Thursday, December 31, 2009

I Hereby Resolve...

"How to get out of debt in '10"

That's the page-one teaser in my local paper: Get out of debt. Story, page 32.

From page 32:
Get your financial house in order

It may be difficult, but it's not that complicated. Much of it is what our grandparents taught us. Don't owe a lot of money. Don't buy what you can't afford. Put something aside for a rainy day.

After the year the economy's had, no doubt many people are making resolutions to get their own finances in order.
And really, who could blame them?

Tuesday, December 29, 2009

Gresham's Law Redux

 "Good Money"
 "Bad Money"
 Not Debased
 More Valuable
 Less Valuable
 More Expense
 Less Expense
 More Costly
Reviewing the previous post, one finds a number of ways to describe good and bad money. (See table at right.)

These days we associate fiat money with inflation. But the debasement of gold or silver coin also caused inflation. And sometimes the debasement was government action, the way printing money is government action. But sometimes it was not.

Sometimes the debasement was by the public. People did it, scraping a little gold off the edge of a coin before passing it on to the next guy. Today we worry about the government causing inflation. We forget that given the chance, people will also do things that cause inflation.

We forget that inflation may come from human nature.

If inflation is a natural result of human nature (and you can't change human nature) then the only way to avoid inflation is to put a device in the system to prevent it. That may be one reason many people support the gold standard. It's one reason that I do not totally reject the gold standard.

But that's not why I called this meeting.

Sunday, December 27, 2009

Gresham's Law

This evening, the Wikipedia article Gresham's Law opens with this statement:

Gresham's law is commonly stated: "Bad money drives out good", but more accurately stated: "Bad money drives out good under legal tender laws".

Well, I never heard it put that way before. The "more accurate" version is probably a twist of history inserted by the Austrians. You have to be careful with the economics in Wikipedia. The Wik is full of Austrianisms made to look like part of mainstream thought.

I've heard the five words: Bad money drives out good. I came looking for more, because I wanted to know what Gresham meant. Not what somebody wanted to make it sound like.

Like a Coin...

Like a story...

There are two sides to every economic act.

For every buyer there is a seller.
For every borrower, a lender.
For every dollar of debt, a dollar of credit in use.
For every dollar received, a dollar paid out.
For every purchase, a sale.

The economy is transaction

Sunday, December 20, 2009


Excerpts from Chapter 1 of Paul Samuelson's Economics (1958 edition)

"Take a good look at the man on your right and the man on your left, because next year one of you won't be here."

Saturday, December 19, 2009

Surprise! Yesterday's newspaper says:

Slow going for stimulus funds
As construction grinds to a halt for the winter, less than 40 percent of the $47.1 million in federal stimulus money budgeted for road, bridge and sidewalk improvements [in the region] has trudged through bureaucratic obstacles to the contract stage, state Department of Transportation figures show.

And only about 10 percent of the money has made it into the economy so far as incremental reimbursements to the contractors who are doing the work....

How many jobs the local road-and-bridge work has saved or created is impossible to say.
What I said.

The Missing Puzzle-Piece

So I read this Animal Spirits post on John Williams' prediction of hyperinflation, and it got me thinking: We don't have an anti-inflation policy anymore.

Yeah, we have the Fed. But the Fed's policy these days seems to be to avoid deflation. That's pro-inflation policy.

What else have we got? Nothing. We've got fiscal policy, which is always stimulative because the budget is never in balance. And we've got the tax code, which is always pro-growth or pro-spending (or pro-investment; but investment is spending), and therefore pro-inflation. And we've got the Fed, trying to keep prices from dropping.

No anti-inflation policy.

Friday, December 18, 2009


This is a summary of the December 16 post

The problem is debt. We need to reduce debt.

Wednesday, December 16, 2009

Debt Does Not Exist

...Debt does not exist, except as a measure of credit in use.

Debt is an accounting of the use of credit. If you borrow a dollar, you put credit to use. If you borrow a dollar and spend it, the credit remains in use until you repay what you borrowed. Debt is just a measure of money borrowed. The only way to reduce debt is to reduce credit-in-use.

Saturday, December 12, 2009

Well, This Is Depressing

In his 1995 book To Renew America, Newt Gingrich wrote:

The power of economic growth was driven home to me by a study that suggested that a 1 percent increase in our economic growth rate would shrink the federal deficit by $640 billion over the next seven years, would increase federal tax revenues by $716 billion without a tax increase, and that each and every adult citizen would earn $9,600 more than they would in the current growth projection.

In this world of merely 1 percent higher growth, the Social Security Trust Fund never runs out of money....

Part Four of Three

You have to go where the numbers take you, that's what I think. But after I finished the first three posts of my "On the Growth of Government" series, I realized that I could have achieved the same result by making just one adjustment to Federal spending. Instead of three.

I adjusted for inflation, population, and living standards. But in the living standards adjustment, I had to disallow inflation and population because those adjustment were already made. So I ended up using "real GDP per capita."

If I didn't adjust for inflation separately, I could use "nominal GDP per capita." And if I didn't adjust for population separately, I could drop the "per capita." So now I want to look at Federal spending growth again, adjusted only for the growth of "nominal GDP."

The accuracy will be much better, I think, using this approach. Using only one tweak.

I really don't see how this "unified" graph -- annual change in Federal spending growth, less annual change in Nominal GDP -- can look like my final graph from Part 3. Because I've heard too many horror stories of "Federal spending relative to GDP." Those stories always tell the tale of excessive Federal spending.

Okay. So now it's even more important to do the new graph.

Friday, December 11, 2009

Supply Side Economics?

Scouring a set of drawings for some key information, I ran across this note at work:

Wednesday, December 9, 2009

Jake? Jake??


Monday, December 7, 2009

On the Growth of Government (Part 1 of 3)

If you run a business you'll probably compare this year's sales to last year's, to see how much your business has grown. If sales are up 6%, you could say your business has grown 6%.

I want to look at government spending by that standard: year-over-year change.

On the Growth of Government (Part 2 of 3)

If you run a business you may compare this year's sales to last year's, to see how much your business has grown. If sales are up 6%, you could say your business has grown 6%. But if prices went up 4%, then really your business grew only 2%. To get a better gauge of how much your business grew, you have to adjust for inflation.

I want to look at government spending by that standard: adjusted for inflation.

On the Growth of Government (Part 3 of 3)

So your business got 6% bigger, but 4% was inflation and only 2% was growth. You're not doing as well as you hoped. So then, how are you doing? How does your business growth compare to your competition? How does it compare with the economy, overall? ...And can we ask similar questions of government spending?

Tuesday, December 1, 2009

Jacob Claus

My grandson at 12 weeks...

Monday, November 30, 2009

Pets? ...Pets???

My play-by-play on a foolish idea in yesterday's Parade magazine:

A Tax Break for Pet Owners

Animal shelters across the country have reported a sharp surge in abandoned animals, many cut loose by owners who can no longer afford to care for them. Now, Rep. Thaddeus McCotter (R., Mich.) has introduced a bill that would use the federal tax code to help.

Sad, the sharp surge in abandoned animals. Odd, that Rep. Thaddeus McCotter (R., Mich.) has introduced a bill to use the federal tax code to help relieve the sadness.

The idea behind McCotter's plan is that when people "can no longer afford" something, tweaking the tax code can help. I do agree we need to change the tax code. But all sorts of changes are possible, and not all of them are improvements. McCotter's bill is not an improvement.

Tuesday, November 24, 2009

Individual Responsibility

Some topics are difficult to discuss. This is one of 'em.

"People don't take responsibility for their actions."  Those are not my words; they are common words. That is what makes the topic difficult to discuss. There is a magical power, a holiness to the words, and anyone who brings the subject up but doesn't use the right words is gonna be in trouble.

Do I lack the words?

I take responsibility for my actions. Most people do, I think, though I am no judge of character. But I don't care about that.

I care about the economy. About understanding the economy. About fixing what's wrong with it. It fascinates me. It's a big, complex system that needs to be tweaked. I have a tweak that no one else has thought of. And I want people to think about it. But some other time, maybe. That's not what this post is about.

Some people say we should use gold for money. To them I say: Go ahead. Use your gold for money. I'll accept gold as payment. I don't think I'll use it for payment myself, but you can. You think it's the right thing to do. So, go ahead. Do the right thing. Take the initiative.  Individual responsibility, and all that.

What's wrong with this picture?

Thursday, November 19, 2009

Questions from Aaron

Recent email from my son Aaron:
What should individuals do to reduce the 'credit per dollar' numbers you're talking about? I think you've laid out what govt. could do to help... So perhaps some practical guidelines would be good for the simple folks... (something about 'ask not what your country can do for you...').

How does one calculate their own 'credit per dollar'? Or for a business?

Is there one 'number' that we could come up with to compare individuals or businesses (or countries or what not) as far as this measurement goes? Or locate where this problem is growing the fastest? Or compare yourself to the average? Is this done already?

My reply:

> What should individuals do...?

There are lots of people and businesses and churches offering advice on how to get out of debt. But the problem only grows worse.

I am (apparently) the ONLY person who thinks our excessive reliance on credit is due not to individual behavior, but to ECONOMIC POLICY.

I (alone) am not talking about how people, or government, should be more frugal and cut back and eliminate waste. I am saying that policymakers misunderstand the cause of inflation, and as a result of this misunderstanding they have established bad policies and pursued them far too long.

(Actually, the policies were not always bad. But as a result of policy, the economy changed. And after it changed, a different policy was needed.)

How does an individual help? That is like asking: How does an individual change economic policy? The only answer I have for that is, you have to understand that policy is the source of the problem. When enough people understand, the problem will go away.

(Beating a dead horse.) Meanwhile, as long as policy-makers fail to understand that RESTRICTING the quantity of spending money while ENCOURAGING spending is a policy whose useful life has passed, they will continue to cause sluggish growth and "structural" inflation.

Monday, November 16, 2009

Substantial Friedman

Milton Friedman is famous for having said "inflation is always and everywhere a monetary phenomenon." Indeed, he makes much of it in Money Mischief: "I believe I first published the statement in these words in Friedman (1963)," he writes. And in his preface he makes the statement the "central thesis" of his book.

Sometimes, though, writers leave out a word here and there. I do. In my previous post I wrote, "The tweak shows that money increased more quickly than prices." What I meant was, "The tweak shows that 'the quantity of money relative to output' increased more quickly than prices." Taken literally, the difference is significant. But extra words weigh down the thought and make it more difficult to toss and catch.

Writers leave out words sometimes. Friedman left out the word substantial. Not every time. But enough that the lighter phrase caught on. People say, "Inflation is always and everywhere a monetary phenomenon." Friedman said "substantial inflation is always and everywhere a monetary phenomenon." He even put it in italics.

Milton Friedman's Mischief

On the left is a scan of one of the graphs from Milton Friedman's book Money Mischief; on the right is a tweak of that scan.  [Regarding the tweak...]

For the figure on the left, I moved the "Figure 3" label to the bottom and reduced the size of the text below the "Figure 3". Otherwise this figure is not retouched.

In the figure on the right, I moved the label, reduced the text, and shifted the "money" line up so that the two lines start at the same level. That makes it easier to compare the trends. And I erased the Y-Axis labels because shifting the trend line makes those labels incorrect. (These tweaks were all done in Paint.)

The tweak shows that money increased more quickly than prices. Funny -- that's not what you might expect. If printing money causes inflation, the two lines should travel together. They don't.

Saturday, November 14, 2009

Thoughts at Three A.M.

Up, up, and away...

It seems to me there are three basic reactions to the apparent shift in Fed policy that can be seen in this graph. First is the view that printing money causes inflation and, basically, we're doomed. This view leaves no room for discussion.

Then there is the view that maybe they're not all idiots at the Fed. As the lender of last resort, the Fed resorted to an unprecedented increase in the quantity of money to deal with an emergency. And when the time is right, the Fed will withdraw that money and defuse the inflationary outcome.

There is plenty of discussion related to this view. How will they know when the time is right? How will they withdraw the money? What is the exit strategy? How successful will it be? Will we avoid some or much of the inflation that we expect?

That discussion spills over to the fiscal side of policy. Is the stimulus working? Is it big enough? Is it too big? Was it even needed in the first place?

And then there is the third view.

Saturday, November 7, 2009

Taylor Rule - Equation Discussion

Sometimes I discuss these topics with my son Jerry. This is one of those times. He got back to me after taking a look at the Taylor Rule. He makes very good sense of it...

Wednesday, November 4, 2009


Thanks for the update, Kevin.


"Unfortunately, macroeconomics has been in utter disarray since the Keynesian consensus broke down in the 1970s."


"Keynesianism was the economics of the world from around 1940 through the 1970s, but in the 1960s and 1970s came this extraordinary and quite unexpected inflation. And that took the bloom off the [Keynesian] rose. The Keynesian schema, which had tremendously wide acceptance, had no theory of inflation.... Since then, no new view that anyone can agree on has emerged, and there has been a vacuum in terms of a defining picture of what the hell economics is.... In the history of economic thought there has never been such a prolonged period of intellectual disagreement."

Not heard much on the topic lately. Until today. In a comment on Scott Sumner's Does macro need a paradigm shift?, Kevin Donoghue wrote:

So in my view you can only expect to see agreement on what tight money means when there is agreement on the appropriate model. That seems to be much farther away than it was in the 1970s when students could look at papers by Tobin and Friedman and say, what’s the argument about, the length and variability of lags, is that all? Fine tuning bad, coarse tuning good. There was a mainstream then, with only Austrians and Post-Keynesians and suchlike outside it. There is no mainstream now....

Not yet, Kevin. I'm workin' on it.

Tuesday, November 3, 2009

The Reliance on Credit

Where are we?

Following the Secret Economist's Altig link brought me to this:

Scratch any gathering of macroeconomists these days and out will bleed a steady stream directed at incorporating credit and financial market activity into thinking about the aggregate economy. The necessity of proceeding with that work was emphasized by no less an authority than Don Kohn, vice chairman of the Federal Reserve Board of Governors, speaking at just such a gathering of macroeconomists last week:
"It is fair to say, however, that the core macroeconomic modeling framework used at the Federal Reserve and other central banks around the world has included, at best, only a limited role for the balance sheets of households and firms, credit provision, and financial intermediation. The features suggested by the literature on the role of credit in the transmission of policy have not yet become prominent ingredients in models used at central banks or in much academic research."
I will admit that economists were not exactly ahead of the curve with this agenda, but prior to 2007 it was not at all clear that detailed descriptions of how funds moved from lenders to borrowers or how short-term interest rates are transmitted to longer-term interest rates and capital accumulation decisions were crucial to getting monetary policy right.

So, What's the Problem?

This is amazing.

If you look up "Taylor Rule" in Wikipedia, this is what ya get:

In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the by U.S. economist John B. Taylor in 1993.

There's more, but I got scared off by that big, ugly formula.

Well check it out! it also says this:

Uses of such a rule include systematically fostering price stability and full employment in reducing uncertainty and increasing credibility of future actions by the central bank

This is totally amazing. The inflation problem is solved. The unemployment problem is solved. Plus, problems I don't even know about: The uncertainty problem is solved. And the credibility problem is solved.

The only problem that remains? Idiots. Either the people that use the Taylor rule, or the ones who posted that joke, or me for not getting it. Pro'bly me.

Saturday, October 31, 2009

The Schwartz

The name Anna Schwartz should ring a bell. She wrote a very great book (which I never read) with Milton Friedman, who was a very great man. Schwartz has some thoughts on the money supply, here. I have just a few remarks.

Tuesday, October 27, 2009

Previously on the New Arthurian Blog...

Last time, we looked at a typical "money supply relative to output" graph. Then I drew the graph again with the deflator inverted. Inverting the deflator flipped the blue line. The line moved with the deflator. I said this shows that the deflator -- the "correction" to output -- is the reason the typical graph mimics the CPI so closely.

People say it is the relation between money and output that mimics the CPI. But when I inverted the deflator, the blue line inverted. In other words, the line shows what the deflator is doing. Not what "money relative to output" is doing. Money and output play an insignificant role in the graph, despite what people say.

What would happen if we left the deflator alone, and flipped money and output?

Monday, October 26, 2009

What If...

Messin' with the numbers.

Okay, let's do a typical "money supply relative to output" graph. We take the GDP as it comes, purchased at actual prices, and total it up. (That's nominal output.) Then we divide the GDP number by the price level (to "deflate" the GDP down to what it would have been if there was no inflation). This calculation gives us "real output", which is often just called "output."

Next, we take the quantity of money (M2) and divide it by the "real output" number. This gives us the famous "money supply relative to output."

Then we "index" this number: Figure the average value for the whole series, and divide each number in the series by the average. The new values we get are the ones we will display on a graph.

We also grab the CPI, which shows the level of prices. And we index this series of numbers just as we indexed our "money supply relative to output."

We index both sets of numbers, as Milton Friedman said, "To make the two series comparable."

Important Stuff

(Important to me, anyhow.)

The Secret Economist recently posted an evaluation of the Taylor rule.

What's the Taylor rule? According to the Wik, the Taylor rule "stipulates how much the central bank ... should change the nominal interest rate" when inflation and economic growth wander from their targets.

Long story short, the Secret Economist became "suspicious" of the good match between the Taylor numbers and the "Federal Funds" interest rate, and decided to investigate. The bold conclusion: "The Taylor rule fits because it is an identity."

Now, Wikipedia says, "An identity is an equality that remains true regardless of the values of any variables that appear within it." So SE's conclusion is that the Taylor calculation will always give a good match to the interest rate. Suspicions justified.

But -- as Arlo Guthrie said -- that's not what I came to tell you about.

Saturday, October 24, 2009


"To divide by a fraction, invert and multiply."

Suppose we have a calculation like . But we know that is a fraction, and that . In order to understand our calculation, we can replace the in the calculation with the thing it equals, thus: . It is evident now that in our calculation, we are dividing by a fraction.

To divide by a fraction, use the rule they teach in elementary school: invert and multiply. Inverting the fraction gives us . Now, multiply by the inverted fraction: .

In this form our calculation is simpler because there is only one division. It is okay to remove the parentheses: , and to rearrange terms: . We can add parentheses to show we do the division first: . All of this is valid arithmetic.

Our new formula will produce the same result as , our original calculation.

is the quantity of money.
is real output.
is output in actual prices.
is the price level (the "deflator").

In its final version, our calculation divides the quantity of money by output in actual prices, and multiplies the result by the price level.

The calculation we started with was used by Milton Friedman in Money Mischief to produce all those graphs that show how "money relative to output" follows the same trend-line as prices.

His numbers follow the price trend because he multiplies by the price level.

You can mimic the price trend in many ways. You don't have to use the quantity of money and output. You can use any number you want, pretty much. Just multiply by the price level, and your answer takes on the shape of the price trend.

Friday, October 23, 2009

The Three Little Graphs

Wow! This was easy to do!

Below is a Google Docs spreadsheet. It contains three pages. Each page has calculations and a graph. The graphs are off to the right, near the top, but you won't see them unless you go looking.

This post is mostly in the nature of a test. Probably not much here of interest. This is the spreadsheet used to develop graphs for my comments at The Secret Economist.

Thursday, October 22, 2009

No, That's Not True

Mankiw, again.

From Chapter 2 of Macroeconomics:

"The goal of GDP is to summarize in a single number the dollar value of economic activity in a given period of time."

Endogenous Drivel

(and other big words)

Looking thru N. Gregory Mankiw's Macroeconomics (fourth edition, 2000). He writes:

"Models have two kinds of variables: endogenous variables and exogenous variables."
Ooh, I need this. I don't know these big words. I'm interested in the economics, but the big words are a problem for someone of little memory. (The big words are so troubling that I don't even notice Mankiw uses the word variables three times in that sentence.)

"Endogenous variables are those variables that a model tries to explain. Exogenous variables are those variables that a model takes as given. The purpose of a model is to show how the exogenous variables affect the endogenous variables."
Okay this is good. I'm looking at it like computer programming. Send some values to a function, and get a return value. The values I send are exogenous. The return value (calculated by the function, based on the values I send) is endogenous. I get it.

Mankiw continues:

"In other words, as Figure 1-4 illustrates, exogenous variables come from outside the model and serve as the model's input, whereas endogenous variables are determined inside the model and are the model's output."
Just like a function in C. Arguments come from outside the function and serve as the function's input, while return values are determined inside the function and are the function's output. Okay.... (Arguments, or parameters maybe. I'm not always clear on the big words.)

Anyway I wanna see his Figure 1-4...

Saturday, October 17, 2009

The Wrong War

Back in the early 1990s I was all gung-ho for Milton Friedman: Prices go up because the quantity of money goes up, always and everywhere. Amen.

And then I got a new job with a small steel warehouse. The counter man -- Wesley, his name was -- once said something I never forgot. He said, "We have to raise our prices, because our costs are going up."

This wasn't Milton Friedman's explanation. It was something else. As I look back now, it is clear to me that "always and everywhere" is not the same as "only." Friedman said prices go up when the quantity of money goes up, always and everywhere. He didn't say that was the only reason prices go up.

When you raise your prices because your customers have "too much money," your good profit gets better. When you raise your prices because you have to, it's because your profit is being squeezed. These two worlds are totally unlike one another.

Milton Friedman explained demand-pull inflation. Wesley introduced me to cost-push. Everybody today is familiar with Wesley's problem. Our costs are going up. Health care costs. Gasoline and heating oil. Candy bars and coffee. Costs are going up and it's tough to make ends meet. We have met the enemy and it is cost-push inflation.

All In Fun

It's all fun and games until somebody gets hurt.

From Krugman of 15 October 09: thing that’s hard to convey is how boring business seemed in the 1960s and 1970s. (”I’ve got just one word for you: plastics.”)

But even a decade later, it was the guys who went off to investment banks who were buying the third homes.... And it wasn’t just the money: business stopped being so boring, and was even getting to be fun for some people.

I thought that was an interesting observation. What else was happening at that time?

Wednesday, October 14, 2009

And While We're On the Subject

Pandering to Bad Arithmetic

The problems of our economy are often attributed to excessive government spending.

I have all kinds of problems with that. But suppose it is true. If excessive government spending is the cause of our economic problems, then a lessening of the excess should reduce our economic troubles. Right?

Monday, October 12, 2009

Balancing Act

Was It Worth It?

Bush the Elder went into Iraq with 500,000 troops. Bush the Younger couldn't muster 200,000. In the intervening years Bill Clinton balanced the budget. He did it by cutting the military.

Wednesday, October 7, 2009

Krugman, Again

I'm not picking on him. Honest.

From PK's post of 7 October 09:

Everyone agrees that this is a stopgap, and we want to get the Fed out of the business of private lending over time.

But here’s my question: why does it have to be a return to shadow banking? The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold. Or to put it differently, by the numbers there’s no obvious reason we shouldn’t be seeking a return to traditional banking, with banks making and holding loans, as the way to restart credit markets. Yet the assumption at the Fed seems to be that this isn’t an option — that the only way to go is back to the securitized debt market of the years just before the crisis.

Why? Are we still convinced that securitization is a far superior system to conventional banking, and if so why?

Inquiring minds want to know.

Tuesday, October 6, 2009

Negative Feedback

It's not what you think.

If I said I was getting "positive feedback" you'd probably figure I heard from people who like my posts. If I said "negative feedback" you'd figure they didn't like 'em. Fair enough. That's probably what I'd mean. But y'know, if that was all there was to it, I wouldn't be writing this post.

Tack the word "loop" on to those feedback phrases, and the meanings are totally different. A positive feedback loop is a self-reinforcing loop. A negative feedback loop is self-negating. These are not at all the meanings we ordinarily use. We might think of a bad situation making itself worse as a negative thing. But it's a positive feedback loop.

Wednesday, September 30, 2009

Krugman Agonistes

"Well yeah it's bad, but we need it, so I'll say it ain't really so bad."

In yesterday's post, "The true fiscal cost of stimulus," Paul Krugman writes:

So fiscal expansion is good for future growth. Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.

Y'know, I like the guy. I like a lot of what Krugman says. But he's desperately trying to make an argument here in favor of debt. When I read it I was sympathetic, but I don't buy the argument. He's waffling, and he's trying to weasel around the problem of insurmountable debt.

Tuesday, September 29, 2009

Hoard, Flow, Save, Spend, Hold

Sometimes you wake up in the morning and there it is.

One way the Federal Reserve can fight inflation is to sell some of its assets. If it sells a T-Bill to someone, in exchange the Fed receives money that someone was willing to spend. That money, spending-money, is M1 money. The Fed receives that money and holds it, and it is no longer in circulation. It comes out of M1.

I get it now. A few days ago I wrote You can only either spend or save. I wrote People make their own decisions.

Here's the thing: You can only either spend or save. But while you're deciding between the two, you are holding money.

Here's the picture that was in my head when I woke up this morning:

The heavy line between HOARD and FLOW represents the range of possible attitudes toward holding money. Call it the Hold line. If you don't hold money very long, your spending happens near the FLOW end of the line. If you do hold money a long time, your spending shows up closer to the HOARD end.

The diagram also shows that hoarding is not the same as saving. If you save a dollar, your bank will put it to use, lending out multiple copies of it. But until you put it in the bank, you are holding that dollar. And as long as you hold it, no one is putting it to use. The money you hold may count as being in circulation; but it is not in circulation. Just like at the Fed.

Monday, September 28, 2009

Another H-Word

Many voices

Back when I was teaching myself C language, two of the first words I came upon were declarations and definitions. Well, they were long words and both started with D, and I was just startin' out, and they were two of a kind to me. So I skipped over them and started writing functions.

Things went pretty well for a while. As I learned, my programs got bigger. And then I started getting really strange errors. One time, the source code in the editor changed when I ran the code. Weird errors.

It took me three years to figure it out. In the end I finally understood the difference between definitions and declarations. I started using them both, and the weird errors went away.

I'm not sayin' anyone will have a problem like that with the words holding and hoarding. I just thought it was interesting.

Hoarding is an extreme form of holding money.

Saturday, September 26, 2009

Either, Or

There is no other choice

You can spend a dollar, or save it. There is no other choice. Keep a dollar, or let it go. If you keep it, that's saving. If you let it go, that's spending, Save and spend are the only options.

The Little Things

Holding Patterns

How are we gonna solve the big problems if we don't even know the meaning of little words?

Milton Friedman used to write about "the amount of money people want to hold." I never quite understood it. I want to hold lots of money. Who would want to hold less? It never made sense to me.

Friday, September 25, 2009

From an Ad in my Gmail just now

Maybe this is something new?

Two Things

Thing One

The Wikipedia article "Money Supply" this morning contains this statement:

Since most modern economic systems are regulated by governments through monetary policy, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures include those more directly affected by monetary policy, whereas broader measures are less closely related to monetary-policy actions.

I'd say that's an accurate statement. Maybe we could leave out the word since, because it implies causal relationships that complicate the simple facts. Leave out the word since, change the first comma to a period, and we're good.

The supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. Narrow measures [are] more directly affected by monetary policy, whereas broader measures are less [responsive].

Wednesday, September 23, 2009

In Circulation

Hustle'n' Flow

Raging river. Meandering stream. Stagnant pond. The flow of water: sometimes more, sometimes less, sometimes not at all. The same is true of money.

Sunday, September 20, 2009

Giving New Meaning to my Label 'TOT'

I have a grandson! Jacob Arthur

Born on 7 September 2009. Labor day.

Saturday, September 19, 2009

This Is Getting Krugly

Inflation and the VietNam War

Krugman writes:

For the late 1970s was when macroeconomics experienced its great divide. It’s a period engrained in the memory of those of us who were young economists at the time, trying to find our own paths. Yet I haven’t seen a clear explanation of what went down at the time. So here’s a sketch, which I hope a serious intellectual historian will fill in someday.

Discretion Aside (A Response)

Further thoughts on an earlier post

Come to think of it, there's not much difference between
1. People finding somebody to blame, like Greenspan or Keynes; and
2. Economists laying the blame on people for being complex.
It's the same blame game.

Friday, September 18, 2009

Making Sense Of It

My son, my boss, my economy

When my son Aaron was in the first grade, he came home from school one day all upset. I asked him what was wrong. He said, "They told us we have to study. I don't know how to do that."

It wasn't a big problem, really. And he since became an engineer.

Wednesday, September 16, 2009

Here, I Looked It Up

Behavioral Economics

From Wikipedia, the free encyclopedia:

Behavioral economics and behavioral finance are closely related fields that have evolved to be a separate branch of economic and financial analysis which applies scientific research on human and social, cognitive and emotional factors to better understand economic decisions by consumers, borrowers, investors, and how they affect market prices, returns and the allocation of resources.

Balance In All Things

"When economists write textbooks or teach introductory students or lecture to laymen, they happily extol the virtues of two lovely handmaidens of aggregate economic stabilization -- fiscal policy and monetary policy." - Arthur Okun

In 1977 when I got my three credits in economics, I learned that the government had two tools to use for managing the economy: monetary and fiscal policy. Maybe they don't teach this anymore. Maybe that is the problem.

Monday, September 14, 2009

Discretion Aside...

The Big Piece

Krugman's "big state-of-economics piece" is the focus of much attention, this fifteen minutes. Here is his conclusion:
"So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit... that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics...."

Here it is in shortform:
1. Economists have ignored the imperfection of markets.
2. Keynesian economics provides the best understanding.
3. Economics must incorporate the realities of finance.

Going thru the wormhole and coming out on my side, we get the following:

Friday, September 11, 2009

This Day


What would you do?

Suppose you invented a carburetor that gave you 200 miles per gallon. What would you do? Put one on your own car, obviously. Sell them to your neighbors. Or just give them away to get things started. Word-of-mouth. Invent a better mousetrap and people will come knocking at your door.

Suppose you came up with an economic theory that explained a lot. What would you do? How would you install it? How would you show that it works?

Friday, September 4, 2009

Notes on the Forgiveness

1. Gold Can't Do This

If we were on the gold standard, the Forgiveness could not be done. You can't print gold. Fiat money is flexible. Unfortunately, we have not yet learned how to take advantage of the features of fiat money. We know only how to create inflation.

Tuesday, September 1, 2009

Just a Quick Reference

Roosevelt came to office at a desperate time, in the fourth year of a worldwide depression that raised the gravest doubts about the future of Western civilization. "The year 1931 was distinguished from previous one outstanding feature," commented the British historian Arnold Toynbee. "In 1931, men and women all over the world were seriously contemplating and frankly discussing the possibility that the Western system of Society might break down and cease to work." On New Year's Eve 1931 in the United States, an American diplomat noted in his diary, "The last day of a very unhappy year for so many people the world around. Prices at the bottom and failures the rule of the day. A black picture!" And in the summer of 1932 John Maynard Keynes, asked by a journalist, whether there had ever been anything before like the Great Depression, replied: "Yes, it was called the Dark Ages, and it lasted four hundred years."

From:   The FDR Years: On Roosevelt and His Legacy  By William E. Leuchtenburg
in The Washington Post

Beyond Hope

The bigger they are, the harder they fall.

What are we waiting for?  The fall of Rome?

We're talking ourselves silly. Among the forces that drive the economy I list "human nature." Fickle. For the first couple months after inauguration, President Obama spent much time warning us just how serious was our economic situation. And everything seemed to be getting worse. Then suddenly the talk all turned to "green shoots," and now everything seems to be getting better (at least if you listen to the news). Our whole economic policy now boils down to an audacity of hope.

The economy is driven largely by human nature. Largely, but not entirely. Here's what human nature does for us: It allows us to expect existing conditions to continue. When things are bad, we can see no end in sight. And when the economy is doing well, we can see no end in sight. And when we're in the midst of an unsustainable housing bubble, we expect housing prices to continue upward at least until we've made a killing. Men are fools. That's what drives the economy.

Wednesday, August 19, 2009


The Lender of Last Resort

So the Fed is printing dollars by the trillion now. A trillion dollars is a lot of money. How much? It's a thousand billion -- a thousand dollars apiece for a billion people. We don't even have that many people in the USA. Our population is less than a third of that. A trillion dollars is three grand apiece for us, with something left over. It is a lot of money. Twelve thousand dollars for a family of four. For every family of four.

And what is the Federal Reserve doing with all that money? Typically, they do one of two things: Either they lend it to the banks, or they lend it to the government.

So we have a "credit crisis" brought on by excessive debt, and the Fed's solution is to print more money and use it to create even more debt! Is that reasonable? There seems no way to make sense of it. One could say the Fed is too intently focused on its role as "the lender of last resort."

Wednesday, August 5, 2009

The Real Laissez-Faire

Apart from the level of taxes...

I am still in the midst of my Mises Month, reading and parsing the Mises Daily email and learning about Austrian economics. But today's Daily merits special attention. The article, by Art Carden, rejects the notion of rent control.

Carden says rent control "ignores the information-transmitting function of prices." That got me thinking about how strict the Austrians are regarding free-market principles. But even Austrians fall short, when it comes to taxes.

Saturday, August 1, 2009

On Money

...and plenty of money, wrapped up in a five pound note!

I'm not a "gold standard" guy. But sometimes it's useful to think in terms of money-as-gold when thinking about the economy. So let's say the U.S. base money is gold. M0 is gold.

Then M1 money is gold in circulation, and I suppose gold certificates, and checking-account money. And after that, M2, M3, whatever, we have "debt-backed obligations." Okay? So let's start up this economic model and let it run.

Tuesday, July 28, 2009

The Western Peril

Recently I've been reading the Mises Daily email.

The Mises Daily expresses the view called Austrian economics. (I subscribed to the Daily to learn a bit about that branch of the subject.) The Austrian school is highly concerned about the possibility of inflation. The school objects to government interference in the economy, favoring Laissez-faire. And, judging by the Daily, they're an opinionated bunch. That's what I've picked up so far.

But then the 7-21-09 post by Thomas J. DiLorenzo caught my eye:

I recently received in the mail the 2008 Annual Report of the Federal Reserve Bank of Minneapolis. The title of the report is "The Current Economic Crisis: What Should We Learn from the Great Depressions of the 20th Century?"

Now that's my kind of report: reputable source, fascinating topic. So I took a gander at the Fed report. The thing that most struck me was... Well, here's how it opens:

The current financial crisis has prompted these questions: Could the world economy enter a great depression like that of the 1930s? If so, what can governments do to avoid it?

Really??? Now they're gonna think about the possibility of economic depression? Now that it's upon us? Now that all sorts of bizarre policies to skirt depression are being put to the test? What have they been doing for the past 30 years? The fact of the matter is, in observations like this I find an explanation for how things went so terribly wrong: Incompetence, dogma, and ego. But I wander.

Saturday, July 25, 2009

How to Avoid the Inflation

Dated 18 May 09

Here's an item I was putting together back before I started this blog. It was for my Google-site. But this was just when I was starting to figure out the difference between a website and a blog. Anyway, I knew this post wasn't meant for the website and I just left it as litter on my desktop. 'Til I found it this morning.

Thursday, July 23, 2009

An Arthurian Future

Could you reiterate that again?

I commented on Aquinum's:

Okay. Say your proposal had been set up 20 or 30 years ago. Say it was in place and working....

But Vince batted that back to me:

Say your proposal had been set up 20 or 30 years ago.

Oh. Well, I put an answer together. A satisfying answer. (You know how it is.) Anyway, I thought my economic proposal ought to be on this blog. So, here it is:

Wednesday, July 8, 2009

It's not a Stimulus

It's not a Stimulus


Tuesday, July 7, 2009

Time is Money

Fiddling while Rome burns

7 July 09 - Today's "Alerts" from Seeking Alpha include this gem:

Krugman vs. Bartlett: A Tale of Two Charts by Kurt Brouwer

The post is a mish-mosh of Brouwer-quoting-Krugman-quoting-Bartlett, with some Brouwer-quoting-Bartlett in the mix. And now I'm skimming that soup.

Brouwer opens with an interesting observation:

Despite the fact that most of the existing economic stimulus program has not yet been implemented, a Nobel laureate economist and New York Times columnist and blogger has been advocating a second government stimulus program.

Yeah, the existing stimulus plan has hardly been implemented at all. As of today -- 140 days since President Obama signed the stimulus bill into law -- only about 7.2% of the $787B has been allocated.

(On the little "Stimulus Watch" gadget my son Jerry created for me, we say 7.2% has been spent. Perhaps that's not quite right. Our number comes from VP Joe Biden's site, where he lists it as the total "paid out." However, that site identifies 10 October '09 as the day that "recipient reporting begins." So I'm thinking the "paid out" number counts money distributed from the big bureaucracy in D.C. to smaller bureaucracies in D.C. and elsewhere, government offices that have been drawing up lists of "shovel-ready" projects. I'm doubting that any of that 7.2% has found its way to people with shovels.)

So yeah, as Brauwer says, it's a "fact that most of the existing economic stimulus program has not yet been implemented." And it is obvious to me that this could be the reason we've seen little effect from the stimulus. Brauwer, however, completely misses the obvious.

He has flies in his eyes: Paul Krugman's comments on Bruce Bartlett's article.

Bartlett says Obama was "much too optimistic" about effects of the stimulus package. He says Obama's economists expected results "almost immediately." And Krugman says "that's totally false." Krugman's evidence is a graph you've likely seen before, showing projected unemployment with, and without, the stimulus.

Chart showing predicted effect of $787B stimulus on unemployment

Now what I see in that graph is a reduction of unemployment projected to begin in the Second Quarter of 2009. I would call that an almost immediate effect of First Quarter activity. So I would say Krugman's evidence shows Bartlett's statement to be true, not false.

But what do I know. Brouwer says "Krugman is quibbling." And then he says, "Wouldn’t it have made sense for Krugman to update the chart to see how much of a positive effect the stimulus program has had?"

Well, no. Krugman didn't post the chart so we could see the most current situation. He posted the chart to prove Bartlett wrong. (It didn't work, but that's another matter.) Looks to me like Brouwer is IM-ing Krugman.

Brauwer has his own agenda. He wants to see the most current results of the stimulus. He wants to see the most current unemployment situation. So, does it make sense for him to post the update?

Well, Idunno. Because it is, as Brauwer says, "fact that most of the existing economic stimulus program has not yet been implemented." But then it might be interesting to look at the results of not implementing the stimulus.

Chart showing increase of unemployment

So, Brauwer presents his update. It shows unemployment skyrocketing. Obviously, this recession or depression is a lot worse than we thought, worse than Obama thought, worse than the January predictions.

And then Brauwer says, "At this point, it is clear that the economic stimulus program has not delivered as promised." And he quotes Bartlett: "Another stimulus would be a grave mistake. The first one was justified by extraordinary circumstances. But it must be given time to work. People should not allow their impatience to lead to the adoption of policies...."

Impatience? Give it time to work?? Really??? Unemployment is much worse than expected. Worse than we anticipated when Congress settled on the $787B number. The recession is worse than we thought, when we thought a $787B stimulus would fix it. So the $787B must be too small to fix this recession.

If a stimulus package is the answer, then it must be sufficient to address the problem or there is no bang for the buck, and the money is truly wasted.

The economic stimulus program has not delivered as promised? But how can Brauwer say this? After all, he points out "the fact that most of the existing economic stimulus program has not yet been implemented." So of course it hasn't delivered.

My God! The whole purpose of stimulus spending is to create an immediate surge of economic activity. Immediacy is the essence. One cannot wait while the economy declines further. For then, to achieve the equivalent effect, the surge must be even bigger.

Immediacy is the essence. Allow me to close, as Brauwer closes, by quoting Bruce Bartlett:

…just 11 per cent of the discretionary spending on highways, mass transit, energy efficiency and other programmes involving direct government purchases will have been spent by the end of this fiscal year. Even by the end of 2010 less than half the funds will have been disbursed and by the end of 2011 more than a quarter of the money will be unspent.

Monday, July 6, 2009

Debt and Equity

Like touching a snake

My friend Aquinum has written:

"Possessing physical dollars is like having equity in the economic output of the United States of America, and has no credit risk associated to it.... To summarize: physical paper money is equity. Bank deposit money is backed by debt...."

Paper money is equity. This is an astounding observation. Aquinum refers me to Unqualified Reservations for a technical definition of money-as-equity:

Any financial instrument is one of three things: a deed of ownership of some good (a title), a liability to fulfill some obligation, possibly contingent (a debt or option), or none of the above (equity). The dollar is equity....

Saturday, July 4, 2009

Always the Bing

This is totally off-topic (TOT) but some things can't be helped.

One of the great things about Seinfeld was that they often had two conversations going at once. Jerry and Elaine would be talking about something, and George would add something irrelevant. They would continue their conversation, and George would continue inserting his own, unrelated thoughts. It was funny because it caricatured a thing that happens all the time.

Friday, June 26, 2009

Between Three and Four Percent

One way to measure inflation

In 1983 I bought a new little car for $5000. In 2007 I bought a new little car for $12,000. That's 240% of the 1983 price, an increase of 140% in 25 years. I worked it out in Excel: With compounding, it's a 3.715% annual rate of increase.

That reminded me of something Milton Friedman said in Money Mischief:

As Forrest Capie points out in a fascinating paper, it took a century for the inflation in Rome, which contributed to the decline and fall of the empire, to raise the price level "from a base of 100 in 200 AD to 5000... -- in other words a rate of between 3 and 4 percent per annum compounded."

Fall of Rome.

Thursday, June 25, 2009

Understated Urgency

"Too much money chasing too few goods"

Printing money causes inflation. Know what? Expectation causes inflation, too.

Central bankers and I say that in this economic crisis, printing money will not cause inflation because nobody is spending. But we forgot about expectations.

Suppose the central bankers are right: Suppose there isn't enough "chasing" for inflation to be caused by "too much money chasing goods." Well, if people don't buy that story, we can get inflation anyway. If people insist on thinking we're gonna get inflation because the Fed is printing money, then we'll get inflation even if the central bankers are right. But it won't be printing that drives prices up. It'll be expectations.

Thursday, June 18, 2009

Beyond Krugman's Inflation

At least he's not a politician.

I admire Paul Krugman because he is so much more reasonable than most of his critics. We are here today to review an opinion piece of his, something my wife found in our local paper. You can find it here.

Krugman says we've been in this situation twice before, and says both times policymakers "stopped worrying about depression and started worrying about inflation" much too soon. He says that's happening again now. He says there's no need for worry about inflation, because "a rising monetary base isn't inflationary when you're in a liquidity trap."

Krugman also says something I totally agree with: "What about all that government borrowing? All it's doing is offsetting a plunge in private borrowing -- total borrowing is down, not up. Indeed, if the government weren't running a big deficit right now, the economy would probably be well on its way to a full-fledged depression."

Now I'm gonna be explicit about this, so read slow: I agree with Krugman that "all that government borrowing" is not the problem right now. But of course it's a problem. It's part of the central problem: All that borrowing... All that lending... All that debt. The central problem -- debt -- is the problem that got us where we are today. But now that we're here, we have a new problem: namely, the threat of depression. The moment this new problem arose it became a thousand times more significant than debt.

Saturday, June 13, 2009


I take it back. I take it all back. I was wrong.

If something isn't done, and done soon, there's gonna be one wicked inflation. It's already trying to break out. A bag of Milky Way bars was 99 cents last week. This week it's $2.50. That's jaw-dropping wrong.

Saturday, April 18, 2009


Bernanke-Fed won't keep rates too low for too long
2009-04-14 19:08 (UTC)

WASHINGTON, April 14 (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday that the U.S. central bank, which has cut interest rates almost to zero, will definitely reverse its monetary policy at some stage to prevent inflation.

The Fed will 'make sure we do raise rates at an appropriate time and make sure we don't leave rates too low for too long, because it can have adverse effects, at least on inflation,' Bernanke told students at Morehouse College in Atlanta.

quoted from

So if everything works out according to plan, we restore the economy back to where it was a year or two ago, before everything fell apart.

Well, then we'll be in trouble. Because if we get back to that time again, we will only be ripe for economic collapse again. Bernanke must know this. Central to the concept of fixing the economy is the notion of fixing the problem that created the problem. Not just fixing consequences we don't like.

Ben Bernanke has the most thrilling job in America, and I think he's the right man for the job. But I hope he's keeping secrets. Because the things he said at Morehouse College are just more of the same numb-brain, defunct-economist crap that got us into this mess in the first place.

Sunday, March 22, 2009

The Big T

How to prevent inflation when the Fed prints a trillion dollars.

  • NPR reports that " the U.K., the ... latest attempt to goose the economy ... calls for the Bank of England to create 75 billion pounds" in new money. And NPR quotes the BBC: "These actions are unprecedented in the Bank's 315-year history but are now considered necessary...." [From NPR's "Planet Money" blog, 11 March 2009]
  • Under the headline "Fed Prints a Trillion," on 20 March 2009 Chris Martenson reported: "In a shocking development that I frankly hoped we'd never actually see, the Federal Reserve dropped a bombshell yesterday and announced that it is going to create an extra $1 trillion dollars out of thin air...."
  • The Seattle Times reports that the Fed's trillion-dollar decision was unanimous. [Seattle Times, 20 March 2009]

Well, it's happening. And the Internet response to these printing press releases is largely what you'd expect: Inflation, inflation, inflation. I have a different take. 

Sunday, February 15, 2009

The $787B Stimulus

A Context for Obama's $787,000,000,000.00 Stimulus Package

In the June 10, 1934 edition of The New York Times there appeared an article by John Maynard Keynes. Keynes wrote in part:

  • "For six months at least, and probably a year, the measure of recovery to be achieved will mainly depend on the degree of the direct stimulus to production deliberately applied by the administration."
  • "The aggregate emergency expenditure is now declining. If it is going to decline to $200,000,000 [$200 million] monthly, much of the ground already gained will probably be lost. If it were to rise to $400,000,000 [$400 million] monthly, I should be quite confident that a strong business revival would set in by the Autumn."
  • "Four hundred million dollars monthly is not much more than 11 per cent of the national income...."

I don't know how Keynes came up with his $400 million figure. But it is easy enough to scale his number up to fit the current national income.

Thursday, January 1, 2009

A Continuous Dribble

Here are some bold words originally from 5/25/09; my first blog post.