Saturday, September 17, 2011

Exponential Force

Re-posted from 8 Jan 2010

The purpose of policy is to change the economy

The economy changes in response to policy. The economy changes, but policy doesn't.

The economy changes, and after a while policy starts to fail because policy has not changed. We don't change policy, because we think our policy is the right solution to the economic problems.

When policymakers realize their solutions are failing, they don't change them. They strengthen them. As time goes by, strengthened policies reinforce the economic changes, changes created by policy. The strengthening makes things worse.

We think we know what must be done to fix the economy. We think that if we make our policy strong enough, we can make things better. But it turns out we must strengthen policy again every few years.

It becomes a trend. Policy grows stronger as time goes by. The strengthening of policy in this manner is a driving force that can create exponential trends in economic data.

The exponential growth of debt is a consequence of economic policy.


jim said...

Hi Art,

What is the reason you ended the debt/dollar graph at 2007?

Here is the current version

This relates to one of the most interesting quotes from the Minsky document:

"Thus, bankers (using the term generically for all intermediaries in finance), whether they be
brokers or dealers, are merchants of debt who strive to innovate in the assets they acquire and the liabilities they market. This innovative characteristic of banking and finance invalidates the fundamental presupposition of the orthodox Quantity Theory of money to the effect that there is an unchanging "money" item whose velocity of circulation is sufficiently close to being constant: hence, changes in this money's supply have a linear
proportional relation to a well defined price level."

The Arthurian said...

Gawd! Your graph starts at over $10!!!

The reason is... laziness I suppose. That version of my DPD graph is a couple years old, and from a time before I knew of FRED. So my data came mostly from Statistical Abstracts, and the newest issue's most recent debt data was always a couple years old.

I find that, every time I update the graph, pretty soon it's out of date again. Thought I could get away with one here, but you caught me :)

Your graph shows a recent peak (which mine lacks) similar to the peak of 1933. I have been expecting the new peak ever since I first looked at the Historical Statistics numbers (which show 1916-1970) some time in the late 1970s or so.

What interests me much on both our graphs, however, is the similar (if brief) peak-and-downturn around 1990-1993. Immediately after that decline ended, you will note, there was 5 or ten years of very good economic performance.

Similarly, there was a "golden age" after the 1933-1947 decline came to an end.

RE: the Minsky quote...
Interesting, about invalidating the fundamental presupposition.

"Financial innovation" fascinates me, but it is a curse.

I think we... they... policymakers let innovation get away from them in the 1970s and 1980s. When they should have restrained it, they encouraged it because (I guess) they thought it would help the economy grow. The "we need credit for growth" thing, as always.

RE: the presupposition.
Yes. I have complained (somewhere) that Milton Friedman had very strict ideas about what should happen to money, but he didn't care which money measure was used.

I think that's absurd. The different money measures are different mixes of money and debt. The WHOLE trouble with our economy is the excess of debt relative to money (as our graphs show). So Friedman misses the WHOLE point.

I gotta go finish mowing the lawn before the wife gets home!

Thanks, jim.