Tuesday, March 13, 2012

The analysis is incomplete

JW Mason links to Seven unsustainable processes, again? (short PDF) which contains two quotes that caught my attention. First:

Godley (1999) pointed to seven unsustainable processes which could harm U.S. growth prospects. In our view, a longer, deeper crisis was averted in 2001, without addressing the underlying growth problems, so that the next (current!) crisis was more severe.

Sure, okay. And the rest of that thought, too:

It follows that if the remaining imbalances are not addressed by appropriate policy measures, resuming growth under the same demand patterns will imply further instability.

Yeah. Except for one thing. This pass-the-buck approach to dealing with the longer, deeper crisis does not go back only to 2001. It goes back at least to 1974.


Some commentators put the blame on monetary policy for keeping interest rates too low, and therefore allowing an ever increasing level of debt.

In our view, low interest rates helped defer the crisis.

Again, sure... Low interest rates DID help defer the crisis. And low interest rates did contribute to the expansion of debt, or at least, did nothing to slow it.

Low interest rates postponed the inevitable and made it worse -- exactly as the PDF posits in the first quote.

It seems to leave us between the rock and the hard place: Jack up interest rates and suffer the consequences now, or leave 'em low and suffer worse, later. But the analysis is incomplete.

I insist: The analysis is incomplete.

Our assumptions so thoroughly permeate our thinking that we fail to see what we're doing wrong. We think we need credit for growth. So we see nothing wrong with increasing our reliance on credit, and increasing it more. And then increasing it more.

And then increasing it more.

But we don't need credit for growth, not so much. Certainly we do not need a volume of credit equal to three and one-half times GDP. One-fifth of GDP is probably twice what we need for growth.

Thing is, we don't just use credit for growth. We use credit for everything. And we don't pay it off. We let it accumulate. We use credit like money and let debt accumulate. We make financial crisis inevitable.

But it's not like we had a choice. It's policy. We use credit for growth because policymakers think credit is good for growth. And they set that in stone.

Oh, and the other thing: They think printing money causes inflation. So the cheap money, interest-free money, there's almost none of it around. But there is plenty of expensive money in use, as evidenced by the size of private debt.

And when the expensive money contributes to inflation, policymakers further restrict the quantity of cheap money, and make the expensive money more expensive. What they ought to do is encourage more rapid repayment of existing debt, to fight inflation.


The Arthurian said...

There are not only the two options

1. Stop the growth of debt, and create a problem now.
2. Allow the growth of problem, and create a bigger problem later.

There is a third option: Use the repayment of debt as a way to fight inflation. Always.

Jazzbumpa said...

I've been looking at the relationships between money supply and inflation and debt and inflation and find nothing compelling in U.S. data.


I think there was a transient relationship in the 70's. I'm wondering if that was merely a data artifact, but don't know how to get a firm handle on that idea.

Looking at short term data, there is little to no correlation. Looking at 8-yr averages, During the 70's, inflation, M2 and TCMDO all increased. During the 80's M2 and inflation fall. TCMDO does not.

Don't remember where I got this ref - maybe from you at some time.


He states: "Data since 1959 are used for the analysis. While data are available much farther back in time, the relationship between
money growth and inflation was
quite different in earlier years.


That is a 1999 paper. Since the early 90's any correlations have completely broken down. For the last 20 years there have simply been no correlations between inflation and either money supply growth or debt.

I contend that either 1)a relationship that comes and goes is no relationship at all (simply coincident correlation) or 2) at different times, for reasons that are not clear to me, the economy exists in different realms, and in these realms the relationships among measurables are different.

I'm convinced the ZIRB is a different realm - as now and in the 30's. I also believe the 70's were different in some other way.

What got us here and why. I find economic explanations very unsatisfactory.

But I don't have any data that suggests that excesive growth of the finance sector is innocent.

This guy doesn't exactly go there, but the insights are inteesting.



The Arthurian said...

Lots to chew on.

"I've been looking at the relationships..."
The relation must be between spending and inflation, but everything else in the world comes into play.

As you know, Milton Friedman showed a close relation between money/output and prices, but I have shown his arithmetic to be so bad it borders on fraud.

"I think there was a transient relationship..."
The economy changes. The measures of money change. You might be able to patch together a long-term graph using different money measures combined with different prioritizations for money and other factors, maybe GDP growth or productivity and even population shifts.

But we should expect a graph that compares M2/RGDP to prices for a hundred years -- Friedman's graph, say -- we should expect it to FAIL because the economy changes all the time. Among other reasons.

"Since the early 90's any correlations have completely broken down."
I showed some significant correlations... no, patterns, say, centered on that time period.

And maybe I should be explicit about this: If I talk of inflation it is not because I'm worried about inflation. It is because inflation is a strong signal emitted by the economy, a powerful indicator, whether high or low or zero or negative.

"I contend that either 1) no relationship at all or 2) different realms..."
I'd go with 2). The economy changes all the time.

"I don't have any data that suggests that excessive growth of the finance sector is innocent."
If finance grew faster than the rest, probably it was more profitable. But growing profit for finance means relatively shrinking profits for the productive sector. Thus, stagnation. The more so, if we subtract the financial component from GDP.

Also, supply and demand. Finance grows because of the demand for finance. Not for financial assets so much; (that's a cost to the financial sector). But demand for loans, which is the source of revenue to finance. Cut the demand for loans in half, and we cut finance in half.

re the Mises link, it is not clear to me what money the guy is talking about. Perhaps, sometimes base money (which the Fed controls) and sometimes much larger aggregates (which it does not).

The Arthurian said...

BTW my post is not about inflation. It is about a monetary imbalance and the way to correct that imbalance.