Monday, February 28, 2011

The Usefulness of Good and Bad

For a while now, my friend Greg has been talking about the use of moral arguments in economics. I understand morality to be an analysis of the world in terms of good and bad. But "moral" is not a word I use much, so I had trouble understanding Greg's posts. Like they were written in a foreign language. (Sorry, Greg!)

It festers.

Finally, it woke me up at one in the morning and I realized that my recent exchange of comments at was just the sort of thing Greg has been talking about. Pete Cooper writes in praise of Darrell Delamaide's "terrific article at MarketWatch" and lists Delamaide's key points. First among these being

The true problems are mass unemployment and home foreclosures...

Yeah, those are bad things. And that is a moral judgment, not that I actually noticed. I objected to Peter's selection of problems, saying

unemployment and foreclosures are problems for people. Not for the economy. If you want to fix the economy, you have to look at the economy’s problems.

Tom Hickey didn't like that:

“The economy” is the real process of people’s choices and behavior based on these choices...

I am saying that the economy is based on people and the choices they make...

People have problems, not “the economy,” and Peter identified some of these problems. If you said, “the country” (the people collectively), I would agree. But “the economy”?

So I gave an example:

Tom, if there is too much money in circulation (and if we accept Milton Friedman’s model for the sake of this example) then inflation is the economy’s solution to that particular imbalance. A general increase in the level of prices will dissipate the “excess” money and thereby correct the imbalance, and inflation will fizzle out of its own accord as the excess money is absorbed into the price level. BUT it is NOT anybody’s DECISION to correct that imbalance that way!

After that, there was no more discussion of whether the economy has problems. Instead, Tom waxed philosophical:

persons are never to be considered as means or treated simply as means, because they have absolute or intrinsic value. This is the foundation of liberal democracy as stated in our founding documents...

Then he quoted the Preamble, and concluded:

Peter is correct. THE problem is income, hence employment. ALL attention should be focus on that as an ethical matter

As an ethical matter. There it is, morality again. We want the economy to be "good" to us. And Tom tied it back to the founding fathers, making "good" a core principle.

I would say that morality and ethics might be useful for establishing objectives. But they are not useful for economic analysis. I think morality and ethics divert attention from the effort to understand and solve the economic problem.

Sunday, February 27, 2011

Significant Difference

This graph...


looks a lot like this graph:


A bunch of wiggles on the left, then a point after which the line just takes off and goes up and up and up, and we just know it must be a bad thing.


But their graph is a projection. An estimate. A forecast, you know, like the weather forecast: probably wrong. My graph is a picture of something that actually happened.

Mine is a picture of the growth of private debt, and the stability of government debt.

Saturday, February 26, 2011

Supply and Demand, an Application

It occurs to me that my method and Gesell's are two different approaches to the same problem.

Gesell's "stamped" money was a way to create a cost for saved money. Making savings somewhat more costly, Gesell attempted to reduce the supply of saved funds.

My "accelerated repayment" of debt is a way to reduce the demand for saved funds.

Where we are today, there is no reason to stamp money. Before we worry about reducing the natural supply of savings, we ought to undo the many many artificial incentives both to save and to rely on the savings of others.

Friday, February 25, 2011

It's no secret

From Wikipedia, Money Supply:

The monetary value of assets, goods, and service sold during the year could be grossly estimated using nominal GDP back in the 1960s. This is not the case anymore because of the dramatic rise of the number of financial transactions relative to that of real transactions up until 2008. That is, the total value of transactions (including purchases of paper assets) rose relative to nominal GDP (which excludes those purchases).

So in the 1960s there was not an imbalance between financial transactions and productive transactions. Then (since the 1970s, presumably, or the '80s anyway) there is an imbalance.

I've said this before, but it bears repeating:

When you look for economic data you find it broken down into "financial" and "nonfinancial" categories. "Nonfinancial" is the productive side of the economy.

I think better naming for these categories would be "financial" and "productive."

Or -- better yet -- "productive" and "nonproductive."

Meanwhile, the current naming is indicative of where the emphasis is placed. And that tells you how things got so far out of whack.

Thursday, February 24, 2011

Meet the Press: Hour of Agony

I listen to the crap on the Sunday morning talk shows, and everybody is asking how we are going to balance the budget, or avoiding clear answers to that question.

I find it extremely frustrating. All of 'em think we have to cut spending to balance the budget. They have the arithmetic on their side, of course: If A is less than B, then A minus B is less than zero, and "less than zero" means deficits.

I find it frustrating because it overlooks things I talk about. Important things. It overlooks monetary imbalance and the reliance on credit.

If you take the money out of the economy and expect everybody to use credit, then we are gonna have a lot of debt. This is what economic policy has done for 60 years.

This is why we are unable to balance the federal budget: Because you cannot solve problems like "monetary imbalance" and "the excessive reliance on credit" with budget cuts and/or tax increases. The simple arithmetic, sound as it is, is completely irrelevant to the economic problem we face.

But we have thick-headed, pushy, Sunday-morning hosts like David Gregory pressing the issue of what to cut and what, specifically, to cut, and what, exactly, is on or off the table. And we will never solve the economic problem until we stop focusing on such irrelevant crap. Excuse my French.

Wednesday, February 23, 2011

Since when?

You want to say: All money is credit.

I want to ask: When did that happen?

I can think of two possible answers (other than my own, of course).

1. It happened in 1933, when FDR took us off gold. Or
2. It happened in 1971, when Nixon took us off gold.

So then the key year, the significant turning point, would be either 1933 or 1971. But I don't see either answer on this graph:

Oh. 1933 is a match with the first turning-point on this graph. But the graph shows a downtrend after 1933, meaning there was less debt per dollar, not more. Less credit-in-use per dollar of money in circulation. Not more. If FDR's action turned all money into credit, the line should go up. But the line goes down.

And what about the second turning point on the graph here? In 1946, the trend changed and started going up. In 1946, we started using credit more-and-more for money. Not 1933. And not 1971.
If you start at the 1933 peak on my graph, stay at that level and slide over to the right until you hit the trend-line again, and then look down to the X-axis and see what year it is, the year is right around 1971. Isn't that odd?

I say it looks like "all money is credit" today because we use credit for money, because of policy. But it was a gradual change. In the 1950s and '60s we had plenty of money and relatively little credit in use. But the trend-line kept going up, and up, and up. Because of policy. Because policymakers and economists think there is no difference between money and credit. But I say there is a big difference between money and credit.

What say ye?

Tuesday, February 22, 2011

A First Impression

In recent comments, Piet directs me to Thomas H. Greco, Jr.'s ReinventingMoney site, where one finds the "Documents of Ulrich von Beckerath," including Must Full Employment Cost Money?, wherein Joern Manfred Zube provides introductory remarks and the text of Beckerath's work.

Beckerath directs us to Milhaud in a statement that caught my eye --

Milhaud's system of purchasing certificates offers the possibility of resuming the full activities of State concerns which had to be curtailed because of the depression, as well as those of private concerns.
[from page 119 of the "Full Employment" file]

This chain of writers is all new to me, so we are dealing with first impressions here. Trying to pull out bits of Beckerath and understand bits of Milhaud. Here is a bit, from page 121 of the file:

With regard to Milhaud's purchasing certificates, Zander's railway money, and Treasury paper money which is irredeemable and not legal tender, and which maybe also freely discounted, the following problem still awaits solution: How much of the credits created by orders placed, by monopolies, or by taxation may be utilized for the payment of expenses, without the fractionalized parts of these assets i.e., the purchasing certificates, the railway money, the State paper money being exposed to a discount in the open market?

The theory on the subject is likely to be discussed for some time yet, although the problem is essentially no other than that of the time validity of the bills discounted by the banks of issue, a topic often dealt with in the older bank literature. The practical aspect is simple: when the market value of the certificates on three consecutive stock exchange days stands at 99% or lower, then the limit is passed and a suspension of issues should ensue.

Milhaud's goal is to assure that the economy has enough money so that money is not an obstacle to economic performance. Naturally, one of the problems with providing enough money is that inflation is a likely outcome. Beckerath suggests a way to identify the onset of inflation and prevent it by "suspension of issues."

First impression: Sure, but "suspension of issues" sounds to me like the way to create an insufficient quantity of money.

Probably when Milhaud and Beckerath were writing, we were still on a gold standard. The gold standard would have been a way to limit the quantity of money and assure insufficiency of the money supply. We don't have that trouble now. Now we have monetary policy to manage the quantity of money.

Nonetheless, we have today a condition similar to that which concerned Milhaus and Beckerath: We have a quantity of money inadequate for the needs of the economy. We don't even have enough money to keep in good standing on our debt.

People say we have too much money and the price level is evidence of it. Okay. Let's take that as true. Nonetheless, we don't have enough money to keep in good standing on our debt. If both those things are true, it must be the case that we have too much debt. But debt is nothing other than the measure of credit in use. So if we have too much debt, we must have too much credit in use.

Except for the cost of it, "credit in use" is indistinguishable from "money." Other people say we have too much money. I say we have too much credit in use. It is not "money" that has caused inflation in our lifetime, but the use of credit.

In our economy, as I see it, "suspension of issues" of money can do nothing to prevent inflation, because inflation in our time is caused by the excessive reliance on credit. Not by the printing of money. Policymakers were very careful not to print too much money. But they encouraged the use of credit.

The problem that most concerns me is the ratio or imbalance between money and debt, or between money and credit in use. I don't know how this fits in with Beckerath and Milhaud. But I know that in our time people simply sweep this problem under the rug by insisting that money and credit and the same. They are not the same. Credit is distinguished by the cost of interest.

We have (on the one hand) the problem of insufficiency, which is dealt with by a form of printing money. And we have (on the other) the problem of excess, which is dealt with by "suspension of issues."

There is in our time insufficiency and excess at once. But it cannot be that there is both too much and too little money. It can only be that there is too much of the money-substitute, credit in use, relative to the quantity of money itself.

Things I Know

1. I know there is not enough spending-money in the economy.

2. I know there is too much debt.

3. I know there is an imbalance between money-in-circulation and money-in-savings.

These three graphs are the foundation of my understanding of the economic problem. Everything I say arises from them, or from my own confusion.

Monday, February 21, 2011

Where's the Beef?

A while back I criticized the emptiness of my own economic argument:

Back in 1977 I wrote...

According to the theory, after the good times have lasted a while, inflation and other factors may begin to weaken the economy's growth. Eventually, conditions get bad enough that the economy begins to shrink. The result is a recession....

Things eventually get so bad that they 'can't get any worse,' and then the economy begins to grow again. Thus the pattern the economy weaves is a cycle of growth and recession.


So in 1977 I thought that time, inflation, and other were the factors that cause recession. And that time and lousy conditions are the factors that restore growth.

Isn't that inadequate? I think so, now. But a lot of economics is empty like that.

A lot of economics is empty like that. I came across one just now, by R.A. of The Economist, of all places.

I don't know whether it is R.A.'s story that's unsatisfying, or "the world's" or both. But anyway, here is the excerpt that prompted this post:

I would argue that views of the world formed during a very specific economic period in which the magic of inflation hawkishness developed a similar hold over the minds of central bankers. The stagnation of the 1970s was cured by the central bank engineered downturn of the early 1980s, which ushered in the long, growth-rich Great Moderation. Inflation is the enemy, and the more than can be done to exorcise the inflationary demon from the modern economy, the stronger and more durable will long-run growth prove to be.

It is that kind of thinking, that kind of inadequate thinking, that leads to economic conditions that lead to financial crises and great recessions. Compare R.A.'s excerpt to any of my three previous posts and you'll see what I mean.

Sunday, February 20, 2011

The Cost-Push Economy

One of the quirky aspects of MMT is that people like Billy Mitchell always talk of taxes as a way to limit private-sector spending in order to prevent inflation. It could work that way, I admit. But that's not the point. The point is, people react badly to the idea.

People still think inflation is a problem. So Billy makes his argument and people are left thinking: They want to raise taxes MORE??? And people shake their heads, and nobody wants to listen to Billy the Wise.

But that's not why I'm writing today. I'm writing because Billy said something about inflation. Something I think is wrong. Something that tells me Billy still thinks in terms of demand-pull inflation.

Here's what Billy said: "I agree that taking a dollar from a private citizen reduces their capacity of spend that dollar. That is the very important function of taxation – to ensure that the state can manage total spending and keep it in line with what is required for full employment but not push nominal growth beyond the inflation barrier."

He's talking about a way to manage total spending and keep it in line to avoid breaking through the inflation barrier. This is the same sort of thing Milton Friedman used to say, except Friedman wanted the Federal Reserve to control inflation, and Bill Mitchell wants the IRS to control it. Their methods differ, sure. But their objective -- removing money from circulation -- is the same.

Stop thinking about taxes. This post ain't about taxes. I don't want to talk about how we control the quantity of money. The differences between Fed policy and Bill's MMT approach are not relevant to this post. I want to talk about the point of similarity.

I want to talk about the idea that it is the quantity of money that causes inflation. Of course it is, you know. I don't argue the point. However...

Milton Friedman asked a question: Why the excessive monetary growth?

The answer Friedman provides, which I find totally inadequate, includes three points:
1. the rapid growth of government spending,
2. full-employment policy, and
3. mistakes by the Federal Reserve.

My answer is different. I say conditions changed, and left monetary policy between a rock and a hard place. In the 1950s, when Milton Friedman was honing his ideas to perfection, there was too much money in the economy. You know: "Too much money chasing too few goods." It was a consequence of wartime spending and such.

Prices were going up because there was too much money in circulation. Friedman said we should restrict the quantity of money, and he was right. And we did restrict the quantity of money, and it worked. By 1960, inflation was pretty much at an end. Then we had a few good years. "Camelot," it has been called. Whatever.

Anyway, pretty soon inflation started coming back, what with the war in Viet Nam and all. And if you ask economists today, they still say that in the 1960s and '70s the excessive money growth was the cause of that inflation. Maybe. But "too much money in circulation" was not the driving force.

When inflation came back in the 1960s, it was cost-push inflation. By the 1970s it was obvious. We were getting stagflation. Prices were going up even when demand was going down. There was no more "demand-pull" to cause inflation.

It's easy to tell the difference. In demand-pull inflation, prices go up because we have more money than we know what to do with. In cost-push inflation, prices go up because we either increase income, or we go under. In times of demand-pull inflation, people have money to burn. In times of cost-push inflation, people have to stretch every dollar.

Demand-pull inflation is associated with good times; cost-push inflation, with hard times. By the mid-1970s, the "golden age of post-war capitalism" had reached an end. Times have been hard ever since.

The inflation since that time has been driven by rising costs. People have to have more income, just to stay even. So the choices open to policymakers at the Federal Reserve are to accept inflation, or to have recession. There is no middle ground any more. Just the rock and the hard place: Inflation, or decline.

Yes, we have inflation because of the quantity of money. But there are reasons we have an inflationary quantity of money. Reasons that developed after Milton Friedman had formulated his ideas and written his 1963 book with Anna Schwartz. Reasons Friedman and Schwartz never understood.

Anna Schwartz continues to explain inflation in demand-pull terms.

The question that must be asked is: What is the source of the rising costs that drive cost-push inflation? The answer is clear: The factor cost of money is the source.

In the 1980s, at the Federal Reserve they continued to restrict the quantity of money to fight inflation. In Congress, they came up with all sorts of ways to boost economic growth.

The thing is, if you boost growth you boost spending, and it's spending that causes inflation. But that's not the half of it. What we spend, matters. If we spend money, there's no associated interest cost and we don't have to pay the money back. If we spend credit, we have the cost of interest to deal with. And the repayment of principal.

Our economic policies took money out of circulation and encouraged the reliance on credit. "What we spend" became more costly. The factor cost of money increased.

A factor cost is something like wages or profit, or something that competes with wages and profit. The cost of interest is a factor cost that competes with wages and profit.

The cost of interest is an "extra" cost, a largely unnecessary cost in our economy. Yes of course we need to use credit. But we don't need to use credit for everything. But we do. So, we have this extra cost to deal with, the factor cost of money. And it creates cost-push conditions. And cost-push conditions cause inflation. Inflation, or decline.

In the '90s and the Naughts we have the Federal Reserve letting money grow enough to prevent decline, and still thinking it has to fight inflation by restricting the quantity of money. But it isn't even money that's causing inflation. It's credit-use and the cost of this substitute-for-money that are causing inflation. But nobody sees it. Nobody at the Fed says Hey, wait a minute!

At the Fed, they think they have to restrict the quantity of money even more. And of course Congress is happy to do more to encourage spending and the use of credit, to stimulate growth.

And, yeah, they did. But the economy wasn't working very well, so of course Congress had to do even more to boost credit-use. And then one day we had so little money and so much debt that we couldn't afford our debt anymore. Then we had a financial crisis.

And, somehow, the crisis seemed to catch everyone by surprise.

Meanwhile, Billy Mitchell, like Milton Friedman and Anna Schwartz, writes of taking dollars from people, to manage total spending, so that we may prevent inflation.

It's all wrong. It's just all wrong. It isn't even money that causes inflation anymore. It is credit-use that causes inflation. And it is the cost of credit-use that causes cost-push inflation.

Saturday, February 19, 2011

Everything You Need to Know About Economic Performance

An excerpt from mine of 15 November 2010:

Graph #4 shows private debt, relative to public debt. A relative increase in public debt will drive the red line down, as it does here during the Depression and World War II. A relative increase in private  debt will drive the red line up, as it does here from 1947 to the 1974  recession. Roughly equal growth of public and private debt will leave  the red line roughly flat, as we see for 20 years after the 1974  recession.


During our 1947-1973 "golden age," private-sector debt increased. 1974 was when the trouble started. By 1974, interest costs took so much out of wages and profits that our "golden age" came to an end.

Since  1974, by no coincidence, the best-performing part of our economy has  been the financial sector. Since 1974, the level of debt has been too  high and the cost of debt too great to permit the productive sector to  grow with vigor.

Graph #4 also highlights a difference  between Arthurian economics and Modern Monetary Theory. MMT wants to  increase the denominator. I want to decrease the numerator.

The MMT way -- increasing the federal deficit  -- is exactly what we have been doing since Reagan. That is why the  federal debt is so large. It's why people are up in arms about the  federal debt. Moreover, even in a weak economy the method fails, because  no matter how fast government debt increases, private debt increases as  fast or faster.

The thing we need is some measure of balance  between public and private debt. We don't need public debt to increase  in dollars, but we do need it to increase relative to private debt --  not forever, but only until balance is achieved. And, since it is  private debt that shows inordinate increase since the 1970s (see Graph  #3), the appropriate solution is to reduce private debt.

Recently,  our economy took that task upon itself. Economists call it  "deleveraging." A better solution to the problem would be to apply  forethought to the task, late as it may now be. The solution is to use  policy to reduce private-sector debt, in the least painful and most  productive way we can.

The best solution is to achieve  balance, painlessly. And how will we know when the task is done? We  will know balance has been achieved because economic performance will be at its peak.


Our best economic performance is associated with a rising trend-line. We see it between 1946 and 1974 on this graph, and again from 1994 to 2000 or so. The earlier uptrend matches up to the "golden age" of postwar capitalism. The latter uptrend matches up to the "golden" decade. These match-ups are not coincidence.

The uptrends occur when private-sector debt is increasing faster than public-sector debt. Uptrend means the private sector growth is good. That's what we want, I think. But the graph shows more than this. Not only the tilt of the line is important. The level also matters.

The postwar golden age came to an end when private-sector debt climbed to too high a level, relative to public debt. The level 3.0 appears to be where our troubles begin.

For twenty years after the end of the golden age, the graph shows a holding pattern -- a roughly flat trend-line at 3.0. Economic growth in this period was nothing to write home about, and government debt grew like crazy.

Private debt grew just about as fast as government debt in those years, the graph shows.

The level 3.0 is when troubles begin for us. The level 5.0 is when troubles reach crisis. We see it once, at the onset of the Great Depression in 1929. We see it again at the onset of the Great Recession in 2008.

In order to achieve sustainable growth at a satisfactory rate, we must push the trend line down to about 2.0. Simple arithmetic says we can achieve this either by reducing the level of private-sector debt, or by increasing the level of government debt. But the graph tells us one of those options will not work.

The graph shows a roughly flat trend-line from 1974 to 1994. There was during those years a large increase in the level of government debt. But that increase did not push the trend-line down significantly. The trend-line did not fall because private-sector debt grew just about as fast as government debt. So the large increase in government debt did not pave the way for the new golden age that Ronald Reagan was looking for. All it did was permit a large increase in private-sector debt.

The simple arithmetic says we can push the trend-line down either by reducing private debt or by increasing government debt. But that arithmetic does not account for the way our economy behaves in response to a large increase in government debt.

If we want our restore our economy to vigorous and healthy growth, our only option is to reduce the level of private sector debt.

Friday, February 18, 2011

Geanakoplos and the Can of Worms

Peter Schiff writes:

The government has been subsidizing housing since the Roosevelt administration, and we never had a bubble of this proportion. It was not until these guarantees were combined with a 1% federal funds rate that they became supercharged.

Schiff says the low interest rate causes problems. I think he's right. But I know the low rate is a policy intended to solve a problem. So the picture is not as simple as Schiff seems at first to suggest. But then he says:

The reality is that no one wants to blame the crisis on loose monetary policy because monetary policy is even looser now then it was [sic] then. If the commission had correctly blamed the housing bubble on easy money, then it would have called into question current Fed policy. Given the fragility of our economy and its continued dependence on low rates, no one has the guts to open that can of worms.
It could have been a good thing to call current Fed policy into question. If the commission was able to recognize not only that low rates create a problem, but also that there was a different problem that low rates were intended to solve, it could have put emphasis on that pre-existing problem.

A "can of worms" indeed. Peter Schiff clearly recognizes that the economy remains fragile and dependent on low interest rates. At the same time, he says low interest rates are "the primary factor behind the financial crash of 2008."

This low-interest-rate policy causes a problem the way U.S. fire-suppression policy did: A policy of prevention of small forest fires led to less frequent, more severe large fires. A policy of keeping interest rates low to prevent recession leads to bubble, panic, and severe recession.

But the economy is not a forest. An analogy to fire-suppression policy is not evidence that a policy of not preventing recessions would have beneficial effects comparable to the policy of not preventing small forest fires. Peter Schiff, however, seems to think the analogy applies:

We simply need to return to a sound monetary policy...

Jack rates up, he suggests, and everything will be fine. I don't agree. I think you jack up rates, and you make the pre-existing problem worse. Jacking up rates is like testing fragility with a hammer. As Schiff himself points out, our economy exhibits "continued dependence on low rates."

A Long-Term Problem

"Neither Democrats nor Republicans want the Fed to turn off the monetary spigots," Schiff writes, "for fear of the short-term shock."

The short-term shock. Schiff suggests that a sound monetary policy may make the economy hesitate briefly, but then everything will be fine. This is the difference between me and Peter Schiff. I think there is an underlying, long-term problem that is not addressed by his plan.

The short-term shock. The small forest fire. The minor crisis. It's a nice, symmetrical argument. But economic analysis does not depend upon symmetry of presentation. It depends on an understanding of the interaction of economic forces.

Our need for low interest rates did not arise from the financial crisis.

The need for low interest rates arose in response to a more fundamental problem, a pre-existing, long-term problem that Schiff does not discuss. And as a glance at Graph #1 will show, we have evidently needed lower rates for a long time -- since Paul Volcker decided it was time to ease, early in Reagan's first term.

The Growth of Debt

Schiff does not discuss the obvious consequences of easy money -- the increase in credit-use and the increase of accumulated debt. Rather, he sees the low-rate solution itself as the problem. This is circular analysis, for clearly there was a pre-existing problem, to which low rates were applied as a solution. That original problem, which came before the low interest rates, cannot have been caused by low rates.
Nonetheless, low rates surely do contribute to our problems. Low rates make the accumulation of debt bigger, faster than high rates.
The original problem, which we find already in the late 1960s, was an excessive accumulation of debt. In order to prevent the cost of this debt from crippling economic growth, policymakers found it constantly necessary to accelerate the increase in the quantity of money. That led to inflation.

In the 1960s we said the inflation was the result of "guns and butter" spending and the Viet Nam war. In the 1970s, the policy led to higher and higher rates of inflation, along with higher and higher interest rates. When the war ended and inflation did not, we at last understood that there was an economic problem. Then with Reaganomics in the 1980s came the trend of falling interest rates, as Graph #1 shows.

Surprising as it may be, the easy-credit policies in place since the 1980s did not cause accumulation of debt to increase noticeably faster than it did in the 1950s and '60s and '70s. The accumulation of debt continued at a remarkably constant rate, as shown by the straight-line trend of Graph #2.

In the years leading up to 1980, debt increased despite rising interest rates. But in the years since 1980, falling interest rates did not cause debt to grow faster. Our fix for the long-term problem pushed interest rates to lower and lower levels, simply to obtain a growth rate equivalent to the period before 1980.

The Ultimate Bubble

To summarize: Low interest rates lead to an increase in the growth of accumulated debt. But low interest rates were a solution. Policymakers applied low rates to a long-term, pre-existing problem. That problem was the excessive accumulation of debt. Yes, the solution contributed to the problem. But surprisingly, the rate of debt growth did not accelerate. Low interest rates only prevented the decline in debt growth that is a natural result of debt accumulation.

Schiff thinks the blame for the recent crisis should be placed on loose money policy -- for allowing the quantity of money to increase too rapidly, which allowed us to end up with too many mortgages and too-expensive houses. But there was no acceleration of debt growth due to the low rates. And it was the luck of the draw that housing turned out to be the place where the money went, this time around.

We've had one bubble after another, these past three decades. One crisis after another. That's far more significant than the isolated fact that the most recent bubble occurred in housing. The real question is: Why all the bubbles? What makes us bubble-prone? We have to figure this out and fix it before some ultimate bubble does us in for good.

The short answer: Bubbles arise because that's where the profit is.

The problem is that finance has become more profitable than production. So when we get growth, we don't get a burst of production. We get a bubble in the profitable sector, in finance, some part of finance. This time it was mortgages. We call it housing. It was finance.

Finance is more profitable than production because we use credit for money. No matter what we do there are finance charges, because we use credit for money. And we end up with an economy where Ford makes more money by financing cars than by making cars. Because we use credit for money. It's not good for output. It's not good for income. It's not good for the economy.

All that credit-use creates debt. All that debt has to be maintained. All that maintenance is a cost that holds our economy down.

Graph #3 shows the U.S. "capacity utilization" trend since the mid-1960s. Since that time, the high points have come at progressively lower levels. The economy has peaked, or inflation has arisen and the Fed raised rates to fight inflation at progressively lower levels. This is a result of the long-term problem. Accumulating debt is that problem.

There are two exceptionally low peaks in the 1980s that I did not mark with red lines, as they do not fit the down-stepping trend. These two severe lows are associated with the Volcker squeeze.

Those lows are examples of the "short-term shock" that Peter Schiff wants from policy. Graph #3 shows two things about such shocks. First, they are quite severe. Second, they do nothing to change the long-term down-trend of the pre-existing problem.


Albert Einstein's definition of insanity is "doing the same thing over and over again and expecting different results." By that standard, U.S. economic policy is insane.

It is time to stop doing policy the way we've been doing policy for 65 years: We raise interest rates, and we lower them. We raise them, and we lower them. It's insane.

When we lower interest rates, borrowing increases and total debt increases. When we raise interest rates, new borrowing decreases. Total debt does not. It's insane.
This is a "stocks and flows" thing, evidently. The "flow" of new debt stops increasing so quickly; but the "stock" of existing debt remains.
We need a plan to reduce the accumulation of existing private-sector debt. We have no such plan. This is the problem in a nutshell.

The Plan to Reduce Debt

In his Banks as Social Accountants PDF, Dirk Bezemer observes that

Geanakoplos called for an end to ‘the obsession with interest rates’ and asserted that ‘regulating leverage, not interest, are the solution for a troubled economy’.

Yes, absolutely. The problem is not that interest rates are too low, but that the level of accumulated debt is too high. We need to keep interest rates low and we need to reduce the accumulation of debt. Both.

People say we need credit for growth. It's true. But it begs the question: How come we have all this debt, and no growth to show for it?

The answer is, existing debt does not help the economy grow. What we need is new uses of credit. That's what supports growth. We don't need the accumulation of old debt. That's just an impediment to growth.

So what we need is easy money, combined with incentives designed to accelerate the repayment of debt. That's the whole plan, right there. John Geanakoplos called it "regulating leverage." I call it tax incentives to accelerate the repayment of debt. As an added bonus, we get to use the repayment of debt to reduce the quantity of money and fight inflation. If you think about it, this is the right way to fight inflation.


I do not think the lowness of the number is what bothers Peter Schiff about the federal funds rate. I think what bothers him is the consequence of holding that number down -- the growth of debt and the growth of credit-funded economic activity. And this is exactly the problem that is solved by a tax designed to "regulate leverage."
I should add that such a tax need not be a revenue-raiser. I always imagine my tax notions as revenue-neutral. But it could be used to cut taxes.
The great advantage of this policy will be that its effect is in proportion to taxpayer indebtedness. By contrast, the existing policy of raising interest rates affects all borrowers alike, and hinders new growth.

Anyone who likes the idea of raising interest rates at some point in the business cycle should keep an open mind to the notion of using tax incentives to accelerate the repayment of private-sector debt.

The Accelerated Repayment Tax hinders economic activity in proportion to taxpayer indebtedness: Those who have little debt are encouraged to borrow and spend. Those who are heavily in debt are encouraged to reduce their debt.

If we are thinking about eliminating the tax deduction for interest expense, we can replace it with the Accelerated Repayment Tax, and offset the stick with a carrot that helps heavily indebted taxpayers reduce their existing debt.

And we still have the interest rate to use as a policy tool if we need it.

The time to put this tax in place is now -- before interest rates start going up again, again.

What Einstein said.


Whaddya mean, "It's not economics"

Had a thought. Googled forest fire policy. Found this:

Forest Policy Up in Smoke: Fire Suppression in the United States

Alison Berry

Property and Environment Research Center

For most of the 20th century, U.S. federal fire policy focused on suppressing all fires on national forests. The goal was to protect timber resources and rural communities, but this policy ignored the ecological importance of fire. North American forests have evolved with fire for thousands of years. Fire returns nutrients to soils, encourages growth of older fire-resistant trees, and promotes establishment of seedlings.

Decades of fire exclusion have produced uncharacteristically dense forests in many areas. Some forests, which previously burned lightly every 15-30 years, are now choked with vegetation. If ignited, these forests erupt into conflagrations of much higher intensity than historic levels.
Found this, too:

Forest fire strategy: Just let it go
By Tom Kenworthy, USA TODAY

In the worst year for wildfires in nearly half a century, it may seem odd to celebrate how well some of them burned. But the Payette National Forest in central Idaho is doing just that.

Their reasoning is that fire is a natural part of the landscape that clears out underbrush and small trees and creates forest openings in a mosaic pattern. Such conditions help keep small fires from growing into the kind of large, catastrophic blazes that have become increasingly common in recent years. They now say that decades of aggressively fighting fires was a mistake because it allowed forests to become overcrowded and ripe for fires nearly impossible to control.


A policy of prevention of small forest fires led to less frequent, more severe large fires.


Come back for my 8:00 post to see how I work this in...

Thursday, February 17, 2011

Two Years Today

Two years since the $787 billion dollar stimulus bill was signed into law.

Wednesday, February 16, 2011

Intrinsic Problems

For me, the economy is transaction. Every transaction is part of it. Any transaction is an example of it. If I buy a hamburger, wolf it down, pay up, and leave, that's a transaction.

The "credit theory of money" looks at things differently. It doesn't look at my burger transaction. Or maybe it does, but then it also looks at the $10 bill I used to pay for my meal. And it says that the $10 bill is a promise to pay $10, even after lunch is bought and paid for.

I think that's just silly.

The people who look at money that way are still thinking in gold-standard terms. Intrinsic-value terms. They're thinking the $10 bill isn't gold, so it has to be a promise of gold, or a promise of paper, or a promise of something. It isn't. It's just a medium of exchange. It's a way to transfer value, because it is a store of value.

When I sit down at the counter and order a burger, my words convey an implied promise to pay for the grub. After I eat, when we settle up, I make good on that promise.

That is the medium-of-exchange part of it. Then there is the standard-of-value part of it, which means we call it "the dollar" and it is issued by the Fed. And then there is the store-of-value part which depends on how well they run the economy. And that's the whole thing.

That's it. There are no other promises to think about. There is no more economics to think about. The economics is simple. The rest is philosophy or something.

Tuesday, February 15, 2011

The Word Theory of Money

On Star Trek, they don't use money. Sort of like in TV commercials, where you never see people actually paying for the things they buy.

But they work, ya'know, on Star Trek. And they use transporter credits, and replicator credits and other kinds of credits. And one might assume there is some connection between the work and the receiving of credits.

What I think? Of course they use money. They just don't use the word "money."

Also, the fictional economy of Star Trek no longer provides a challenge to policy-makers. Their economic policies work. So there is plenty of wealth to go around, solving a lot of problems that would otherwise "require" money.

In Walden Two, community-members are not allowed to use money. They use labor-credits, which members earn by working, and some of which they must pay to the community as membership dues.

They keep track of their labor-credits as you would money. And they can save up labor-credits, and use them to take a vacation. Of course, the vacation can be no more than a few days of rest at Walden Two, for you have no money to use if you leave the place. Unless they let you exchange labor-credits for money. But that would mean that labor-credits are some kind of money.

I was unable to tell whether they pay interest on saved labor-credits.

At Walden Two they don't use money; they use labor-credits. As I see it, they don't use the dollar as a standard of value. They use labor-credits as a standard of value. So I say they do use money. They just don't call it money.

And again, as with Star Trek, the fictional economy of Walden Two runs like clockwork, so that many problems common in our own society simply never arise in theirs.

William F. Hummel provides The Credit Theory of Money by A. Mitchell Innes. Here's just a bit of it:

The Credit Theory asserts in short that a sale and purchase is the exchange of a commodity for credit.

No. If I pay you with credit, it means I'll pay later. It is something like the Austrian "intertemporal" thing, which itself sounds like something out of Star Trek.

A sale and purchase is the exchange of a commodity for money. If I pay you with cash, you and I are done. If I put it on the credit card, you and I are done, but I have a secondary transaction with my bank, later. And you have a secondary transaction where for some reason it costs you money to get paid from the credit card company.

The Innes thing descends into jibberish:

From this main theory springs the sub-theory that the value of credit or money ... depends on the right to satisfaction for the credit, and on the obligation of the debtor to “pay” his debt.

If I buy a hamburger, wolf it down, pay up, and leave... we're done. There is no other "satisfaction for the credit" to worry about. There is no more "obligation of the debtor." We're done. But that doesn't stop Innes from heading even deeper into the muck:

Likewise it depends on the right of the debtor to release himself from his debt by the tender of an equivalent debt owed by the creditor, and the obligation of the creditor to accept this tender in satisfaction of his credit.

Innes sets up unnecessary complexity by referring to money as credit, and then builds a tangle of words upon that confused foundation.

In theory we create a debt every time we buy, and acquire a credit every time we sell.

No, we don't.

This is what's wrong with economics. They make everything more complicated than it has to be. They make it more complicated than it is.

If you want to understand money, you might start by calling it "money."

Monday, February 14, 2011

Gang8 (3)

In part two of this series I quoted Keynes:

...we can draw the line between "money" and "debts" at whatever point is most convenient for handling a particular problem.

I'm with Keynes on this one, and apart from those who claim all money is debt.

You can think of the horizontal line in my graphic as a spectrum of possible divisions between money and debt. And you can "draw the line between 'money' and 'debts'" at any convenient point between zero and 100%.

My view is that in the years since the end of World War Two, we have pushed that line closer and closer to the "All Credit" end of the spectrum, until we had so much debt and so little non-credit-money that we could no longer afford our debt.

To handle our "particular problem" we must push that line back toward money, and away from the reliance on credit.

I think there is a sort of Laffer curve for that spectrum, a curve that shows economic performance as a function of the reliance on credit.

With too little credit in use, there is clear opportunity to expand credit-use and reap an era of golden-age growth. With too much credit-in-use, the factor cost of money competes with wages and with profit, and times are hard.

The curve I used for this graph may look familiar. If you don't know what it is, you can download the Excel file or open the GoogleDocs version to find out. :)

Sunday, February 13, 2011

Gang8 (2)

While writing my previous post on Gang8, I had Maynard's book open to page 167, but I didn't think I had a use for the footnote there. Later, on the drive to work, the use of it occurred to me. From the footnote:

...we can draw the line between "money" and "debts" at whatever point is most convenient for handling a particular problem.

What's happening at Gang8 is they see all money as debt. It is just one extreme end of the spectrum described by Keynes.

My position is that the failure to distinguish between money and credit is the source of our economic problems. In mine of 4 November 2009 I wrote:

Economists and pundits continue to utter "money'n'credit" like a single word. But the more we rely on credit for the spending that we do, the greater the cost of using money.

In mine of 8 Feb 2010, I showed how to distinguish money from credit:

In days gone by there were two distinct kinds of money: one with intrinsic value, and one without. These days there are also two distinct kinds of money: one with interest charges, and one without. The extra cost of interest, or the absence of that cost, is the significant feature that distinguishes the two forms of money in our time.

And in mine of 9 Jan 2011, I showed why distinguishing money from credit is essential for policymakers:

As debt is repaid, the monetary authority must allow the increase of non-credit money enough to keep "money'n'credit relative to output" essentially stable.

People don't think in these terms -- that there is too much credit in use. We do what we need to do. How can it be "too much"? And then we get a financial crisis and, for a moment, everyone knows the reliance on credit is excessive.

All the while, of course, everybody wants to reduce their debt, and everybody wants to balance the federal budget. But you can't pay off debt if you use credit for money.

Money and credit are not the same.

Saturday, February 12, 2011

The Osgood Post

Excerpts from a file from 1997.

Most people don't study economics. Most of us do not expect to grasp every nuance of the dismal science. Indeed, some would say that the fault lies not in ourselves but in our stars, our experts. For like us, the experts have misunderstood something simple and basic.

How can this be? How can the experts have misunderstood something simple and basic? The answer is that our economy is constantly in a state of change. An economist may spend his life trying to understand the economy, and succeed, in his old age, in understanding only how it was in his prime. Thus Charles Osgood writes in The Osgood Files,

"So far in the history of economics, any economist who has been proved right in the short run has always turned out to be wrong in the long run."

Keynes called those economists "defunct" and said their ideas dominate the world anyway.

Why do they go from right to wrong? These economists who have proved right may be most generally the product of Long Wave declines. They are proved wrong by history when one long wave fades into another, in small steps of the Cycle of Civilization.

From mine of 23 July past:

For me, economics is the effort to understand what happens in the world that I see. For Keynes, for Adam Smith, for Bastiat and Say I am certain it was no different -- I am certain the effort was no different.

But I am also certain that the economy itself was quite different. That's why the observations change. What was true on the upswing was no longer true at the peak; and what was true at the peak is no longer true in the decline. The economy changes. That's what business cycles are: Changes. So, observations that were correct once will not be correct forever.

Friday, February 11, 2011

On Determining an Approach to the Economic Problem

Maitland A. Edey and Donald C. Johanson, Blueprints: Solving the Mystery of Evolution. Boston: Little, Brown and Company, 1989.

Mom's book.

Don Johanson is the discoverer of the famous "Lucy" fossil.
From a file dated 11-24-1995:

The book Blueprints is a study of evolution and the development of thought on that subject. It describes some of the observations made by Charles Darwin which led to his theory. It describes Darwin's internal struggle over the publication of his work. It describes the religious spirit of the time and the controversy which Darwin knew would arise because of his theory of evolution.

Blueprints also examines some predecessors of Darwin, those whose work paved the way for Darwin's own. The first of these is Linnaeus; next is Buffon. Both Linnaeus and Buffon were born in the year 1707; both "rode the same surging wave of curiosity that was sweeping over Europe, an avid desire for explanation and description of the natural world." [p.10]

Linnaeus devised a scientific naming system. The system he devised is still in use today. The system organizes all living things in a hierarchy of categories based on physical traits, from kingdom and phylum, to genus and species. Buffon also devised a naming system. Blueprints authors Edey and Johanson write: "As one who sought to put the universe in order, Buffon, of necessity, had to become a classifier himself. He rejected Linnaeus's system [...but Buffon's] system of animal classification was preposterous." [p.15]

The authors explain that Buffon "graded animals according to how useful they were to humans, and started with the horse, 'the noblest conquest man has ever made.'" Now, the usefulness of things is clearly what makes things useful to us, so that a hierarchy based on usefulness is not entirely without merit. But the subjective nature of Buffon's approach makes it an unsuitable standard for widespread use. Moreover, as the authors point out, Buffon's approach "does make clear what a strong hold the idea of the centrality of humans in the cosmos had on humans themselves--before Darwin." [p.15]

Now, suppose we were having economic problems and we wanted to solve those problems. We would want to devise a system or an explanation to help us understand those problems. What sort of system would be most fruitful? Would it be the system which carefully describes how these problems affect us and our society? Or would it be the system that describes the problems and how they relate to the economy as a whole, organized in such a way as to lead to an explanation of causal factors? A system based on the human aspect of the problems is a more natural approach and, because it describes the aspect which is familiar to us, it seems quite reasonable; this approach is in widespread use. But an objective analysis of the problems would be more fruitful.

Given a set of problems that are known to be problems, we can achieve much by determining the causes of these problems, and then attempting to subvert those causes. But we can achieve little by quibbling over which problems are the most harmful to us and which are the easiest to live with.

If we wish to gripe about economic conditions, Buffon's approach is well-suited to our needs. But if we are to satisfy our curiosity, our need to understand, then we must use the Linnaean style. And if we wish to solve those problems, and most especially if we are to set economic policy, we must not base policy on how problems affect us, but on the nature and traits of the problems themselves.

Thursday, February 10, 2011

Let's be practical

Recent thoughts from two guys at work who pride themselves on their conservatism. The one says:

Anything that lowers my taxes makes me happy.

The other says:

KISS -- Keep It Simple, Stupid.

I am not looked upon, by people who know me, as a practical person. But some things are obvious. If you want to fix the economy, you have to deal with 300 million people who want lower taxes and don't want to hear long-winded explanations.

Wednesday, February 9, 2011


Paul Krugman writes:

Another Kind of Financial Fragility
February 4, 2011, 10:46 am

Recent events have a lot of economists working hard at trying to determine the causes of financial fragility — the vulnerability of some economies, ours very much included, to disruptive shocks that cause credit and spending to freeze.

"Trying to determine the causes of financial fragility." Really?


We think that red blood cells cause inflation. We think that white blood cells don't. We think we can take red cells out of your blood, and encourage you to grow more white cells. We think this will keep you good and healthy.

Then, when you get sick, we try to determine the cause of your "fragility."

62 today

Will you still need me
will you still feed me
when I'm sixty-four?

Tuesday, February 8, 2011

So, what am I gonna do with this?

The graph shows the actual ("nominal") growth of GDP, and the very much greater hypothetical growth of output that would have been required to counterbalance the growth of federal debt. Economic growth enough to keep "federal debt relative to GDP" declining along its golden-age trend.

First thing I'm gonna do -- you're not gonna believe this -- is check my numbers.
I'm thinkin to spot-check 1974 and 2007 maybe, just to be sure.

The graph really highlights the growth of federal debt, really makes it stand out. I think you can tell, it's not at all what I expected to see.

All kinds of things can be said, of course. If the economy continued to grow at a "golden age" rate, there would have been a lot less call for the sort of stimulus spending that arose in response to declining growth. This alone would have pushed the federal debt down and the GDP up, reducing the massive difference from both ends at once. But I have no way to tell how much less stimulus spending would have been enacted over those several decades.

And, of course, the main problem is that we use credit for money. So no matter how much we grow, we're always gonna have too much debt. A result of confused policy.

I do think it is reasonable, since our goal is to achieve adequate growth, reasonable to look at a desired level of growth -- realistic growth -- and go from there.

"The Debt Commission and Government Excess"

The size of government is none of my concern. When I run across one of those Founding Fathers quotes about limited government, I like it. I don't object to reducing the size of government. But I don't want government extinguished.

Jeffrey H. Anderson (Dec 2, 2010) writes

The debt commission's report, to be voted upon tomorrow by the commission's members, is a provocative proposal that should help to jump-start serious discussions about paying off (or at least not continuing to add to) our $13.8 trillion debt...

While the debt commission's efforts are laudable, however, its basic premise that we have both a spending and a revenue problem is mistaken. And its notion that 75 percent of our debt-reducing efforts need to come from spending cuts, while the other 25 percent need to come from tax increases, is only 75 percent right. What we have is not a spending and revenue problem, but merely a spending problem....

The story is, it's the excessive size of government that hinders our economy.

The fact is, it's the excessive public and private debt -- especially private debt -- that hinders the economy. And the fact is, this problem has lasted so long now that it has got quite bad, so that now more and more people are taking an interest in the problem. But these people, too many of 'em, are looking only at the current situation. They're not looking at how we got into this situation.

They're looking at their taxes and government debt and stuff, rather than at the burden of private debt that has hindered economic growth for 40 years or more.

And the fact is, you cannot solve results. You have to fix the causes.

Monday, February 7, 2011

"Starve the Beast"

Bruce Bartlett
In 1976, Bartlett changed careers, going to work for Congressman Ron Paul...
In January 1977, Bartlett went to work for Congressman Jack Kemp...
In late 1984, Bartlett became vice president of Polyconomics, a New Jersey-based consulting company founded by Jude Wanniski...
In 1987, Bartlett became a senior policy analyst in the White House Office of Policy Development...
In his "Starve the Beast" PDF (2007), Bruce Bartlett writes:
The earliest reference I have seen to the phrase starve the beast appeared in a Washington Post article one hundred years ago. The author, Charles Edward Barnes (1907), used it literally to refer to intentionally starving an animal. [p.5]

The oldest expression I have found of the notion that tax cuts will hold down government spending comes from economist John Kenneth Galbraith. [p.6]

The earliest recent use I have seen of the precise term starve the beast as it relates to the budget appeared in a Wall Street Journal news story in 1985. [p.6]


Richard Nixon, Eisenhower’s vice president, continued this policy of resisting tax cuts and supporting tax increases after his election as president in 1968. One of his earliest actions in 1969 was to ask Congress for extension of the 1968 surtax... [p.7]

Gerald Ford, after succeeding Nixon in 1974, similarly resisted political pressure to cut taxes permanently... [p.7]

In an influential article in early 1976, Wall Street Journal editorial writer Jude Wanniski blasted Ford for timidity in cutting taxes. He argued that the nation needed each political party to be a different type of Santa Claus—the Democrats being the spending Santa Claus and the Republicans being the tax-cutting Santa Claus. [p.7]

After Ford’s defeat, Republicans in Congress and in the states began to experiment with tax cuts as a way of reviving both the economy and their political fortunes. In 1977, Congressman Jack Kemp (R-N.Y.) and Senator Bill Roth (R-Del.) introduced the Kemp-Roth tax bill, which would have cut statutory tax rates by approximately 30 percent across the board without corresponding spending cuts. In 1978, voters in California enacted Proposition 13, which cut and capped property tax rates, leading to further tax-reduction efforts in other states and giving rise to a national tax revolt. [p.8]

The political popularity of these two measures encouraged a reconsideration of the balanced-budget orthodoxy among conservative intellectuals. They found the starve-the-beast idea to be a way in which they could support tax cuts without abandoning a commitment to fiscal responsibility. [p.8]

Writing on the Wall Street Journal’s editorial page, which often sets the Republican agenda on economic policy, columnist Irving Kristol made clear the political connection between tax cuts and government spending. Tax cuts, he explained, are essential to shrinking the size of government. [p.9]

At this point, the circle had been largely squared. Instead of being viewed as the height of fiscal irresponsibility, cutting taxes without any corresponding effort to cut spending was now seen as the epitome of conservative fiscal policy. [p.9]

The political popularity of tax cuts would also help to elect more members of Congress with a desire to shrink government. [p.9]

In the 1980s, public-choice theory developed the idea that a conservative government might intentionally increase the national debt through tax cuts in order to bind the hands of a subsequent liberal government... More of the budget would have to be used for interest payments, thereby precluding a liberal government from spending as much as it would like on consumption. [pp.10-11]


Although the starve-the-beast theory still has adherents, even among reputable economists, the growth of spending and deficits even in the face of large tax cuts has worn down at least some of its former supporters. There is now a growing fear among such people that the ultimate result of relying on starving the beast to support tax cuts may be to make future tax increases inevitable. [p.20]

Perhaps a future fiscal crisis will provide political cover for massive cuts in entitlement programs that would be politically impossible except in such dire circumstances. [p.20]

A truly remarkable story, without a lick of economics in it.

Sunday, February 6, 2011


I have described the six decades of the post-WWII era as 30 years of Keynesian economics followed by 30 years of Reaganomics. But I think that's wrong. I think "Reaganomics" is the wrong name. I think the right name is "Wanniski-nomics"

From mine of 18 January:

Our so-called "golden age" -- 1947 to 1973 -- occupies the post-war uptrend shown on the graph. But by the last years shown, you can see the uptrend tapering off just as it did during the Depression. We squeezed out only a few more good years before that golden age ended.

After that, economic growth wasn't so good anymore. That's when the Laffer Curve, the Two-Santa-Claus Theory, and Supply-side economics, and Reaganomics arose, and lots of other trendlines started changing.

1974: The Laffer Curve

The term "Laffer curve" was reportedly coined by Jude Wanniski (a writer for The Wall Street Journal) after a 1974 afternoon meeting between Laffer, Wanniski, Dick Cheney, Donald Rumsfeld, and his deputy press secretary Grace-Marie Arnett.

1976: The Two Santa Claus Theory

The Two Santa Claus Theory is a political theory and strategy published by Wanniski in 1976, which he promoted within the U.S. Republican Party.

The theory states that, in democratic elections, if one party appeals to voters by proposing more spending, then a competing party cannot gain broader appeal by proposing less spending.

1978: Supply-side Economics

In 1978, Jude Wanniski published The Way the World Works, in which he laid out the central thesis of supply-side economics...

1980: Reaganomics

Reagan himself claimed to be influenced by "classical economists" such as Frédéric Bastiat, Ludwig von Mises, Friedrich Hayek, and Henry Hazlitt. Upon Reagan's death, a memo released by Jude Wanniski, economics advisor to Reagan during his 1980 campaign, highlights Reagan's firm grasp of economic concepts and his knack for conveying them so a layperson could understand.


So we can go to FRED and find the numbers on Federal Debt Held By Federal Reserve Banks (FDHBFRB) and compare it to the Gross Federal Debt (GFDEBT):


Those are both discontinued series, ending in 1998. So we can do the same thing using New data series (FDHBFRBN and GFDEBTN):


The first graph shows an increase in the ratio from 1955 to 1973 or so, roughly commensurate with the "golden age" that followed World War Two. It shows decline from 1975 to 1992. And it shows slight increase from 1992 to 1998.

The second graph repeats the "decline" part of the first. It repeats the slight increase and extends it beyond 1998 to 2003. And it shows slight decline thereafter, until the recent disturbance. Without looking at the numbers, I presume the sharp drop during the recent recession is a "denominator problem." That is, Fed holdings of U.S. debt didn't drop. But the trend-line dropped because of the sudden large increase in federal debt in response to the sudden large recession.

One can say that Federal Reserve holdings of federal government debt are low by historical standards. One might even suggest they ought to be increased. An increase of this nature would increase the quantity of money -- the quantity of interest-free money -- in circulation. Assuming, of course, they get it into circulation and not just into reserve accounts and corporate coffers and other hoarding hiding places.

Oops, I didn't post this first on my testing and development blog.

Taking a second look at the second increase, the "slight" increase that runs from 1992 to 2003 about, it occurs to me that this increase is commensurate with the golden decade described by Dean Baker and John Schmitt in The Real Economic Crisis -- "From the mid-1990s ... to ... the second half of 2004."

These correspondences are not coincidence. Interesting, however, that the first uptrend, while it occurred during the "golden age" did not prevent the end of that period of good economic performance. Other important factors -- such as the growing accumulation of private-sector debt -- are not considered in this post.

Saturday, February 5, 2011


"Gang8 - devoted to Creditary Economics"

Google Analytics tracks visits to this blog and to my Google Site, and reminds me daily that I must work harder to create something that more people will be interested in. The other day there was a spike of activity on the Site. The "Traffic Sources Overview" in Analytics led me to a Yahoo group called Gang8 and Message #15567:

"Gang," writes Dirk Bezemer,

I came across this wonderful site

He provides a link to my site and says, "Half right, half mistaken." My ego grew three sizes that day.

Responding to Dirk, Arno Mong Daastoel said,

Credit (and interest) is toxic only when it is spent unwisely, resulting in BAD (unpayable) debt. Debt is neutral both ethically and economically and not bad per ce.

And Dirk responded to Arno:

Agreed, Arno, that's the mistaken part. Also that there is money-money and credit-money. The correct part is that there are 'different moneys' and that the 'composition of money' matters. But remember that Keynes liked to read the 'monetary cranks' (like Gesell)- they made him think.

Hey, if Dirk is comparing me to Gesell, that ain't half bad. And if he is sayin I made him think, this is high praise.

For Dirk, a question: If there is not "money-money and credit-money" then how can the ratio of debt-to-M1 vary?

And to Arno I would suggest that the risk of credit-use "resulting in BAD (unpayable) debt" is far greater when the reliance on credit is excessive, than when it is moderate.

Arno's first response was to refuse to consider the possibility that debt can become a problem simply by accumulating. This seems to me particularly closed-minded unless Arno has already worked out an explanation. But the thing Arno says -- Credit is toxic only when it is spent unwisely -- is not explanation. It is proclamation.

Consider the source. The home page of the group says Gang8 is "devoted to Creditary Economics." So the group would want to assume that "debt is not bad." The group would want to assume that "Credit is toxic only when it is spent unwisely." No matter how much debt accumulates, the group would want to assume that it isn't a problem.

It is an assumption that must be challenged.

// UPDATE 10:24 A.M.
There are now additional posts in the thread. There is more now to consider than the views I captured above.

Just briefly, I want to suggest that Gang8 does not seem to consider the cost of a high credit/money ratio. Nor do they seem to treat monetized federal debt as interest-free, non-credit money. Just briefly.


A lot of graphs here lately, looking at the federal debt as a percent of GDP. I hope these posts don't frustrate you. I hope you find them interesting. For some reason, I seem to think it necessary to share with you an example of the "struggle with numbers" that occupies so much of my time.

Maybe that is part of the "being more personal" thing that was among my New Year's resolutions this year.
See, now I think that is funny.
You may notice, in these recent posts, that I do a lot of looking at the numbers, but not a lot of drawing conclusions from them.

If we lived in a society where everybody thought they would live forever if only they could get to the moons of Jupiter, astronomy would be different than it is today. It would be more like economics.

Everyone who has touched money has "experience" with the economy and "views" about it. And this personal aspect of our subject affects the conclusions we reach.

And I think the conclusions we reach -- or at least the conclusions that policy-makers reach -- are clearly, obviously, outstandingly wrong.

I think it is easy to get the conclusions wrong, when you have "experience" and "views" and a vested interest in a thing.

I do my best to avoid reaching conclusions. I try to look at evidence until the conclusions presenting themselves become undeniable.

I do not jump to conclusions. I jump away from them.

Friday, February 4, 2011

Doubting the Numbers

Then I got email from my son Jerry:

I'm trying to figure out your post numbers problem... Could you try using
(gross federal debt from "hist07z1") / (nominal GDP from measuringworth)
instead of
(gross federal debt as a percentage of GDP from "hist07z1")
and see what happens?

Jerry thinks the discrepancies in the numbers may arise because the "federal debt relative to GDP" table has embedded GDP numbers that differ from the Measuringworth numbers I'm using. It was a good idea, I thought.

So I made another copy of the first spreadsheet, deleted everything but the original source table, and started over.

Took the Gross Federal Debt numbers from the "hist07z1.xls" source the Supporting Evidence site provides. Deleted the "TQ" row right away.

Took the Nominal GDP numbers from Measuringworth, as Jerry suggested. And calculated my own "Federal Debt Relative to GDP" numbers from the two sources.

Then to satisfy curiosity, I compared my calculated numbers to those given in the "hist07z1" table, for the 1955-1973 period:


The one is consistently lower than the other; this is exactly the problem that kept recurring in the previous analyses. I think Jerry has identified the problem. The discrepancy is in the GDP numbers. Not in my arithmetic. Well, that's a relief.

Next step was to generate a "best-fit" exponential trend based on the 1955-1973 years of the improved "Federal Debt Relative to GDP" numbers. I also have to grab the exponential formula from Excel:

y = 0.6854e-0.0381x

The R-squared value came out at 0.9891, even higher than I had before. So that's good.


Using this formula in my Google Docs sheet, the base-period comparison looked good:


And the full-period trend will look familiar by now:


The next step is to calculate the hypothetical output for which growth is fast enough that the gross federal debt declines along the exponential curve. To do this I'm using federal debt numbers from the "hist07z1" divided by the exponential curve number, again following Jerry's suggestion.

I generated the GHP numbers and made graphs comparing hypothetical output to actual ("nominal") output. First, the base period 1955-1973:


I was relieved to see that the two lines cross repeatedly in these years, just as they do in Graph #3 above. Finally, the little things were taken care of, and I could move on. Only the big thing remains:


But before I go, here again is a close-up of the start of the Federal Debt problem: