis is 4% a good number? Perhaps because it is in the neighborhood of the nominal GDP growth we want? Perhaps. But I reject the thought. We don't only need base money growth commensurate with GDP growth. We also need base money growth commensurate with the growth of financial obligations: If accumulated debt grows three times faster than base money between 1960 and 2007, then base money is tight.

Glasner implies base money was not tight in 2004 and 2005 because its growth rate was a little above 4%. If that is the case, then 6% to 8% growth (or more) would likely be loose, no?  Too loose, maybe.

The next graph is the same as Graph #3: same data, same units, same trend line. Graph #4 only shows more years. It begins in January, 2000.

Graph #4: Base Money Growth 2000-2008. Expands Glasner's Graph. Same Trend Line as Graph #3
The tightening trend I see in David Glasner's graph of base growth 2004-2008, that same trend extends back to 2003, maybe 2002, maybe earlier. Tightening all the while. I recall something Glasner wrote a while back, in Why Fed Inflation-Phobia Mattered:

To promote recovery, the Fed increased the monetary base in 2001 (partly accommodating the increased demand for money characteristic of recessions) by 8.5%. The monetary base subsequently grew by 7% in 2002, 5.2% in 2003, 4.4% in 2004, 3.2% in 2005, 2.6% in 2006, and a mere 1.2% in 2007.

From 2001 to the crisis, base money growth fell. By David Glasner's numbers, base growth was higher in 2001 and 2002 and 2003 than the acceptable 4% level of 2004 and 2005. Was inflation a threat because of it? It was. But inflation remained low, despite rapid base growth.

Then, when base money growth was slow enough that inflation was not a concern, base money growth was no longer fast enough to keep up with the growth of financial obligations. It became crisis-inducing.

There are two separate standards for "tight" money. It is possible for base money growth to be at the same time fast enough to raise inflation concerns and slow enough to undermine the financial system.

There is more to the story of tight money than Glasner tells. There is more to the story than Beckworth tells. As Graph #4 shows, there was persistent decline in base money growth for near a decade before the Great Recession. A decade.

The next graph shows a long view of base money growth, with the years from Graph #4 circled in red:

Graph #5: Percent Change from Year Ago, Base Money (Long Term) and a Repeating Decline

Kevin Erdmann at Glasner's:

I think the very slow monetary base growth in the 2000s is important and widely overlooked... I’m very pleased to see you advance the idea that Fed tightening was a much earlier issue than most people think is plausible.

Go, Kevin!

Wednesday, February 3, 2016

A New High in Non-Federal Debt

Graph #1
The third quarter 2008 peak was 47,754.4 billion. The new peak is 47,923.13 billion.

Tuesday, February 2, 2016

TCMDO is no longer discontinued

My favorite FRED data series, TCMDO, is no longer discontinued:

I noticed when I went back and looked at the last graph here. My screen capture from back in October shows TCMDO (red) running slightly below the sum of the two replacement series. But when I followed the link below that graph to get back to FRED, the red line now runs right atop the blue.

So they revised the TCMDO data and brought it back from the land of the discontinued. Nice.

It also has a new name now.
Old name: All sectors; Credit Market Instruments; Liability, Level
New name: All Sectors; Debt Securities and Loans; Liability, Level

The new name makes sense. The two series that I had to add together back in October were Total Debt Securities and Total Loans.

It's like finding a four leaf clover.

Monday, February 1, 2016

Monthly GDP data from Macro Advisers, or, Writing in the Dark

David Beckworth had me flying off the handle with his graph of "Total Dollar Spending":

Graph #1 via David Beckworth

1. Money times Velocity equals GDP, not total dollar spending.
2. GDP is final spending, not total spending
3. You don't start with money and velocity, and figure GDP. You start with money and GDP, and figure velocity.
4. Oh! His data is monthly. That's interesting.

In the comments, Beckworth says the data comes from Macro Advisers. Found it! And guess what? They say All MA MGDP data and historical files are available to the public at no charge.

Nice. That's what I live for. But I must have some setting wrong in my browser. I clicked the

MA’s Monthly GDP Historical Data (Through November 2015)

link at the MA site, and I got a pageful of garbage. Firefox opened their XLSX file (without a complaint) as a web page, not a spreadsheet. It was unreadable. What to do?

I just saved the page. It came out on my desktop as an Excel file, and opened easily then (in Excel) when I double-clicked it.

Well that was fun.

Anyway, the file contains monthly GDP data for 1992 through 2015. That's exciting because GDP data is always either annual or quarterly. Having access to monthly data means my graphs can display more detail. And that can be useful. I was grinning then.

And that's when I figured out what David Beckworth was up to. He was showing monthly data so I could see more detail. Not just to piss me off.

To see it myself, I duplicated his graph in the Macro Advisers download file:

My graph (Excel's first draft) shows the same pattern as Beckworth's. The range of cells from B186 to B209, outlined in blue, is the MA data I used to re-create the graph.


Beckworth's graph is evidence for what he describes as "the decline in ... nominal spending that starts in mid-2008." He's trying to show a decline in nominal spending. That's why he calls it "total dollar spending" instead of GDP.

By using monthly numbers, the graph shows a nice sharp peak there at the 15000.000 level. Using quarterly data, the peak would have been more rounded, and the moment of transition from increase to decrease would have been less well defined.

And Beckworth is not figuring his monthly GDP from money and velocity numbers. He's using monthly GDP from Macro Advisers. The "Money x Velocity" subtitle on his graph is only a reminder that his graph shows spending -- the quantity of money times the velocity of its circulation.

It's still not "total" spending. GDP is final spending. But that particular imprecision is common among economists and in the media. No biggie I guess, as long as you know about it.

The internal argument expressed above is typical for me. When there's something obviously wrong (like referring to GDP as "total spending") I start to see other things as wrong, too.
-> Why does Beckworth's graph show a sharp peak there at his dotted red line? GDP doesn't peak there. (Because he is showing monthly numbers, not quarterly numbers, dummy.)
-> Why is he telling me he figured GDP from Money and Velocity numbers? (He isn't.)
-> Why is the sky blue? (It isn't. The sun's not up yet.)

Since I had the monthly GDP numbers from Macro Advisers back to 1992, I figured I'd take a quick look at 'em. First, with a linear trend line:

Graph #3, Showing Linear Trend
This is the version that shows the economy running well above average in 2005 and 2006 and 2007.  You have to know that's not accurate. It also shows GDP nicely back on trend, by the end there.

That one's good for a laugh. Beware anyone who uses such a trend line.

The second one shows an exponential trend line. Because growth is exponential.

Graph #4, Showing Exponential Trend
The black trendline here is not based on the full length of the blue GDP line. It is based on GDP for the period from April 1992 to December 1999. That was the period when the economy turned out to be pretty good, catching Alan Greenspan quite by surprise.

I may have accidentally selected a period of time that starts out so-so and ends up better than average. Maybe. And maybe that particular selection gives me a trend line that goes up higher and faster than a less fortunately chosen time period would show. That would be a fair complaint.

However, it is fair to point out that the economy after 2001 fell below the standard set by the 1990s. And it is fair to point out that after 2008 the economy fell below both the standard of the 1990s and the lower standard of the 2001-2008 period. And it is fair to ask why these facts may be.

But these questions have nothing to do with the Macro Advisers data. Quarterly and annual data give rise to comparable trend lines, and bring forth the same questions.

Sunday, January 31, 2016

How does this work out on a balance sheet?

In a guest post at Moneyness, Mike Sproul writes:
The bank's IOU will circulate more easily than your IOU, so we commonly talk as if the bank has created money. This is not quite right because the bank is not short in dollars on net. The bank went short in dollars as it issued its IOU, but it took an offsetting long position in dollars when it accepted your IOU. The bank is therefore neutral in dollars, while the borrower is short in dollars. This is why it makes sense to say that borrowers are the original issuers of money, while the banks only help out by putting their name on the money.

I thought Mike's conclusion -- that borrowers are the original issuers of money -- was pretty interesting. But I don't think in terms of balance sheets. So I ask: What say ye?

In follow-up comments, JP Koning asks

Why is the borrower short in dollars on net? A borrower goes short in dollars as it issues its IOU to the bank, but takes an offsetting long position in dollars when it accepts the bank's IOU.

Koning's question: I go to the bank and borrow a million dollars. The bank has my IOU, so I'm short a million bucks. But the bank puts a million in my checking account, so I'm also long a million bucks. Netting it out, I'm just even: not long, not short.

But of course, I borrowed the million because I plan to spend it. And when I spend it I won't have the million anymore. I'll have a really, really nice computer setup instead. So then I'll be short in dollars, and long in hardware. Mike Sproul's answer:

The borrower only holds the bank's IOU momentarily. Once the borrower buys a house, the borrower is short in dollars and long in houses.


What if the borrower buys a dollar-denominated bond instead of a house?

My head starts to hurt. But there's only one more part to the exchange of comments, and Sproul is pretty funny in the end.

Not the funny part:

The origination process is simultaneous in the same way that minting coins is. The "originator" brings an ounce of silver to the mint, and the mint stamps it into a $ coin. Both had a hand in the process, but the originator provided the silver, while the mint only put his name on it.

I'm tempted to say the borrower (or the guy with the bag of silver) is the "issuer" and the bank does the "monetizing" -- which is just about where Mike Sproul started: "borrowers are the original issuers of money, while the banks only help out by putting their name on the money."

Sproul's conclusion is that it's not lending that creates money, but borrowing and lending together. I can live with that.

Saturday, January 30, 2016

Monetary imbalance arises equally for fiat and for gold

David Glasner, commenting on an op-ed piece by Eric Rauchway:
... I stopped nodding my head in agreement with Rauchway when I reached the fifth paragraph of his piece.

Under a gold standard, the amount of gold a nation holds in bank vaults determines how much of its money circulates. If a nation’s gold stock increases through trade, for example, the country issues more currency. Likewise, if its gold stock decreases, it issues less.

Oh dear! Rauchway, like so many others, gets the gold standard all wrong ...

The gold standard operates by fixing the price of currency at a certain value in terms of gold .... The amount of currency under a gold standard is therefore whatever quantity of currency is demanded at the fixed price. That is very different from saying that a gold standard operates by placing a limit on the amount of currency that can be created.

There's more. I'm leaving out stuff about Ted Cruz and stuff about reserve requirements and interest rates in the gold standard era. Good stuff. But the point I want to focus on right now is this: The gold standard did not limit the quantity of currency. That seems to be what David Glasner said.

I was wondering how the quantity of currency could increase beyond the limits set (or not set) by gold. Wondering what it means, that the amount of currency might be "whatever quantity of currency is demanded at the fixed price." I just don't see people lining up to pay an ounce of gold to get $35 of paper. I just don't see it. But then it struck me.

In those days it worked pretty much like it was working for us, while our economy was still working. You'd go to the bank and take out a loan and get some paper money and have money to spend. You didn't pay an ounce of gold for each $35 you got. You just took out a loan.

In the days of the gold standard, the money authority was not able to create base money on demand. These days the money authority can create base money on demand -- "from nothing", as people like to say. That's one difference between then and now.

But that difference is small, I think, compared to this one similarity: In both cases, then and now, it is the money created by borrowing, growing until it gets unsustainably large compared to the monetary base, that is the source of the troubles.