Saturday, March 10, 2012

"In Woodford (2011), the word 'debt' occurs just once."

Today's featured publication at the St. Louis Fed -- go to
and hover over Publications on the menu bar -- is The Federal Reserve Bank of St. Louis Review. The first item on the "In This Issue" list is Death of a Theory, a 20-page PDF by James Bullard, President of the St. Louis Fed.

He's sharp, Bullard is. I never read his stuff until I read David Andolfatto's What output gap?. But Bullard has a way of capturing in a single paragraph ideas I sometimes struggle with for months. Not saying I often agree with the guy, but he does come up with some very quotable quotes.

This is not especially one of them:

In Woodford (2011), the word “debt” occurs just once. This is because, within the setting analyzed there and in most of the literature, there is nothing special about government borrowing, as it indicates only that taxes will be collected in the future in such a way that the net present value of taxes and expenditures are equal. Debt might represent a problem only to the extent that it means that the proposed increases in government spending today are not being matched by taxes collected during the same period...

Notice that when Mr. Bullard uses the word "debt" here he is thinking specifically of "government borrowing" and "government spending" and "taxes". When he uses the word "debt" he means only the Federal debt.

When he uses the word "debt", he neglects 80% of debt.

Mr. Bullard, sir, I like ya, but you're never gonna see the problem if you refuse to look at the problem.

Gross Federal Debt (the big one) as a percent of Total Credit Market Debt Owed
Before the crisis, sir, the Federal debt was less than one-fifth of total debt, and had been falling for the better part of two decades.

I count the words as you do, Mr. Bullard. But it's important to count the debt, too.

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