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

FOUR DAYS OLD:
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

Assumptions

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 years...by 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.