Friday, August 31, 2012

Paul Krugman Faces Debt

Photo: Jeff Zelevansky / Getty Images (Forbes)
Graph: Paul Krugman / NY Times (FRED)

MPRA 40696

Thursday, August 30, 2012

"Technology changes everything"

Title of this post comes from a recent TV advertisement for some school that wants your money desperately enough to advertise.

I suppose you can't deny it: technology does change things. Couple of my personal favorites: the fax machine and the microwave oven.

New phones, no, I don't care. They're everywhere. Doesn't matter. I couldn't be bothered even to answer a land-line phone. Why would I want a one I can carry around?

But that's just me. Let's go with Toynbee instead. Arnold Toynbee. In my old notes, under Why Technologies Are Abandoned (Toynbee), there is this excerpt:

When a civilization is in decline it sometimes happens that a particular technique, that has been both feasible and profitable during the growth-stage, now begins to encounter social obstacles and to yield diminishing economic returns; if it becomes patently unremunerative it may be deliberately abandoned.

...An obvious case in point is the abandonment of the Roman roads in
Western Europe....
from: Arnold J. Toynbee, A Study of History. Abridgement by D.C. Somervell, pp.255-256.

If it becomes patently unremunerative it may be deliberately abandoned.

Technology changes everything. But technology does not survive if it becomes patently unremunerative.

Economics trumps technology.

Wednesday, August 29, 2012

Funny, in a sad way

This, from fat pita.

And this, from Scott Adams.

Tuesday, August 28, 2012

Celebrate the Fed

This is one of them: Velocity since 1869. (The red is what FRED had before.)

I am still astounded by the density of recessions up to the 1930s.

Monday, August 27, 2012

Why don't they just move the Actual/Projected Line to the left enough to make things better now?

Funny how everything always gets better *after* the Actual/Projected Line.

From CBO:

More slides available at the link.

Sunday, August 26, 2012

Heilbroner and Bernstein (3): In Pictures

Following up.

Figure 1
Figure 1:

The little rectangle with a little "d" in it is a "deficit". You know, we get them every year. After a few years, they begin to pile up.

Figure 2
Figure 2:

You can think of the accumulated deficits as "debt". That's what the big "D" means.

Yeah, the one on the left shoulda had a small "d" in it.

Figure 3
Figure 3:

But remember, debt is just an accumulation of annual deficits.

Figure 4
Figure 4:

Sometimes we get inflation, and the value of the dollar becomes less. The value of the debt we owe becomes less, too.

Figure 5
Figure 5:

But the new deficit from this year doesn't get any smaller, because the dollars themselves are already smaller.

Figure 6
Figure 6:

This year's deficit cannot shrink until we get more inflation, like next year maybe. It is the old deficits, the old debt that is shrinking because of inflation.

Figure 7
Figure 7:

According to Thayer Watkins, the way Heilbroner and Bernstein adjust the deficit for inflation is to take the new total debt, with the latest deficit added in, and adjust that number for one year's inflation, and then subtract out everything except the current year's deficit. But when you do that, you make the deficit look smaller than it is.

Intuitively, I just don't think that's right.

I will come back to this topic, after I ruminate a while.

Inflation-adjusted debt is sometimes a useful concept, as when you want to evaluate the erosion of debt by inflation. But it is always important to get the arithmetic right.

Saturday, August 25, 2012

Heilbroner and Bernstein (2): Adjusting "this year's deficit" for "last year's inflation"

Woke up the next morning saying That's not right!

I think Heilbroner and Bernstein's incremental adjustment is a cheat that reduces debt by bad arithmetic.

Suppose we have an inflation that reduces our 100 debt to 90. But let's do it H&B's way, adding in this year's new debt before making the adjustment.

So, say our new addition to debt is 10. So our total before inflation is 110. And then after the inflation adjustment, ten becomes nine, so our 110 debt becomes 99.

We start with 100, add 10, adjust for inflation, and end up with 99. We end up with less debt than we started with, after adding ten. That has to be wrong. It is wrong, because we don't get to inflation-adjust this year's addition to debt for last year's inflation!

What I think it should be: Take last years accumulation of debt (100) and adjust that for last year's inflation (reducing it to 90) and then add this year's deficit (bringing accumulated debt up to 100 again. The difference isn't much, 100 instead of 99. But do it wrong every year and accumulate the differences, and it will add up. Anyway if the math is wrong, it's wrong.

As I noted previously, H&B's objective in the book (as Thayer Watkins presents it) was to minimize debt. Not to reduce debt, but to reduce the significance of debt in people's minds. It looks to me like they were willing to use bad arithmetic to do it.

I still need to check this out more rigorously.

Friday, August 24, 2012

Heilbroner and Bernstein (1)

It took about two hours of Google search, but I finally found somebody who inflation-adjusts debt by the incremental method, as I do in the On Erosion posts and the Measuring the erosion of debt PDF.

The "somebody" is Robert Heilbroner and Peter Bernstein, authors of the book
The Debt and the Deficits: False Alarms/Real Possibilities. I found them in an old page by Thayer Watkins of the San José State University Economics Department: The Deficit of the Government.

Watkins reviews the techniques by which Heilbroner and Bernstein minimize the Federal debt:

First, Heilbroner and Bernstein consider how much of the Federal debt is owned by the Federal Government itself. Deducting the sale of debt to agencies of the Federal Government gives a net concept of the deficit as opposed to the gross deficit...

Second, there is no reason to limit the concept of government deficit to just the Federal Government. The state and local governments' budgets should be taken into account as well. Usually on balance the state and local governments run a surplus which offsets a major portion of the Federal deficit.

To me, these sound like agenda-driven arguments. But there is something else:

The above corrections are important but the most important conceptual innovation presented by Heilbroner and Bernstein is the correction of the debt for inflation.

Watkins presents a formula to figure the deficit from debt numbers:

(Deficit in year t) = (Debt at time t+1) - (Debt at time t)

and says,

Heilbron and Bernstein correctly note that if one wants the real (inflation adjusted) deficit the way to get it is from the above equation in which the value of the debt at time t+1 is adjusted for changes in the price level by dividing by the price index.

(Real Deficit in year t) = (Debt at time t+1)/(1+f) - (Debt at time t)

where f is the rate of inflation during year t.

I have to look at this. The inflation adjustment is not written the way I would write it. I went to bed thinking about it and woke up the next morning saying That calculation's not right!... It looks to me like he is adjusting "this year's deficit" for "last year's inflation". But I'm not sure. I have to look at it.

In the meanwhile, I am happy to see that I am not the only one who thinks that the inflation adjustment of debt must be an incremental adjustment.

Thursday, August 23, 2012

Echoes of the Ancients

From Al's Emporium at the Wall Street Journal, CEOs Tax the People:

All the major corporations cited in the report paid more to their CEOs than they did in federal income taxes...

Actually, the world's wealthiest people have now stashed $21 trillion to $32 trillion in offshore tax havens, according to a recent estimate by the London-based Tax Justice Network in a report written by a former chief economist for McKinsey & Co.

The middle of that range is more than the annual gross domestic product of the U.S., China and Japan combined.

More than the GDP of the US, China and Japan, combined.

From Domesday: A Search for the Roots of England by Michael Wood:

Archaeology has shown that in the third and fourth centuries
villas were built in great numbers in southern Britain....

Built by wealthy Romans, escaping a decadent and declining Rome.

The long-term effect of Roman government, then, may well have
been to concentrate land in the hands of the governing aristocracy at
the expense of the mass of the population at large.

Concrete evidence survives which gives a clear picture of this
accretion of power and land by a British landowner at this very time.
It consists of a Latin life of a Roman lady from the great family of
the Valerii; she became a Christian, and the Church recorded her
disposal of many estates to charity. In AD 404 Melania freed 8000
slaves out of a total of 24,000 on sixty farms, villas or hamlets
which she owned in the vicinity of Rome. Her other landholdings
included estates elsewhere in Italy and Sicily, Africa, Spain and
Britain.... her rentals show her income to have been on a scale
comparable to the imperial revenues.

Income comparable to the imperial revenues of Rome.

Corporations paid their CEOs more than they paid in taxes. And the tax-haven stash exceeds the GDP of the US, China and Japan combined.

The post at Al's Emporium: CEO = Cash Eating Organism
Al links to this report: Executive Excess 2012 (PDF)

Wednesday, August 22, 2012

Remember the name Edward J. DeMarco and curse it

People talk about fixing our economic problem by regulating or deregulating or inflating or deflating or by... well, the list goes on and on. But, what *IS* the problem?


And how do we know this?

Because the economy tanked all of a sudden when deleveraging became all the rage.

So what must the solution be?

The solution can only be to help with deleverage: to help reduce private debt as soon and as fast as possible. To get us to the point where we don't have to reduce debt.

Joseph E. Stiglitz and Mark Zandi write:

Late last month, the top regulator overseeing Fannie Mae and Freddie Mac blocked a plan backed by the Obama administration to let the companies forgive some of the mortgage debt owed by stressed homeowners. While half a million homeowners could be helped with a principal writedown, the regulator, Edward J. DeMarco, argued (we believe incorrectly) that helping some homeowners might cause others who are paying on their loans to stop so that they also could get their mortgages reduced.

First of all, so what if others also want their mortgages reduced? That is exactly the thing that must be done. We should prevent this thing that needs to be done, because it is something people want?

That probably gets us into the arena of "moral hazard". That's fine. Let's look at the problem again.

The problem is debt. Excessive private sector debt.

The solution must be to reduce private sector debt.

If you have some excuse for not allowing the reduction of private sector debt, then you are delaying or preventing economic recovery.

Edward J. DeMarco, you are delaying and preventing economic recovery. Get off your damned high horse, Edward, you holier-than-thou son of a bitch.

And for the record, the right time to be a moralistic prick would have been the 1990s, when you were instead encouraging the excessive use of credit and the excessive accumulation of debt. Or the 1980s, when you were encouraging the excessive use of credit and the excessive accumulation of debt. Or the 1970s, when you were encouraging the excessive use of credit and the excessive accumulation of debt. Or even in the 1960s.

Then, it would have been a heroic stance to take. Now, it is a horrific stance.

Tuesday, August 21, 2012

Jackson Pollock it ain't

But interesting it is:

FRED Graph #5Do, Found by Random Eyes
Click for FRED Source Page
I can't say who it was that created this graph, nor what they were trying to see. But the graph does show that if you have an inventive mind, you can do some clever things with FRED.

Monday, August 20, 2012

"useless as a fire-hose against a tsunami"

From a guest post by Benjamin Cole at Historinhas --

The conventional central bank weapon for economic stimulus—lower interest rates—is as useless as a fire-hose against a tsunami. Yet Western economies are badly in need of a boost.

Accepted. Now... The usual boost is to substitute fiscal boost for monetary, by increased government spending or perhaps by tax cuts that cause the increased spending to arise in the private sector.

But why does the chatter move from specifics (reducing interest rates) to generalities (monetary policy) to alternatives (fiscal policy) and then back to specifics (changes in taxes and/or spending)? Why the diversionary tactic?

Why the loss of focus? Let's start over.

The conventional weapon is to lower interest rates when a boost is needed.

Stick with that thought. Don't let your mind wander. Now: Why does it work? Or (more accurately) why did it work?

The cause is that interest rates go down.
The effect is that the economy picks up. Spending picks up. Economic growth picks up.
How did that work?

Two ways. Either the lower cost of borrowing induces more borrowing (by supply and demand), or the lower cost of borrowing induces more refinancing, which frees up some income to be spent on other things. Or both.

Either way, the reduction of interest rates lowers financial costs. And the effect of the lower financial costs is that economic growth improves... or is supposed to improve.

It used to work. Now it doesn't.

Don't lose the focus. We're looking at monetary policy here. We're looking at reducing financial costs. And, supposedly, we cannot reduce financial costs any more because interest rates are already at zero.

Supposedly. But we *can* reduce financial costs. We can reduce them a lot. Interest costs are not the only financial cost there is, in our economy. There are also principal costs. If we need to reduce financial costs, and we can no longer reduce interest rates (or if interest-rate reduction has become ineffective), then we can try principal cost reduction.

We can try debt forgiveness and debt writedowns and policies along those lines.

Sunday, August 19, 2012


Tim Duy quotes Joe Gagnon of the Peterson Institute for International Economics:

For more than two years, the Fed has dragged its feet and resisted the obvious need for more aggressive action...

...A large majority of the committee projects that inflation will be below target over the next two and a half years. If they assign any weight to their employment objective, they should be willing to accept inflation at least modestly above target in order to get a better outcome on employment.

Duy's initial reaction: "Considering that more aggressive action has not been taken, monetary policymakers appear to disagree."

My initial reaction: The idea of relying on this trade-off -- accepting higher inflation to get lower unemployment -- is shudderingly simplistic.

Oh, I know: It's just the Phillips curve. And yes, I embrace the Phillips curve. But hey, don't think of it as a "curve". Think of it this way:

One of the arrows is "More Unemployment (Less Inflation)". The other arrow is "Less Unemployment (More Inflation). And that circle in the middle, that's us. Policy slides us a little more to the left, or a little more to the right. And policy discussions like Joe Gagnon's and Tim Duy's talk about where the circle ought to be.

If we were Flatlanders living in that circle, or if we were living somewhere on the actual Phillips curve, we could not tell the difference. (That was the point of the book Flatland.) So what I'm saying here is that really, the Phillips curve is two-dimensional. The Phillips trade-off is two-dimensional. And the argument about whether we should favor more inflation or more unemployment is two-dimensional.

One-dimensional, maybe.

DeLong and the History of Economic Thought

From Brad DeLong's Why History of Economic Thought Is Important

I only took the first part of his post title because I'm only looking at the first part of his post. I'm leaving out Arthur Laffer and the Wall Street Journal.

Allow me to do a little secretarial work also on this excerpt from DeLong's post:
As every even casual student of the history of economic thought knows: back before 1829, whether it was sensible to talk about
increases in economic agents' planned spending raising and decreases lowering economic activity in the short run
was an active research question in economic theory. Back then Say's Law ruled: since nobody produces for sale without intending to purchase, by "metaphysical necessity" planned spending must be equal to and could not be raised above or lowered below production. Thomas Malthus complained that this "Say-Ricardo doctrine" seemed sound in theory but did not appear to fit the world in practice, but he had no theoretical resolution to the problem.

As every even casual student of the history of economic thought knows, the question was definitively resolved by John Stuart Mill in 1829. Mill observed that people plan to spend their incomes not just on currently-produced goods and services, but also on financial assets. When economic agents in total plan to leverage up, planned spending in the short run is in excess of production--and then production rises and the economy booms. When economic agents in total plan to deleverage, planned spending in the short run is below production--and then production falls and the economy slumps.

That's a nice summary. Fits with what I believe. Reminds me of a Mill quote Milton Friedman used in Free to Choose:

There cannot, in short, be intrinsically a more insignificant thing, in the economy of society, than money ... and ... it only exerts a distinct and independent influence of its own when it gets out of order.

Unfortunately, I'm not even a casual student of the history of economic thought. I think it's hugely important, far more than the history of (say) physics. I just don't have the time. Nick Rowe says read a textbook, dammit, it'll only take a day or two. But economics texts are 900 pages. It would take the rest of my life to read that much.

I'm a student of the economy. I look at graphs.

Anyway, I liked this part:

Back then Say's Law ruled: since nobody produces for sale without intending to purchase, ...planned spending must be equal to and could not be raised above or lowered below production.

I liked it, because it is so obviously wrong.

And I liked this part:

Mill observed that people plan to spend their incomes not just on currently-produced goods and services, but also on financial assets.

Because it is so obviously right.

One hundred and seven years later, Keynes shot down Say's Law again, in the midst of the Great Depression when it was pretty clear to everyone except economists that the demand for money and the demand for output are not always precisely coordinated. People do sometimes produce for sale without intending to purchase. Everybody wants a bigger nest egg.

But now, again, the message has been forgotten.

How often must this correction be made? If you want the five-digit years, if you want the Hari Seldon thing, you're gonna have to treat a few rules like facts. This is one of them. It doesn't hurt the economy if everybody saves a little. So, your nest egg is safe. But it hurts the economy plenty when there is too much savings or too much spending on financial assets, to put it Mill's way.

I know. Everybody wants a bigger nest egg. That's why the problem recurs. But if we want to fix the economy, we have to establish serious rules limiting the growth of finance relative to the productive economy. Savings, and all that.

Then, the only choice is whether we want everybody to be able to have a decent nest egg, or whether we allow some few people to have all of it. Those are the options.

Saturday, August 18, 2012

On Erosion (4): Erosion and De-rosion

Now, a look at real debt relative to real GDP, where each year's addition to debt is inflation-adjusted separately, based on that year's price level:

Graph #1: Incrementally Adjusted Real Debt Makes Erosion Visible
The blue line is the same as Krugman presented, from earlier in this series. You can still see the face in it -- the nose, the chin, the forehead. CMDEBT relative to GDP, expressed as a percent, straight out of St. Louis. Nominal divided by nominal.

The red line is real CMDEBT divided by real GDP, where each year's addition to debt is adjusted for inflation incrementally, as opposed to the way real GDP is figured. The red line runs higher than the blue because inflation erodes debt. This graph shows it.

It is a simple matter now to visualize the erosion of debt. One can see it by looking at the nominal value, relative to the incremental real value, or the blue line as a percent of the red line from the above graph.

Graph #2: The Erosion of Debt by Inflation
The 1965-1983 decline is striking. That decline occurred during the Great Inflation.

The post-1983 increase suggests that either we used too much debt, or prices didn't go up enough in the past 30 years. Only one of those possibilities makes sense to me. It cannot be that prices did not go up enough.

It must be that we used too much debt.

// The Google Docs Spreadsheet

Friday, August 17, 2012

On Erosion (3): The Simple Things

Next, we need to look again at CMDEBT relative to GDP, the relation on the graph we started with. Krugman's graph. But I want to look at it three different ways.

I want to see nominal CMDEBT divided by nominal GDP. This will look just like Krugman's.

I want to see real CMDEBT divided by real GDP, where the inflation adjustment is applied to aggregate numbers, just as real GDP is figured.

And I want to see real CMDEBT divided by real GDP, where real debt is figured by incremental adjustment, as described above.

The first two I can do in FRED:

Graph #1: Two Lines in the Same Location
Click graph for FRED source page
Blue: Nominal debt divided by nominal GDP. Red: Real debt divided by real GDP.

The blue line on Graph #1 here is almost entirely hidden by the red line. I started the red line just a bit late, and stopped it just a bit early, so you can see there actually *is* a blue line on the graph.

The two lines are identical.

The blue line shows CMDEBT relative to GDP using "nominal" values, exactly as Krugman has it on his graph. I even multiplied by 100 (as Krugman did) to convert the ratio values to percent values. (The "99.993" in the second formula is the price number for 2005, the base year for FRED's GDPDEF series.)

The red line shows CMDEBT relative to GDP using "real" values -- numbers with the price level divided out of them. Debt is adjusted on this graph by the same inflation-adjustment calculation that is used all the time for GDP. In other words, GDP and CMDEBT are adjusted the same way and for the same amount of inflation. As a result, the Debt/GDP ratio after adjustment is equal to the ratio before adjustment, and the red line ends up in exactly the same location as the blue line.

The graph shows absolutely no "erosion" of debt resulting from inflation. But this is absurd. The inflation adjustment of debt on this graph is most certainly wrong.

What the above graph shows is that anything divided by itself equals one.


Perhaps this is the relation Sumner had in mind when he ignored the effect of inflation on debt for the 1964-1984 period.

Scott Sumner's analysis of Krugman's graph, seemingly accurate on its face, is deeply flawed. The analysis ignores the effect of inflation on debt. It pretends there is no such thing as "erosion" of debt. It misinterprets the effect of inflation, reading it as a significant reduction in new borrowing.

Marcus Nunes builds upon Sumner's error, creating a plausible story about optimism to explain the reduction in borrowing during the Great Inflation. But the reduction in borrowing is something that never actually happened.

If the simple things are not laid out correctly, then everything built upon the simple things is at risk of being wrong.

...the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premisses.
- J.M. Keynes

Thursday, August 16, 2012

On Erosion (2): Ada and Ida

The first thing I want to do is duplicate Krugman's graph from yesterday's post.

Graph #1: Krugman's Graph

Graph #2: My version of Krugman's Graph

Not bad. If you see differences, it is because I downloaded "annual" data from FRED, and Krugman probably used the default "quarterly" data. Both graphs show the same "face" -- a nose in the 1980s, a chin before that, a neck in the early 1960s. Even indications of eyes and hair can be seen in the graph.

Next, I want to graph the raw debt numbers (not divided by GDP) along with "real debt" numbers figured the way "real GDP" is figured:

Graph #3: The Raw Numbers, and "Real" Debt Figured by Aggregate Debt Adjustment

The relation between the two lines shown on Graph #3 is similar to the relation between Nominal GDP and Real GDP, which you have probably seen many times. The two lines cross in 2005, because the price deflator used for the conversion has 2005 as its base year. The red line is higher than the blue in the years before 2005, and the blue line is higher in the years after 2005.

Suppose you wanted to use this graph to learn something about inflation's ability to "erode" debt. After all, some people do call for a higher inflation target -- increased inflation -- to help reduce the burden of debt.

But in 2005 the lines cross. The real and nominal values are equal in 2005. In other words, in 2005 there was *no* erosion of debt, despite all the inflation we had between 1950 and 2005. That is wrong, of course. But that is what the graph shows.

It is the calculation used to figure "real" debt that is incorrect.

Next, I want to do the graph again, using the incremental inflation adjustment described in yesterday's post.

Graph #4: The Raw Numbers, and "Real" Debt Figured by Incremental Debt Adjustment

Here, "Real" debt is significantly higher than nominal debt at every point on the graph. The red line is higher than the blue, by the amount that debt was eroded by inflation. If you are looking to see the erosion of debt, this graph shows it. Incremental Data Adjustment (IDA) of debt shows it.

// The Google Docs Spreadsheet

Wednesday, August 15, 2012

On Erosion (1): Calculating Real Debt

The typical inflation-adjustment of GDP takes the total dollar value of one year's output and converts it to the dollar value for another year. To do this is fairly simple: divide the one year's price number out of the GDP, and multiply the other year's price into it.

For example, if a basket of goods used to cost $80 but now costs $125, take GDP now, divide by the current price-number, and multiply by the old price number.

This calculation is used all the time to figure what economists call "real" GDP. But what happens when you want to figure debt as "real" debt?

Consider any particular year. The new debt created that year should be adjusted the same way GDP is adjusted for that year: Divide it by the price level for that year, and multiply by the base-year price. But when we inflation-adjust debt, we often get the wrong answer.

The problem is that the total debt number for any one year includes both the new debt from that year, plus a lot of old debt left over from other years. The current year's price number is relevant only for the current year's addition to debt. For older debt included in the current balance, you have to use price numbers from prior years.

One good technique is to separate the new debt from the old debt. Then you inflation-adjust the new debt for the year just the same way you would inflation-adjust the GDP for that year. Next, you look at the old debt that you didn't adjust yet, pull out just the most recent year's debt remaining in it, and inflation-adjust that year's debt using that year's price number.

And you keep doing that, stepping back a year and adjusting just the one year's debt the same way you would figure "real" GDP for that year, then stepping back another year. You go back as far as you can go, adjusting each year's debt separately, and then add them up.

This method may be thought of as "incremental" adjustment of debt.

I don't mean to harp on it. But it seems most people think you can adjust debt for inflation the same way you adjust GDP for inflation. You cannot. It works for GDP, because GDP is a measure of one year's stuff. It doesn't work for debt, because any year's debt is almost always an accumulation of many years' deficits.

Recently, Krugman and Sumner and Nunes and Wojnilower and yours truly considered this graph from Paul Krugman:

Krugman sees "a dramatic rise in household debt, which many of us now believe lies at the heart of our continuing depression."

Sumner says "I suppose it’s in the eye of the beholder, but I see three big debt surges: 1952-64, 1984-91, and 2000-08."

Nunes writes, "Why does the share of debt rise? I believe it reflects peoples “optimism” about future prospects... During the 1950s and first half of the 1960s we observe a rise in household debt. People felt good about the future... Note, however, that as soon as inflation begins to trend up in the second half of the 60s, the future doesn´t look so bright anymore. Households’ don´t increase indebtedness..."

And, when Sumner reports that the first two debt surges were followed by golden ages and the third by a severe recession, and asks "What was different with the third case?", Joshua Wojnilower responds:

The difference is the aggregate amount of household debt compared with incomes... As the aggregate amount of debt rises, increasing percentage of income and savings becomes necessary to cover interest costs and... pay back previous debt. These actions reduce the amount of income and savings available for consumption and investment, creating a drag on economic growth.

Wojnilower doesn't read anything into the graph. He doesn't chop it up into surges and remissions the way Sumner does. He doesn't attribute the surges to optimism, the way Nunes does. He doesn't even describe the increase as "dramatic" the way Krugman does. Wojnilower says only that debt was very high by the end. Then he lays out a scenario explaining some troubles that may arise when debt gets very high.

By contrast, Sumner presents a relaxed, eye-of-the-beholder evaluation of the graph. He points out three "big debt surges" and the remissions of debt growth following each. And yes, if you glance at the graph, you can see the surges clearly.

But Sumner's evaluation of the graph is too relaxed, and he misses an important detail. He calls the end of the first surge at 1964, and the start of the second at 1984. As luck would have it, Allan Meltzer calls the start of the Great Inflation at 1965, and its end at 1984. The Great Inflation fits very neatly between the first two of Sumner's surges.

Could Sumner have missed it? With all the ruckus these days calling for policymakers to raise the inflation target from 2% to 4% or more, simply to help erode debt, I don't see how Sumner could possibly have overlooked the Great Inflation.

The Great Inflation significantly reduced the burden of debt relative to GDP, and that is what you see between Sumner's first and second surge on Krugman's graph.

Perhaps Sumner would say that the inflation in the numerator (CMDEBT) and in the denominator (GDP) of Krugman's ratio simply cancel each other out. But if that was true, there could be no such thing as the erosion of debt by inflation!

// Related post: MICROBES

Tuesday, August 14, 2012

The problem is not the Dual Mandate

Reviewing an old article...

From CNN Money: Republicans to Fed: Forget about jobs, by Annalyn Censky (3 December 2010):

For more than 30 years, the Fed has been tasked with a so-called dual mandate, which outlines two important goals: keep prices stable and maximize U.S. employment.

But some critics are sick and tired of the Fed prioritizing job creation at the risk of rising prices. They say the juggling act of promoting economic growth while staving off inflation has proven ineffective, and has led to a policy of too much cheap money with dangerous consequences for the economy.

A House bill introduced last month by Pence seeks to scale the dual mandate back to a single goal of focusing only on prices, and leave job creation policy up to Congress.

You know, Congress never keeps its hands off job creation policy. They're always spending more to stimulate the economy, or spending less to let the private sector blossom. It's all hokum and hogwash anyway.

Pence is focused on the wrong thing. He has not identified THE problem. He has identified A problem. But if you're not fixing THE problem, then you are just trying to fix results. And that'll never work.

THE problem is excessive debt.

Here's what Congress does to grow the economy. They cut taxes, assuming that people will spend more as a result. They encourage saving, so that we may borrow more and spend it. They encourage spending by means of the business tax code. To grow the economy Congress does all sorts of things to cause spending to increase.

Here's what the Fed does: They fiddle with interest rates and the quantity of money in order to control inflation. They limit the amount of money that is in the economy.

Think of it like in the 1800s when we used gold for money. The Fed is limiting the amount of gold we have to spend, while Congress busies itself doing things to make us spend more. More spending, less money. So, we use credit.

So, our financial costs increase.

So eventually, the money that circulates outside the financial sector becomes insufficient to support both the productive sector and the financial sector. That's when you get a crisis.

So what the hell is Pence talking about?

Monday, August 13, 2012

When finance grows large, it circumvents and weakens policy

Note well the title of this post. It is not just a point of view. It is a view about the survival of societies. It is a view compatible with Arnold Toynbee's statement that civilizations die by suicide.

Sunday, August 12, 2012


In a comment on Scott Sumner's Debt surges don’t cause recessions, Sumner wrote:

Woj, You said;

“As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.”

This is simply factually wrong. Every debt payment is money received by someone else.

Let's put it a little differently, then. Let's stop confusing the financial sector with the productive sector. Let's look at them like two different sectors of the economy. You know: the same way the stats are presented all the time.

As the aggregate amount of debt and interest rises, the percentage of productive sector income used to pay interest costs and pay down debt also rises, lowering the amount available for consumption and investment in the productive sector.

It does not matter that "every debt payment is money received by someone else." It would not matter even if every debt payment was received by the same person who made the payment! What matters is that the money is moving out of the productive sector, and into finance. That is the problem.

Among economists, mind you, productivity is said to be of the highest importance.

I go back again and again to Adam Smith and his Factors of Production, though I do not think he called them that. Smith looked at the component parts of the price of commodities. He thought the topic important enough not only to write about, but to use in the title of the chapter where he wrote it.

Modern economists, or textbook writers at least, seem to think the Factors of Production are all about the inputs to the production process. That is incorrect or, if not incorrect, it is of no importance whatsoever to macroeconomics. (Why economics seems boring: Economists insist on talking about inconsequential and meaningless things. In place of math anxiety there is economics ennui.)

The issue is the component parts of price: The issue, gentlemen, is cost.

As the aggregate amount of debt and interest increases, the cost of finance rises in the productive sector. As Smith put it,

The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue...

The cost of finance, if not paid out of profit, comes out of wages...

Now who ya gonna listen to -- Sumner, or Smith?

Beating the dead horse, again

We looked at household debt the other day, relative to GDP:

That's Krugman's graph, used by Sumner and Nunes and me. Sumner foolishly said it shows one "debt surge" ending in 1964 and another starting in 1984. I say that between 1964 and 1984, the Great Inflation pushed the denominator up, and flattened the curve.

Let us look at that. Let's us separate out CMDEBT and GDP as two separate lines, and compare their growth rates:

Graph #2: Growth Rates of Household Debt (blue) and GDP (red)
Click for FRED source page

At the very start, the red line is high. But the blue line didn't even start yet. And at the end the red line is higher than the blue, but the blue line is down because of the crisis.

Other than that, there are only four times that the red line is clearly above the blue line: around 1965 and 1969 and again around 1975, and 1981. That's it. For those four brief moments, GDP grew faster than household debt.

All four of those moments are within the period called the Great Inflation. In all four cases, GDP grew faster than household debt because inflation drove prices up, so the dollar-value of GDP went up. It was not so much that output increased, but the rising price of output pushed the red line above the blue. At all other times, with inflation more moderate, GDP growth ran lower than the growth of household debt.

Oh, oh, oh -- There is something else. After the 1990 recession the red line rose briefly above the blue, and again, ever so slightly, maybe around 1998.

But you know what? Those two glaring highs of GDP growth both fall within Sumner's second golden age, 1991-2007. So again it isn't necessarily that debt growth slowed, but that actual improved real growth gives the impression of slower debt growth.

Saturday, August 11, 2012

How can I resist?

Two from Cochrane.

I quoted him here...

tax consumption not savings

...and I quoted him here:

most economic analyses don't look at the long-run, growth effects of tax distortions.

Yep. (Like taxing consumption, but not savings.)

I refer you to my recent remarks on savings.

Friday, August 10, 2012

Doubting Lars

In a look at Cochrane’s inconsistencies, Lars Christensen writes

Cochrane seems to be very upset about the calls for easier monetary policy in the euro zone... Here is Cochrane:

“As you might have guessed, I think it’s a terrible idea...“

Hence, Cochrane thinks easier monetary policy is very evil. However, in the in the comment section Cochrane states the following:

“I like a price level target. I view money as a set of units for value, and I don’t think the government artfully devaluing the meter and kilo to give shopkeepers a boost is a good idea, any more than fooling with inflation to do so, even if it does “work,” at least once.”

Anyway, note that Cochrane says he likes a price level targeting regime. Fine with me. Then why not endorse Price Level Targeting for the euro zone professor Cochrane?

The graph below shows the euro zone GDP deflator and a 2% trend path for prices. The 2% path is of course what the ECB would be targeting if it implemented a Price Level Target as supported by Cochrane. Now have a look at the graph again and tell me what the ECB should do now if it was a Price Level Targeter?

The graph is very clear: Monetary policy is far too tight in the euro zone and as a result the actual price level is far below the pre-crisis 2% path level.

If Professor Cochrane was consistent in his views then he would obviously conclude that the ECB’s failed monetary policies are keeping the euro zone price level depressed, but I am afraid he did not even care to study the numbers.

Cochrane should obviously be calling for massive monetary easing in the euro zone. Milton Friedman would do so.

I can only again say how sad it is that the University of Chicago professors continue to disregard the economics of Milton Friedman.

The excerpt is a bit long, but I wanted to provide context for the bit of it that interests me: Lars Christensen misinterprets Cochrane, and then says Cochrane is not "consistent".

Cochrane compares the price level to the meter and the kilo, and says it is wrong to devalue any of them. Cochrane does not say 2% inflation is okay. Cochrane wants prices as stable as the meter and the kilo.

Myself, I'm impressed by Cochrane's clarity. But Christensen doesn't see it. Strikes me as convenient obtuseness on Christensen's part.

Christensen wants easier money, if I have it right. There is a gap between the Euro zone deflator and the 2% trend line, and Christensen wants to fill that gap with money.

That's a simplistic solution.

Cochrane doesn't want the deflator to hug the 2% line. He wants it horizontal.

I respect that.

Cochrane has clear preferences. In Myths and Facts About the Gold Standard, he said:

The Fed currently interprets "price stability" to mean 2% inflation forever. A CPI standard could enforce 2% inflation. But why not establish a price-level target instead? The CPI could be the same 30 years from now as it is today, and long-term contracts could carry no inflation risk.

"The CPI could be the same 30 years from now as it is today," Cochrane says. You know what that is? It's a horizontal deflator. It's not a 2% line. Christensen misinterprets.

Yes: If we don't fill the graph with money like Christensen wants -- if we stabilize prices at zero inflation -- then we have to do something else. We have to do something other than printing more money, to fix the economy.

That's what this blog is about.

Thursday, August 9, 2012

Anthony Migchels: It matters what we pay for the money.

Anthony Migchels at Real Currencies:
It matters not what we use as money. It matters not what backs the money.

It matters what we pay for the money.


I think maybe, at some point on the long wave, or at some point on the Cycle of Civilization, it does matter what backs the money. Or maybe even just when the economy is running really well, it matters what backs the money.

But now? Now the trouble is the excessive reliance on credit, and it is a problem because of the cost of it, cost and repayment, so "what we pay for the money" is most definitely the key thing today. Today, and during the entire Great Financialization.

Wednesday, August 8, 2012

The libertarian dilemma, again

From Cochrane's January post:

I'm almost as pessimistic as Dan. Sure, raising tax rates can generate more revenue for a few years. But most economic analyses don't look at the long-run, growth effects of tax distortions. The full disincentive effects don't show up for years. If taxes just lower growth a few fractions of a percent, that soon compounds to drastic reductions in income and tax revenue.

Raising tax rates lowers growth over the long term. Sounds right, right? Well, here's U.S. economic growth since the end of World War II:

Graph #1: A 21-Year Moving Compound Annual Growth Rate

Growth has been consistently downhill. So we can assume this has something to do with tax rates going up?

Graph #2: Top and Bottom Individual Income Tax Rates
Source: National Taxpayers Union

Hard to say.

Tuesday, August 7, 2012

Cochrane: The VAT, a libertarian dilemma

From January:

An efficient tax code can also raise a lot more revenue. Dan opposes the VAT (and similar consumption taxes) on that grounds. Yes it looks good to start, but politicians will soon raise the rate to the sky and spend the results...

It's a strking dilemma: should we keep an atrocious tax system to limit the size of government? Is there no way to get an efficient tax system and a limited government?

Catches the eye, no?

No. My eye is on the prior paragraphs, the opening of Cochrane's post:

Dan Mitchell wrote an interesting op-ed in the Wall Street Journal ... highlighting a great libertarian dilemma: is a consumption tax (VAT or similar) a good thing?

Every bit of economic analysis says yes. Economists hate distortions, taxes that lead to bad economic behavior. Our tax system is full of them. Broaden the base, lower the rate, tax consumption not savings, dramatically simplify the code, and you can get the same revenue with much less economic damage.

Dan and Cochrane both, apparently, think it would be good to "Broaden the base, lower the rate, tax consumption not savings, dramatically simplify the [tax] code".

Tax consumption, not savings?



Monday, August 6, 2012

On a log scale...

The quantity of base money and the CPI run fairly parallel from WWII to 1982, then veer apart.

Graph #1: Prices and Base Money
You could have just now landed from outer space, and you could still see that there was a significant change -- a significant policy change, probably -- around 1982.

As Staniford said, "it's hard to read changes in small growth rates on a log graph." Still, I think I see a gradual separation of the red and blue lines before 1982. In particular, the gap in the 1970s is twice as wide as in the 1950s!

And there is even more of a widening after 2007.

If you could pick up the blue line intact and move it until its little 1921 peak sat squarely atop the 1921 peak of the red line, you would see a similar -- gradual but accelerating -- separation of the lines from 1921 to 1945.


Now, base money and the rate of inflation:

Graph #2: Base Money and the Inflation Rate
There is pretty much a straight-line increase from 1970 to 1990 on the blue line, if not longer. And right in the middle of that invariant increase, inflation dropped away. It's almost like, before 1982 the blue line served as a "bottom" for the red line. And then after 1982, not.

This one is mostly just all visual effects and mathematical coincidences, I think.

Sunday, August 5, 2012

Anatole Kaletsky: How about quantitative easing for the people?


At Reuters, Kaletsky writes:
Giving away free money may sound too good to be true or wildly irresponsible, but it is exactly what the Fed and the BoE have been doing for bond traders and bankers since 2009. Directing QE to the general public would not only be much fairer but also more effective.

Suppose the new money created since 2009, instead of propping up bond prices, had simply been added to the bank accounts of all U.S. and British households. In the U.S., $2 trillion of QE could have financed a cash windfall of $6,500 for every man, woman and child, or $26,000 for a family of four. Britain’s QE of £375 billion is worth £6,000 per head or £24,000 per family. Even if only half the new money created were distributed in this way, these sums would be easily large enough to transform economic conditions, whether the people receiving these windfalls decided to spend them on extra consumption or save them and reduce debts.

Distributing money to the general public was the one response to intractable recessions and liquidity traps that united Milton Friedman and John Maynard Keynes. Their main difference was that Friedman proposed dropping dollar bills out of helicopters, while Keynes suggested burying pound notes in chests that unemployed workers could dig up. Unfortunately modern economics, based as it is on simplistic and misleading assumptions about self-stabilizing markets, has forgotten the insights of these great students of deep economic slumps. In today’s world of electronic money, we would not even need Friedman’s helicopters or Keynes’s ditchdiggers. Just a few lines of computer code – plus some imagination and courage from our central banks.

Or suppose that rather than simply giving money away to people, the money was used to pay down debt for those same people. This solves the debt-deflation problem. It helps people do the main thing we want to do: deleverage.

It increases demand by freeing up income that had been used for paying down debt. And it solves the problem of private sector debt overhang.

In other words, it is the way to restore vigorous economic growth.

Saturday, August 4, 2012

That fits the pattern

"...the Great Depression, which had been going on in England for about ten years by the time it spread to the rest of the world in 1929..." -- from page 36 of The Congruence of Weber and Keynes (PDF, 28pp.) by Norbert F. Wiley, 1983.

I didn't know that.

Set aside the thought that "it spread" from England to the rest of the world, for Milton Friedman argued that the Great Depression started in the U.S. and that you could know this by looking at international gold flows.

We are still left with the news that things in England were not good during the Roaring '20s. That's interesting, I think, because things were not good for the American farmer in the 1920s, either.

The '20s were roaring because they were good years for finance, and little else.

That fits the pattern.

Friday, August 3, 2012

But why, JW? Why "The past 25 years"??

I think of finance as a competitor of the Federal Reserve, when it comes to providing funds to the economy. It follows that the growth of finance, the relative size of finance, and the deregulation of finance play a role in the outcome of that competition.

At The Slack Wire, JW Mason writes:
Textbook macro models, including the IS-LM that Krugman is so fond of, feature a single interest rate, set by the Federal Reserve. The actual existence of many different interest rates in real economies is hand-waved away with "risk premia" -- market rates are just equal to "the" interest rate plus a premium for the expected probability of default of that particular borrower. Since the risk premia depend on real factors, they should be reasonably stable, or at least independent of monetary policy. So when the Fed Funds rate goes up or down, the whole rate structure should go up and down with it. In which case, speaking of "the" interest rate as set by the central bank is a reasonable short hand.

How's that hold up in practice? Let's see:

The figure above shows the Federal Funds rate and various market rates over the past 25 years. Notice how every time the Fed changes its policy rate (the heavy black line) the market rates move right along with it?

Yeah, not so much.

In the two years after June 2007, the Fed lowered its rate by a full five points. In this same period, the rate on Aaa bonds fell by less 0.2 points, and rates for Baa and state and local bonds actually rose.

I tried to duplicate Mason's graph. But I had to guess from a large selection of interest rates. Here's what I came up with. It goes back to the same start-date:

Graph #2: Collected Interest Rates (since 1987)
Eh, it's a pretty good match. (Note that I am using TB3MS, my "proxy" FedFunds series which goes back 20 years beyond FEDFUNDS. (FEDFUNDS is still on the graph, pretty well hidden by the purple line.))

Here's a look at the numbers as far back as they go:

Graph #3: Collected Interest Rates
Click for FRED source page

What I want to do is
1. drop FEDFUNDS from the data, and use the proxy data series.
2. set the proxy series apart, and average all the rest together.
3. compare the FEDFUNDS proxy to the average of the other rates.

JW Mason says market rates do not move right along with the rate set by the Federal Reserve. That is true, if we go by his graph. But his graph only goes back to 1987, and our economy was already well-financialized by then.

I think if we look farther back, to a time when we were less financialized, the graph may show that markets DID move with the Fed rate. Anyway, that's my guess.

Here's what I did:
1. Download the data in the graph, from FRED.
2. Work on the data using Open Office Calc.
3. Eliminate the early years, where there is no FedFunds Proxy for comparison.
4. Reorganize the FRED source columns: move data series with later start-dates farther to the right. (This is for my convenience in selecting cell ranges when figuring averages in Excel.)

This is a lot of data. All monthly, it is 12 times what I'm comfortable working with.

Note: The start-dates of the various interest rates differ. The corporate AAA and BAA begin well before 1934, when the FedFunds Proxy begins. MSLB20 begins in 1953Q1. GS10 begins 1953Q4. And MORTG begins in 1971Q4. The number of interest rates in the average increases as each new series begins.

Hm. I used Open Office Calc to get the size of the graph. Then I went into Paint and set the size of a new, blank picture to the same size. Then I copied and pasted. The vertical bar thickness changed. Several of the vertical bars from Calc did not show up in Paint. And the colors changed.

Graph #4: Wow, that's ugly!

Used the Windows "snipping tool" on the Calc graph, and got this version:

Graph #5: The FEDFUNDS Rate versus an Average of Other Rates

Well that's better.

I don't know if my expectation holds up. It doesn't really look as if market rates moved with the Fed rate, even before the Great Financialization. Actually, it looks like market rates are "sticky down".

The other-rates average (red) is definitely higher than the FedFunds proxy in the two Depression-times, when the FedFunds rate is near zero. And it looks to me that the red and blue are much closer on the up-swing (1946-1982) than on the downswing (since 1982). That could just be because "other" rates are not immediately responsive to changes in the FedFunds rate. (Long term, obviously, they rise and fall together.)

But maybe the two are closer on the rise than on the fall because financialization was lower on the rise than at other times. You can gage the level of financialization on Thomas Philippon's graph and mine, both presented here.  The striking fall in financialization shown on those graphs reaches a bottom in the mid-1940s, just when the up-swing begins on Graph #5.

I don't have the math skills to evaluate the result any better than that. But I can say that this evaluation of interest rates does not contradict my view that private finance competes with the Federal Reserve and that when finance grows large, it circumvents and weakens policy.

Thursday, August 2, 2012

"But you know what? Just look at M2 divided by M1 instead."

Graph 1: M2 divided by M1. (Click for FRED source page.)
The ratio starts out low, and rising. That was during the "Golden Age".

When the Golden Age is over, the ratio runs flat until 1990.

After 1990, the ratio falls sharply for about three years. We've seen this decline before, in the debt per dollar graph.

Mid-'90s, the ratio takes off like a rocket. That was during the "Macroeconomic Miracle".

After the Macroeconomic Miracle, the ratio runs flat, hiccups, and breaks.

When the ratio is low, or relatively low, the economy grows well. But when the ratio is high or relatively high, the economy grows poorly and gives us trouble.

The ratio is an indicator of financialization. A lower ratio means less financialization.

Or again, the ratio is an indicator of financial slack. Higher is tighter.

Or again, the ratio is a gauge of the factor cost of money. Assuming that money in savings is put to use, a higher the ratio indicates a greater reliance on credit and a greater factor cost of money. Remember, the Factor Cost of Money depends not only on the rate of interest, but also on the rate of credit use.

I hate it when I have to disagree with somebody I would have liked to agree with

From Gang8, from Gunnar Tomasson, an excerpt from Wikipedia on the American Monetary Institute:

Research results are published in Zarlenga's 736 page book, The Lost Science of Money.

This book asserts that money did not emerge from barter between individuals, but rather through trade between tribes and as part of religious worship and sacrifice. Though this is not the mainstream view, there are other scholars of money, such as Keith Hart, who agree that money developed in this way. The reason this distinction is believed to be important is because, according to Zarlenga, it is the definition of money which determines how the public will allow the money supply to be controlled.

If money is a commodity to be traded, then all that matters is that the money is 100% backed by some commodity, like gold or silver for example. If money is credit, then it makes sense that bankers control it, as they do in the United States today. But if money is an artifact of law, whose value is derived from law (payment of taxes and legal tender laws) then Zarlenga argues it would only be proper for the government to issue, and control the money supply. According to Zarlenga, it is this last definition that is supported by the history and nature of money.

Zarlenga seems to be arguing in favor of a particular sort of monetary structure for society today, based on one particular event that occurred in the time of cave men.

I find that exasperating. Does no one believe that the economy is a system that functions as a system? Does everyone think we can re-design the economy at will, simply by coming up with a better stupid story about how money was invented??

How money was invented should be the least of our concerns. We should be thinking about where the money went and why we use so much credit and why we have so much debt. The answers come easy, when you ask the right questions.

From the same Gang8: "the financial sector’s assets are the real sector’s liabilities."

Yes, and the financial sector's income is a cost of production. We would do well to reduce that cost.

I find it useful to expand Adam Smith's "factors of production" -- land, labor, and capital -- to include finance. I find it useful to distinguish real sector capital from financial sector capital. Let "profit" be the return to real capital, and "interest" be the return to finance.

I find it useful to examine costs in the economy based on this expanded set of factors.

From the end of the Gang8 remarks:
Ratio of M2 to GDP in selected countries
United States = 83
France = 152
United Kingdom = 171
Netherlands = 226
Japan = 236


There is no “ideal“ or “normal“ ratio of M2 to GDP. Hence, there would be no benchmark values of M2/GDP to guide US Treasury control over money supply.


I looked at the worldbank link. The figures are for 2011.

Based on one stat from five nations for one recent year, Gunnar Tomasson asserts that there is no ideal or normal ratio of M2 to GDP.

Gunnar should take a look at M2 money for all the years since the crisis, and for all the years leading up to the crisis. And for comparison he should look at M2 money for the years when growth was good: the golden age, the first two decades following the end of World War II.

Gunnar should look at the components of M2 money. Here, I found this recently at Philip George's

M1 consists of currency and the kind of deposits that can be used to write checks. M2 consists of M1 plus other deposits like savings deposits and time deposits. So subtracting M1 from M2 gives us roughly the amount of money available for lending.

That's a good breakdown of the components of M2. If you want to say "loans create deposits" that's fine, too. Just revise George's last sentence to read:

So subtracting M1 from M2 gives us roughly the amount of money in savings.

Don't lose the focus. It is essential to look at these two components of M2 money, the circulating and non-circulating components.

If Gunnar looked at those components, he would find that when savings is a large portion of M2 and circulating is a small part, the economy does poorly. And that when savings is a small portion of M2 and circulating is a large part, the economy does well.

Too much savings: bad. Too little savings: good.

Graph #1 shows the non-circulating component rising through the Roaring '20s. Non-circ was already high by start-of-data, and the Roaring '20s was more a financial than non-financial success, much like the 1990s.

By the end of the Roaring '20s the non-circulating component was very high, and the result was that we had the Great Depression. During the Depression and World War II, the non-circulating component fell as a share of M2 money and the circulating component increased. Finally, non-circ reached a low point, and the Golden Age began soon thereafter.

Graph #1: The Non-Circulating Component of M2, 1915-1970

On Graph #2 below, the FRED data picks up in the midst of the Golden Age. The non-circulating component starts out low and rising. It tries to level off in the 1970s, succeeds in the 1980s, and falls a bit in the early 1990s. Then it rises again, in a financial success comparable to the Roaring '20s. Then, like the Roaring '20s, it ends in Depression.

Graph #2: The Non-Circulating Component of M2, 1959-2011

If Gunnar looked at those components, he would find that when savings is a large portion of M2, and circulating is a small part, the economy does poorly. And that when savings is a small part of M2 and circulating is a large part, the economy does well.

But you know what? Just look at M2 divided by M1 instead. Excessive non-circ still shows up. And it's simpler to think about.

Wednesday, August 1, 2012

Cochrane: Just how bad is the economy?

I liked his post. Maybe I forgot to say that in my comment?

Seven graphs, Cochrane provides. You know I had to like the post. Interesting vertical scales too: "Real GDP, Percent Relative to Peak", for example.

Cochrane considers the merit of trend lines, compares the RGDP trend to potential output trend, looks at lots of things I've looked at; he looks at them with ease and a writing style that made his post easy to follow. Of course I liked Cochrane's post.

My comment?
Good post (I could follow it:)

Word counts
"private debt" -- zero.
"debt" -- two in the sidebar, none in the post or comments.
"credit" -- zero.
"money" -- one, in the comments.

If financial costs are a drag on growth and productivity, one would not know it from this post.

John Cochrane's reply:
More words missing. Education. Regulation. Cronyism. Marginal tax rate. Give me a break, how many words and graphs do you want in a blog post?

Oh, he gave me a good laugh!

It was a good post, and it was a good comeback. But you know what? Cochrane equates debt and private debt and money and credit with education and regulation and cronyism and marginal tax rates. Just more so-so topics that didn't fit in his post.

It's not like that, for me.

Cochrane's conclusion:

The trends are an economists' horror movie. Real GDP seems not to be recovering at all...

What to do? If only it were so simple as to have the Fed print up another two trillion dollars, or have the Treasury borrow another $5 trillion and blow it on stimulus boondoggles. We're stuck in sclerotic growth, and to everyone but a few die-hard extremists, that means growth-oriented policies are the only way out.

My conclusion? It *is* simple. The problem is debt, excessive private debt. If the question is "What to do?" -- and if it is a serious question -- then more is required than just a great retort.