Paul Volcker went with option "b"

Following up on my last two posts...

I'm wondering why people even bother to teach cost-push inflation. I mean, the prevailing attitude is that there's no such thing: Prices go up because there's too much demand, period, end of story.

To me, that's plain ignorance. But that's easy for me to say, because I don't know anything. I had just one three-credit course in economics -- you know, ECON 101, the one economists use as an example when they make jokes about people not understanding economics. Yeah, that. From my vantage point, knowing so little, it's easy to see when people are brushing questions aside thoughtlessly.

Ignorance is an attitude.

Marcus Nunes on Paul Volcker

In an old post (but one that fascinates me more than ever) Marcus Nunes writes

According to Robert Hetzel, during the period of the Great Inflation, the prevailing view, and the one embraced by Arthur Burns, Fed chairman from 1970 to 1977, was that inflation was a real (cost-push), and therefore non-monetary, phenomenon.

... This view is clearly illustrated by Burns who argued as early as 1970 that “monetary and fiscal tools are inadequate for dealing sources of inflation such as are plaguing us now – that is, pressure on costs arising from excessive wage increases”.

There follows an explanation of "a flawed forecasting mechanism" involving the Phillips curve -- again, absolutely fascinating.

Next, Marcus describes the policy change that a change in leadership brought to the Fed:

On becoming chairman of the Fed, Volker challenged the Keynesian orthodoxy which held that the high unemployment high inflation combination of the 1970´s demonstrated that inflation arose from cost-push and supply shocks – a situation dubbed “stagflation”.

... To Volker, the policy adopted by the FOMC “rests on a simple premise, documented by centuries of experience, that the inflation process is ultimately related to excessive growth in money and credit”.

This view, an overhaul of Fed doctrine, implicitly accepts that rising inflation is caused by “demand-pull” or excess aggregate demand or nominal spending.

Essentially, Paul Volcker said there's no such thing as cost-push inflation. And that was all there was to that.

Josh Hendrickson on Paul Volcker

In an even older post, Josh Hendrickson at The Everyday Economist writes

Relying on public statements and personal diary entries from Arthur Burns, I demonstrate that there is little evidence that the Federal Reserve was less concerned with inflation during the 1970s. Rather, the view of Burns and others was that inflation was largely a cost-push phenomenon...

The shift in policy, beginning with Paul Volcker, was an explicit attempt to stabilize inflation expectations and this was done deliberately at first through monetary targeting and ultimately through the stabilization of nominal income growth. Gone were notions of cost-push versus demand-pull inflation. The Fed simply assumed accountability as the creator of inflation.

The solution to the problem of cost-push inflation was to dismiss the whole idea of it. Essentially, Paul Volcker said there's no such thing as cost-push inflation, and that was all there was to that.


Among the comments on Hendrickson's post is one by Marcus Nunes, linking to an older version of his post quoted above.

In other comments there, Nick Rowe quoted Josh Hendrickson

Josh: “Rather, the view of Burns and others was that inflation was largely a cost-push phenomenon...”

and replied:

People forget (and maybe younger people never knew) just how common that view was in the 1970’s. It was common among economists as well as the general population. It was almost the orthodoxy of the time, IIRC. Tighter monetary policy would just raise interest rates, which would increase costs, and make inflation even worse.

Hendrickson replied to Nick Rowe:

Yes, you are correct. I make the point in the paper that Burns’ view is consistent with the orthodoxy of the time...

Bill Woolsey also replied to Nick:

There were really _economists_ who thought that “tighter money” would raise inflation through a cost-push mechanism?

There were such economists. Bill Woolsey is evidence of just how thoroughly cost-push as a legitimate economic concept has been purged from economic thought.

The cost-push problem was never solved. It was dismissed. It was purged from economic thought. If there is no such thing as cost-push inflation, that's okay. Otherwise it's a problem.

Me, I still remember Wesley.

Arthurian Theory

The factor cost of money was increased by persistently increasing the reliance on credit -- what most people call the growth of debt. The growing cost of finance hindered economic growth, such that the choices open to policy were:

a) reduce the hindrance by expanding the money, thus creating inflation, or
b) accept the hindrance and accept that economic growth would be slower going forward.

Arthur Burns followed option "a". Paul Volcker went with option "b".

I call for option "c": Reduce the reliance on credit.

Many people today call for 100% reserve banking. That's the extreme form of reducing the reliance on credit. Too extreme, I think.

Let us create tax incentives that encourage the repayment of debt, and use these incentives in place of the existing incentives that favor debt accumulation (like the tax deduction for interest expense). Today, the playing field is tilted toward increasing the accumulation of private debt. We must tilt it the other way, toward reducing the accumulation of private debt. Then, if we want, we can sit back, put our feet up, and wait.

But who's counting?

I got another link to something on inflation: a SlideShare presentation titled Aggregate Demand, Aggregate Supply, and Inflation. Slide #8 shows arrows pointing left for cost-push and arrows pointing right for demand-pull, just like I was talking about yesterday:

Slide #8

Know what else I found?

Slide #3

An increase in the quantity of money causes inflation.

And this one:

Slide #4

An increase in the Federal deficit causes inflation.

Wanna know what I didn't find?

Slide Not Found

An increase in the use of credit causes inflation, just like an increase in the quantity of money. And then, on top of that, there is the extra cost of interest. So you get demand-pull from spending credit, and cost-push from paying to finance that spending.

But who's counting?

How to tell cost-push from demand-pull

I looked up cost push inflation graph, for the hell of it.

That one interested me because it says "in fact" but uses pictographs rather than graphs of actual data. I want to call them "pictograms" but Blogger insists I use the word pictographs. These things:

Source: Demand Pull and Cost Push inflation with examples at FreeEconHelp

The one has two diagonal lines sloping up (from left to right) and one sloping down. The other has two diagonals sloping down and one sloping up. The one shows a change in Aggregate Supply (AS); the other shows a change in Aggregate Demand (AD). In each case there is one arrow between the two diagonal lines, and another arrow beside the vertical axis, near the label that reads "Price Level". All the arrows are pointing up.

Where there are two diagonal lines with an arrow between, we are to understand that the line moves from the lower position to the upper position. The arrow indicates this movement...

Maybe I have something wrong. Notice that the one graph shows

The price level going up as a result of a decrease in AS

and the other shows

The price level going up as a result of an increase in AD

According to the axis labels, the "up" direction means a change in the price level and the "sideways" direction means a change in Real GDP. So I'm thinking the arrow between the AD and the AD' lines should be pointing to the right. And the arrow between the AS and the AS' lines should be pointing to the left. Otherwise all the arrows show price changes and none of the arrows show changes in supply or demand.

I don't think the lines move from the lower position to the upper position. I think the AS line moves leftward to the AS' position, and the AD line moves rightward to the AD' position. But I don't know if I have that right.

In any event, on each graph there are two horizontals that start at an AS:AD intersection and go back to the Price Level axis. These horizontals represent the price level before and after the movement of the diagonal. In each case obviously the price level is higher after the movement. That's how you know there's inflation!

Okay? Now, none of that interests me. None of that is why I'm writing today. I'm writing because I want to talk about the change in the location of the intersection points.

The graphs both show an up arrow beside the Price Level axis, indicating that the intersection moved upward in both cases. That makes sense. The intersection represents the price level achieved by the interaction of supply and demand. And the graphs both show inflation (as opposed to deflation, say) so we would expect to see an increase in the price level as a result of the movement of the diagonal line.

But that's not the interesting thing. The interesting thing is not the upward change of the intersection point, but the sideways change. The sideways change is leftward for the one type of inflation, and rightward for the other. See here:

The change in Real GDP is in opposite directions for the two types of inflation

The change in Real GDP is leftward for cost-push inflation, and rightward for demand-pull inflation. This is the key difference. In both cases prices go up. The difference between the two types of inflation occurs not in the price level, but in the performance of the economy.

I don't want to suggest that Real GDP must decrease when the inflation is cost-push. Real GDP is generally always going up. So maybe it goes up a little less if the inflation is cost-push, and it goes up a little more if the inflation is demand-pull. That's the real difference to look for, when you want to know whether the inflation is cost-push or demand-pull.


// Related post: The Cost-Push Economy

"equals" equals "equals"

// C=64

Back in the days of the Commodore-64 there was a program that would make the computer talk. I think it was called "Sam".

Anyway one day my son was playing with it. He typed in a whole bunch of "equal" signs and hit ENTER. The computer started saying equals, equals, equals equals...

Just then his brother came into the room, listened to it, and asked: Why is it saying "cosy, cosy, cosy?"

// ... fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption ...

"Saving equals investment". So it is said. Some people, many people, seem to think that's the same as saying "saving IS investment", or that an act of saving is an act of investment, or that an act of investing is an act or saving. Or some other idiotic variation.

When I hear things like that I always fall back on Schumpeter, who said that if we don't make distinctions we can't say anything interesting.

Now maybe you like the idea that saving is the same as investment. It might make you feel good to think that when you save you are doing the world a service by investing. And maybe there is a mote of utility in the thought that investing is, in some strange and strictly limited way, a form of non-monetary saving.

Maybe we should just adopt Schumpeter's idea and shorten the discussion by saying that everything is the same as everything else. That could save us the time and trouble of having the discussion at all.

// In every computer language I ever used, the equal sign assigns the value on the right to the variable on the left

I said it:

In every computer language I ever used, the equal sign assigns the value on the right to the variable on the left: Result <-- Value. So, when I see

I naturally read it as: Take Real GDP, factor prices in, and you get Nominal GDP. Sure, the math is correct. But you don't start with "real GDP". You start with GDP at actual prices -- called "nominal" -- and figure out real GDP...

Yeah but maybe economists don't have to think in terms of the assignment of values, and my experience with computers is not relevant in their world. Okay. But it still should be pretty easy to see that NGDP is equal to RGDP times the price level.

That does not mean that NGDP is the same as RGDP times the price level. NGDP is a number. RGDP times the price level is a calculation. A calculation is not the same as a number. Calculations give numbers as results.

And that brings us back to right-to-left assignment.

// and this all comes to mind because ...

At Naked Capitalism back in 2014, Philip Pilkington wrote

The essence of monetarism is in the transformation of an identity put forward in Irving Fisher’s classic 1911 work The Purchasing Power of Money into a supposed causal relationship... Fisher laid out the following identity:

That equation reads: “The amount of money, M, multiplied by its velocity, V, is equal by identity to the sum of the quantity of goods and services purchased, Q, times the sum of their prices, p.” Note the clause “equal by identity”. The equals sign with an extra bar indicates that this is a tautological statement. It simply must be true...

The monetarists ... converted this identity into a behavioral equation. This equation ran as follows and should be read running from left to right:

Note ... the fact that we have converted the “equal by identity” sign into a standard equals sign. This implies causality running from left to right. So, the left-hand side of the equation causes the right-hand side.

No. The equal sign does not "imply causality", not in any direction. Not for anyone who can do arithmetic. Three plus one equals four, but three plus one does not cause four. Pilkington's assertion is ridiculous.

The word "equals" does not mean "causes". Equals means "has the same numerical value as".

It's drivel like Pilkington's that prevents progress in understanding the economy.

Coincidence, you think?

A gift from Scott Sumner

Sumner:

To return to the example above, the neo-mercantilists believe that if we stopped imports from China, consumption would not decline. Instead all those toys and sneakers and iPhones would be built in America with American workers. But Janet Yellen has made it clear that the Fed regards 4.6% unemployment as roughly full employment, and any attempt by Trump to boost AD will be met with tighter money. The only way to boost output significantly is supply-side policies, and mercantilism is certainly not a supply-side policy.

Sumner is shooting down Trump econ. Specifically, "Peter Navarro, who was just named head of Trump's National Trade Council".

Shoot 'em down, I don't care. But look at Sumner's argument:

Janet Yellen has made it clear that the Fed regards 4.6% unemployment as roughly full employment, and any attempt by Trump to boost AD will be met with tighter money. Therefore, the only way to boost output significantly is supply-side policies...

I added the word "therefore", but it is implicit in the original.

Sumner is saying that we are at full employment, at least in the opinion of the person whose opinion matters. And because we are at full employment, boosting demand is not an option. Therefore, he says, if we want economic growth, the supply side is the only way to get it.

Bullshit.

If it's not demand it must be supply? Supply and demand is how the economy works, sure. But "supply and demand" doesn't necessarily define what's wrong with the economy. To assume that it does is no better than "drawing causal implications from the famous GDP identity" -- something Sumner says is an "EC101 mistake".

Sumner is saying we won't be allowed to increase demand, so the only way to get more growth is by improving supply. But there is no connection between the problem and Sumner's solution. It may be true that "we won't be allowed to increase demand", but increasing demand isn't the problem. It's a solution, one that Sumner says is not an option.

Sumner bounces off the word "demand" and lands on the word "supply". The problem is inadequate growth, but Sumner has shifted our focus to "demand". So it sounds logical when he offers "supply" as an alternative to "demand". It sounds logical, but it is not.

Look, I know Sumner said it, and a lot of people think he's a smart guy, and I think so too, but he's mostly just a bullshitter.

Here's the problem: We need more growth.

Here's Sumner's solution: The supply side is the only option.

Where is the analysis of the problem? There isn't one. Where does Sumner identify the cause of the problem? He doesn't. He only uses the logic of a bullshitter:

  1. We cannot boost demand.
  2. "Supply and demand".
  3. Therefore we must boost supply.

This is Sumner's whole argument: "Supply and demand".

It's not an argument. It's not a logical analysis of the cause of inadequate growth. It's just bullshit.

Merry Christmas.

An Underlying Consistency

Briefly, from mine of 29 November:

You know how, when you look at a graph of debt relative to GDP, the line starts out flat and then suddenly starts going up in the 1980s? Like this graph:

Graph #1: TCMDO Debt relative to GDP

Some people look at a graph like that and say there was an "explosion" of debt in the 1980s.

Well, I don't see the same things other people see. Here's what I see:

Graph #2: TCMDO Debt relative to GDP

Pretty close, those two trend lines.

Some will say that I made those trend lines close by selecting just the right data.

Well, yeah, I did. That was the point. Any asshole can pick data points that don't show an underlying consistency. It takes a special kind of asshole to pick the points to show things that no one else can see.

We have the Korean war. Then after it, in heavy blue, let's call it the "natural" path of debt. And after that, the Great Inflation, which eroded debt and pushed the gray line low.

Then there was the end of the Great Inflation, and a slight overshoot as the gray line came back up. And then, in heavy red, a return to the "natural" path of debt. After that of course, the housing bubble and the crisis.

It's kinda sad that the "natural" path appears so seldom, because of all the interference.

For the record, though, this thing that I'm calling the "natural" path, there are caveats attached to the word "natural". The "natural" path of debt, indicated here by the exponential trend lines, is not the result of our natural inclinations.

It is the result of our flawed economic policies.


// The Excel file

Cost and competitiveness

When I think Tim Duy I think Fed Watch. I most definitely don't think this:

I have been puzzling over this from Paul Krugman:

Donald Trump won the electoral college at least in part by promising to bring coal jobs back to Appalachia and manufacturing jobs back to the Rust Belt. Neither promise can be honored – for the most part we’re talking about jobs lost, not to unfair foreign competition, but to technological change. But a funny thing happens when people like me try to point that out...

Is that the right narrative? I am no longer comfortable with this line:

…for the most part we’re talking about jobs lost, not to unfair foreign competition, but to technological change.

Try to place that line in context with this from Noah Smith:

Then, in the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China's accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages...

Was this “fair” trade? I think not.

Wow! What a great opening! Listen to what Tim Duy said:

I am no longer comfortable with this line

Those are the words of a man who is able to change his mind, and can admit it when he does. I'm gonna start reading this guy more.

//

As an alternative to the uncomfortable line, Duy writes:

Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S.  Fair enough.  To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers...

Yes, technological change is happening. But the impact, and the costs, were certainly accelerated by U.S. policy.

Sounds like an honest, thoughtful blogger. And I remember the Clinton-era decision about favoring "an economically strong China". I don't remember it like a decision, really. It was more like suddenly one day we have always been friends with Eastasia.

//

But I have to go back to the Krugmanism that bothers Tim Duy. Did we lose jobs by technology? Or was it unfair foreign competition? Those are the only choices we're offered. That makes me want to retch.

Answer me one question: What is the biggest economic problem, in the Arthurian view?

You got it: Debt... Finance... Monetary imbalance... These are all the right answer.

Now answer one more: What does the excessive cost of finance have to do with our trade imbalance and the loss of US jobs?

Oh, but this is a question that answers itself. What does the excessive cost of finance have to do with the competitiveness of US exports? Did you figure it out yet? I bet you did.

"Let us not forget that real GDP growth in 1984 was 7.3 percent"

The post is near two years old -- Obama's federal debt dwarfs Reagan's by Sierra Rayne (Wow, does that name sound made up!) at American Thinker.

The article challenges a Washington Post claim that "it is hard to believe he [Obama] could increase the debt by as large a percentage as Ronald Reagan did." It's not my idea of an important topic. But the article does some arithmetic to make its case, and I find that sort of stuff interesting. So.

Here's the part that stuck in my craw:

Factor in higher rates of population growth, inflation, and economic growth under Reagan versus Obama, and it becomes obvious that nominal total debt comparisons are meaningless. Let us not forget that real GDP growth in 1984 was 7.3 percent; the next-highest value since was just 4.7 percent in 1999.

Let us not forget that real GDP growth in 1984 was 7.3 percent.

I went back to the article three times because of that statement. What the hell, one fluke year of suspiciously good growth, that's their evidence? Granted, there is more to their argument than that. They said a bunch of stuff about the Washington Post stats. But to see what I think of that, I'd have to go back and do my own evaluation. And the topic just doesn't hold my interest. So I'm left with the 7.3 number, and here we are.


What could possibly account for a year of real GDP growth with a 7.3% growth rate? I mean, we're not China. And yes, I did go to FRED to check the stats Sierra Rayne provides. The numbers are right.

So what can explain that moment of good growth, good enough to bring up Reagan's otherwise unimpressive stats?

1. Productivity is always high after recession
2. The recession was double-dip
3. Expectations are ephemeral

1. Productivity is always high after a recession

Productivity is always high after a recession. We even had one of those shining moments after the 2009 recession, financial crisis notwithstanding. Have a look:

Graph #1: Productivity goes high after a recession -- after every recession

It's a high one, that post-crisis peak.

I showed this graph before. It's still true, though, that productivity goes high after every recession. So let me evaluate Reagan's high score.

The average of all the data values shown on Graph #1 is two-point-two. That is, a 2.2% annual increase in productivity, on average, for 1948Q1 thru 2016Q2.

But if you only figure the first high peak after each recession, the average is 5.3%. That's three-point-one percentage points higher than the 2.2% average. (And if you look at the 1980s on the graph, a lot of the productivity numbers are below the 2.2% average.)

So I want to say that maybe half of the 7.3% real GDP growth number for 1984 is attributable to the simple fact that it was the first growth spike following a pretty severe recession.

2. The recession was double-dip

It was a "double-dip" recession, by the way, and the post-recession productivity spike after the first "dip" was cut short by the second dip. Did you notice how low the 1981 peak is? I'm thinking that some of the productivity from the first dip didn't have time to work itself out, got saved up, and contributed to the spike that followed the second dip.

Based on annual data for the years 1948 thru 2015, the growth rate of real GDP in 1981, between the two dips, was 2.6%. The growth rate in 1984, the peak after the double-dip recession, was 7.3% (as Sierra Rayne noted). The average of the two is just under 5%.

For the whole 1948-2015 period, the average for "first peak following recession" is 5.4% real GDP growth. So the 7.3% number from 1984 stands out, unless you figure in the "other" first peak from that double-dip recession. Figure in both peaks, and you're almost half a percentage point below the overall first-peak average. So then you would have to say the Reagan boom was below average.

3. Expectations are ephemeral

If you're old enough to remember the 1980 Presidential election, you'll remember there was an awful lot of support for Ronald Reagan. Four years later, with our economy in the midst of its 7.3% RGDP moment, Reagan was campaigning for his second term and talking up Morning in America.

Reagan, and apparently everyone else, thought Reagan had solved the economic problem. The long dark night of the dismal economy was behind us, they thought. Better times had come at last, they thought.

Many people shared the optimism. Expectations were high. You can see those expectations in business investment, gross private domestic investment, here:

Graph #2: Percent Change in Real Business Investment

Investment went high as the 1982 recession was ending, and stayed high for a year. Expectations were at max, and this business investment boom was a result of it.

But it didn't last. After the first quarter of 1984, investment was already dropping off. And look how low investment was for the rest of the 1980s! Even lower than it was in the Bush years, until, you know.

In the Bush years, the bottom gave out. In the Reagan years, it was expectations that gave out. Before expectations fell, they did a good job of propping up the economy for about a year. But you really can't expect more than that from expectations. Unless the expectations arise from an actual good economy, of course. Which, in the 1980s, they did not.

Russian Hacking

My econ blog stats for two hours this morning:

Stats Overview for the Blog
You can click the image to enlarge it but I can't imagine why you would want to

Header across the top identifies the blog & time period ("Now") displayed.
Menu down the left side shows Stats Overview selected.
The remainder of the image is divided into four sections.

Upper Left: Shows pageview count for each minute of the last two hours. Note the one large spike just before 11:30 AM, and zero or negligible pageview-count for most of the rest of the period.
Here are the minute-by-minute pageview counts around the time of the spike:
11:23 = 0
11:24 = 112
11:25 = 283
11:26 = 143
11:27 =103
11:28 = 19
11:29 = 3
11:30 = 0
11:31 = 0
11:32 = 0
Other than the zeroes, the only halfway realistic number is three pageviews at 11:29. But even that would be hard to do, if you were actually reading words or looking at images. The rest of the nonzero counts are some kind of nonsense.

Upper Right: Pageview counts for today, yesterday, the last month, etc. The total for today -- 1083 -- includes the 663 recorded between 11:24 AM and 11:29 AM. This is some bullshit.

Lower Right: Map of the world, showing where the pageviews came from. The US is pale green, meaning a few pageviews came from there. Russia is dark green, meaning most of the pageviews came from there.


Hey Russia, stop messing with my blog!

Federal Debt held by Federal Reserve Banks as a Percent of Debt other than Federal

This one is interesting. Before the crisis we see a continuous down-trend except in the good years of the 1960s and immediately before the good years of the 1990s.

I think the increase since the crisis is exactly what we needed. It restores the ratio to the level it held when our economy was good.

Here's the problem. Last time, it took half a century for the ratio to fall. But this time, the financial technology is already in place to generate private debt. So this time, the ratio could fall rapidly.

We don't want the ratio to fall at all. We want to keep it near the level it was at in the 1960s. To do that, we need to fetter the accumulation of private debt. The best way to do this would be to eliminate some tax incentives designed to maintain our debt, and create some incentives designed to accelerate the pay-down of debt.

Note that I am not suggesting that we should introduce policies that reduce new borrowing. Not yet, at least. New borrowing gives life to our economy. I am proposing that after we borrow and spend the money, we should pay off the loan faster. This will slow or stop the growth of accumulated private debt. And that will be a good thing.

If it means policy must reverse the tendency toward inequality, boosting median income so that people can afford to pay down debt, so much the better.

I've heard it said that since 1980 or so, the suppression of wage increases was part of our anti-inflation policy. Wouldn't it have been better to not suppress wage increases, and instead drain off those worrisome excess wages by accelerating the repayment of wage-earners' debt? This would have been an anti-inflation policy that was sustainable!

Federal Debt held by Federal Reserve Banks as a Percent of GDP

Some people may like this graph because all the action takes place since the crisis, but that's exactly what's wrong with it. This graph tells us nothing about the time when the problem developed. The graph is useless.

Federal Debt held by Federal Reserve Banks as a Percent of Gross Federal Debt

When deficits started going up, and locating the base year

Did a couple quick searches -- seeking how to adjust debt for inflation and then national debt adjusted for inflation by president. Five sites caught my eye. First, an oldie from 2008 -- U.S. Public Debt Since 1940 - Adjusted for Inflation at Economic Perspectives:

Adjusting the public debt for inflation provides a good account of federal government borrowing. The public debt increased in the 1940s to finance World War II. The public debt remained fairly constant from the late 1940s through 1981. This means the U.S. was reasonably responsible with its finances, collecting sufficient revenues to pay for government services...

The first four sentences present us with an introduction, two observations, and a conclusion. That conclusion:

The U.S. was reasonably responsible with its finances before 1981, collecting sufficient revenues to pay for government services.

But was it? According to Christina Romer, "The 1960s introduced Americans to the phenomenon of persistent peacetime deficits." That's the '60s, not the '80s.

Here's what FRED has to say about deficits, on a bar graph, flipped to show deficits above zero and surpluses below:

Graph #2: Federal Deficits, 1945-1992

Just by eye, there are more and bigger deficits in the 1960s than in the 1950s.

Obviously, deficits were bigger in the 1980s than in the 1960s. That's not the question. The question is what happened before the big deficits were obvious. What happened when trouble was still only a-brewin', in the years before the fit hit the shan. That's the question.

I brought the data from Graph #2 into Excel and put trend lines on it. There's a curved blue trend line that describes the whole period from 1945 to 1992. And there's a straight red trend line that describes only the years from 1950 through 1969:

Graph #3: Deficits and Trend, 1945-1992 (blue) and 1950-1969 (red)

Obviously deficits were bigger in the 1980s than in the 1950s and '60s. Bigger in the wartime '40s, too. The 1950s and '60s were a relative low in Federal deficits. It's right there on the graph. I can see it.

But the red trend line should make it obvious that deficits were trending upward even in the 1950s and '60s. Can you see it? I say "should" make it obvious, because if you don't want to see it, you won't see it no matter how obvious it is.

Even the blue shows the trend of deficits rising since 1960. It shows deficits falling after World War Two, and rising since 1960. The red line tells us deficits started rising in the '50s, so I guess they stopped falling in the '40s.

Federal deficits were increasing since the 1950s. Deal with it.

//

Back at FRED, I found a price deflator for Federal spending. I took Graph #2, changed it from a bar graph to a line graph, put the same data on the graph a second time, this time in red, and used the price deflator to take inflation out of the red one:

Graph #4: Federal Deficits (blue) and Inflation-Adjusted Federal Deficits, Base Year 2009 (red)

The red line rises more steeply than the blue, and the numbers are bigger.

Bigger? Yes. Removing inflation makes these numbers bigger. Years back, a dollar was worth more than it is today. $100 back then was worth more than $100 today. So if we show it on a graph -- in today's dollars -- the value of $100 back then has to be more than $100. That's why the red line is higher than the blue.

I know, it sounds like doubletalk. That's because economists insist on using a recent year (like 2009) for the base year. If we used the first year on a graph for the base year, inflation would make the numbers bigger. And removing inflation would make the numbers smaller. And it would all make sense.

When we take a recent year like 2009 for the base year and look backward in time from there, removing inflation makes the numbers bigger. It sounds like doubletalk because we have to look backward in time when we look at years before the base year. We have to think backwards to make sense of it. That's hard to do. I don't want to do it. I want the first year to be the base year.

Bear with me here. To remove the effects of inflation from a number, you just divide it by a price index number. The price index data is a set of numbers that go up following the same path as prices. Doing the division takes the inflation out of each year's deficit number. Or, out of nominal GDP if you are working with nominal GDP.

When you do the division and take out the inflation, the deflated numbers are smaller than the original numbers. BUT THAT'S ONLY TRUE IF YOU ARE GOING FORWARD IN TIME. If you are going backward in time from the base year the deflated numbers are BIGGER than the originals, like on Graph #4. It's a friggin mess, and the whole mess exists only because economists insist on using a recent year for the base year, so that most of the years require you to think backward.

Screw that.

They typically give the base year the value 100. For example the Federal spending price deflator I used on Graph #4 tells me "2009=100". So after I do the division and eliminate the inflation, I have to multiply each number by 100. This makes all the adjusted numbers bigger while keeping them in proportion.

It also makes the adjusted base-year number equal to the original base-year number. That's why you always see real and nominal GDP lines crossing in 2009. And if they cross in 2005 instead, it tells you that the base year of the price index must be 2005. That would be an older price index and probably an older graph.

But anyway, it's dividing by the price index that removes the effects of inflation. And it's multiplying by the base year value (typically 100) that brings the adjusted numbers up near the original numbers.

After that long and painful explanation, for which I apologize, I can get to the point: We don't have to multiply by 100. We can multiply by some other year's value. If we have "2009=100" and we multiply by 100, the adjusted numbers are "2009 dollars" and the lines will cross at 2009.

But if the price index value for 1945 is 7.736, you can multiply by 7.736 instead of by 100. Multiplying by the number for 1945 makes 1945 the base year. The adjusted numbers are "1945 dollars". On your graph the lines will cross in 1945. And if there is inflation in the years after 1945, you will see the original (inflating) line get higher, as you would expect. And the adjusted line, with inflation removed, runs low. Here's an example:

Graph #5: Federal Deficits (blue) and Deficits with Inflation Removed (red), Base Year 1945

Looking forward from 1945, this graph shows the blue line (inflated values) higher than the red line (inflation stripped away).

On Graph #4, looking backward from 2009, the blue line (inflated values) is lower than the line that shows no inflation. It doesn't make sense to show inflated values lower. The arithmetic is right on #4. What's wrong is the whole idea of using a base year that is not at the start of the graph.

Graph #5 shows inflating deficits (blue) higher and rising faster than inflation-adjusted deficits, as you would expect to see because of inflation, and not at all like Graph #4.

On #5 you can see that the red and blue lines run pretty close together until the mid-60s. This agrees with what we know, that "the Great Inflation" didn't start until around 1965.

The space between the red line and the zero line shows the size of the deficits without inflation. The space between the red line and the blue line is all inflation. You should look at Graph #5 and say "Wow".

But because the blue line goes up so high, the red line is squashed down near the zero line. This makes it look like the Federal deficits were small and didn't increase much. But it only looks that way because the red line is squashed down so much by the presence of the blue line. I can fix that by removing the blue line:

Graph #6: Inflation-Adjusted Federal Deficits, Base Year 1945

Before 1960 (and after the World War Two adjustment) the deficits are pretty well centered on the zero line. During the 1960s, the deficits are almost completely above the zero line. During the 1970s the deficits are clearly above the zero line and noticeably higher than in the 1960s. And during the 1980s the deficits are noticeably higher than in the 1970s.

The inflation-adjusted Federal debt is equal to the sum of these deficits. Would it be right, do you think, to say "The U.S. was reasonably responsible with its finances before 1981, collecting sufficient revenues to pay for government services"? I don't see it, myself. I see a gradual and persistent increase in deficits since the 1950s.

Whether this has anything to do with being "responsible" is not an economic question.

Principles of Economic Design: Rising is Good but High is Bad

Principles for the design of Economic Policy:

Rising is good. High is bad. Falling is only bad if debt is high

Repeat after me: Rising is good, but high is bad. Rising is good, but high is bad...


Definitions for today's post:
  •  "Good" = People are happy with the economy.
  •  "Bad" = People are not happy with the economy.

The intrinsic cost of money

Borrowing and lending are the same act, engaged by two different actors. The act itself puts credit to use.

The use of credit puts money into the economy just as surely as the open market operations of the FOMC.

However, when the FOMC buys something, the money it puts into the economy does not come with interest charges or repayment obligations to be paid by the recipient. The money is unencumbered, free and clear. It is as if you sold your old car to your neighbor: the cash you receive comes with no intrinsic costs.

By contrast, when a borrower takes a loan, not only money but also debt is created. After a time the debt is extinguished by repayment; this repayment also destroys the money that was created by taking the loan. Your lender puts money into the economy by lending to you, and takes money out of the economy when you repay the loan.

The difference is that your bank lends money and the Federal Reserve spends money. We see, then, that the money in the economy is of two kinds: encumbered, and unencumbered. When I show the Debt-per-Dollar graph, I am showing the relative proportions of these two kinds of money.

Graph #1: Total Accumulated Debt per Dollar of the Money We Spend

In 1966, when the rate of interest was about 5%, our economy had about $7 debt for every dollar of circulating money. Each circulating dollar therefore, over the course of the year, carried an interest cost of about 35 cents. In 2006, when the rate of interest was again about 5%, our economy had about $24 debt for every dollar of circulating money. Each circulating dollar carried an interest cost of about $1.20.

You remember John Nash, right?

From: Ideal Money and Asymptotically Ideal Money (PDF, 8 pages), a lecture by John F. Nash Jr. Under the heading "Keynesians", quoted for context:

The thinking of J. M. Keynes was actually multi-dimensional and consequently there are quite different varieties of persons at the present time who follow, in one way or another, some of the thinking of Keynes. And of course SOME of his thinking was scientifically accurate and thus not disputable. For example, an early book written by Keynes was the mathematical text "A Treatise on Probability".

The label "Keynesian" is convenient, but to be safe we should have a defined meaning for this as a party that can be criticized and contrasted with other parties.

So let us define "Keynesian" to be descriptive of a "school of thought" that originated at the time of the devaluations of the pound and the dollar in the early 30's of the 20th century. Then, more specifically, a "Keynesian" would favor the existence of a "manipulative" state establishment of central bank and treasury which would continuously seek to achieve "economic welfare" objectives with comparatively little regard for the long term reputation of the national currency and the associated effects of that on the reputation of financial enterprises domestic to the state.

And indeed a very famous saying of Keynes was "...in the long run we will all be dead...".

This is the part of that quote that I want to focus on:

... a "Keynesian" would favor the existence of a "manipulative" state establishment of central bank and treasury which would continuously seek to achieve "economic welfare" objectives with comparatively little regard for the long term reputation of the national currency ...

A Keynesian would continuously seek to achieve "economic welfare" objectives with little regard for the national currency.

Got it?


John Maynard Keynes wrote in the New York Times of 10 June 1934:

I see the problem of recovery, accordingly, in the following light: How soon will normal business enterprise come to the rescue? What measures can be taken to hasten the return of normal enterprise? On what scale, by which expedients and for how long is abnormal government expenditure advisable in the meantime?

... for how long is abnormal government expenditure advisable in the meantime?

In the meantime. Got it? Not "continuously". Only at times when policy has done so much damage to the economy that a Great Depression ensues. Then, and then only, said Keynes.

Nash was wrong about Keynes. Nash was careless.

It's not a metaphor

From page 22 of How to Predict the Next Financial Crisis (PDF, 30 pages, 2012) by Steve Clemons and Richard Vague:

Creating consumer demand — the goal that so often eluded policymakers from Roosevelt forward — is a straightforward process. In 1990, the U.S. consumer debt-to-GDP level was 62 percent. In 2000 it was 70 percent. Today, even after some deleveraging, it is 88 percent. Reduced demand is largely a function of these high levels. Reduce the debt, and demand reappears.

"Reduce the debt, and demand reappears."

It's not a metaphor for something else. It is offered as a way to fix the economy.

If Clemons and Vague are right, we must be able to see it in the numbers. Okay, so here is consumer debt. Or more precisely, household debt:

Graph #1: Household Debt

There, after 2009 or so, the debt was reduced. Now it's going back up again. So, where's the improvement to consumer demand?

And you know what? Consumer demand was good in the 1990s, after about 1994. That was the time they call "the Goldilocks years", when everything was "just right". Where's the reduced debt that made those years good? Ha!

Oh, you know what? The quote says "debt-to-GDP" but I only showed debt. This next graph shows consumer debt-to-GDP:

Graph #2: Household Debt relative to Income

After 2009, debt is reduced. Not much, but more than on the first graph. On this graph, the "going back up again" did not happen yet. But it looks like it might start soon.

And the 1990s? There's a sharp increase in the mid-1980s, not a reduction of debt. And then from the mid-80s to the year 2000, persistent increase. Again: no reduction of debt appears on this graph.

Let's try one more graph. This one shows household debt, relative to the quantity of money that's used as income. That's the money we use when we make payments on our debts -- and the money we spend on other things, instead of using credit:

Graph #3: Household Debt relative to the Money We Use as Income

After 2009 debt is reduced. Reduced a lot this time: more than on the other graphs. But debt looks a little less ready to start going up again just now.

And the 1990s? Well look at that! Yes, on this graph debt fell a bit in the early 1990s, just before productivity improved and the economy got pretty good for a while. There it is in the numbers, the reduced debt that made the "Goldilocks" years good.

A Look at Non-Financial Debt in Bezemer and Hudson's "Finance is Not the Economy"

I searched the B&H article for the terms "non-financial" and "nonfinancial", copied the interesting sentences all to one place, organized them, and decided I like what Bezemer and Hudson are saying more than I thought. I'll go through some of those excerpts now.

Bezemer and Hudson:

Federal Reserve economists note that many contemporary “[a]nalysts have found that over long periods of time there has been a fairly close relationship between the growth of debt of the nonfinancial sectors and aggregate economic activity” (BGFRS 2013, 76).

These correlations suggest a one-on-one ratio between bank credit and the non- financial sector’s economic activity (Figure 1). Growth in credit to the real sector paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s...

Conveniently, FRED offers a series for nonfinancial business credit. The blue line on Graph #1. The red line is GDP. Remember, B&H say "Growth in credit to the real sector paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s". Do you see parallel lines?

Graph #1: Comparing Non-Financial Business Debt (blue) and GDP (red) indexed to 1951

The red and blue start out the same. Or at least they look the same. (The lines are so close to zero it's hard to say anything with confidence.) If they're the same, that's the "parallel" that B&H were talking about.

These "parallel" lines separate by 1969. That's well before the mid-80s. And at the default line width (which is narrower than shown here) the start-of-separation moves to the mid-1960s.

You might be willing to say the lines are parallel, depending on how much you want Bezemer and Hudson to be right, and how rigorous you are about the meaning of words.

I just thought of something not quite relevant, but I'll quote it anyway:

The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight ...

If we pin the lines together in 1960 instead of 1951, the separation is still visible by 1969. If we chop things off at the mid-80s to get a better look at the early years, the separation is visible back to the mid-1950s.

Non-financial debt growth is faster than GDP growth for the whole period shown on the graph. The lines are not parallel. B&H take too many liberties: Their words lack rigor, and they offer wishful thinking as evidence.

I am not pleased to say so.

//

There are ways to compare two lines, other than just eyeballing them to see how parallel they seem to be. We can take a ratio: Divide one line by the other. Then, for example, we can see non-financial business debt relative to GDP. Or we could multiply the ratio by 100 and call it non-financial business debt as a percent of GDP.

If we do this and the ratio runs flat (at 40%, say) it would mean that GDP and debt run "parallel". In other words, they are growing at the same rate. Even if the ratio is only pretty flat, for the years that it returns repeatedly to the same [40%] level and doesn't wander far from it, we can say GDP and debt are growing at the same rate. I'm willing to take liberties that far.

Here's non-financial business debt as a percent of GDP:

Graph #2: Non-Financial Business Debt as a Percent of GDP (blue)

I marked it up a little. Nonfinancial business debt increased from 30% of GDP in 1952 to 50% of GDP in 1975 and to 70% of GDP in 2015. From 30% to 50% in 23 years; from 50% to 70% in 40 years. The increase is substantially faster in the earlier period, perhaps because there was less debt to begin with.

I was going for round numbers: 30%, 50%, and 70%. I could have eyeballed-in (or even calculated) better trendlines if I wasn't constrained by my round numbers. So I'm not showing Graph #2 as a perfect presentation of relative growth trends. I've... taken liberties. But the graph is good enough to give you the idea. The increase slowed after the 1974 recession.

If you relocated the red lines to suit your best estimate of trend, you'd still see a change somewhere in the mid-1970s, and a steeper slope before the change than after. Nonfinancial business debt was growing faster than GDP for all the years shown, and faster in the early period than in the late.

This presents a problem. For in the B&H paper they say that

growth of bank credit to the real sector and nominal GDP growth moved almost one on one, until ... the early 1980s.

They say the line was flat before the change. It's not. And then

While the total credit stock expanded enormously in the 1990s and 2000, credit to nonfinancial business was stagnant at about 40 percent of GDP...

They say the line was flat after the change. It's a stretch.


Granted, the quotes apply to two different measures of debt. That sort of slipperiness is part of what makes it hard to pin down what Bezemer and Hudson really mean. Their sentences slide from one context to another almost continuously. That makes for a very good story until you sit down to write about it. Then you find that no two of their thoughts fit cleanly together.

So if you are not pleased with my evaluation of their work, do sit down and try to piece together your own orderly montage of their thoughts. Let me know how it works out.

//

The two measures of debt referenced in the above quotes are "credit to nonfinancial business" and "credit to the real sector". The latter includes the former, and also includes household debt. I'd say it includes government debt as well. But I won't guess what's in the debt measure Bezemer and Hudson used. I know government debt doesn't play a large role in their article.

Household debt includes consumer credit and, increasingly, household mortgage credit. Bezemer and Hudson have a strong focus on mortgage debt. They imply that mortgage debt crowded out non-fi business:

While the total credit stock expanded enormously in the 1990s and 2000, credit to nonfinancial business was stagnant at about 40 percent of GDP, while its share in overall credit plummeted. By contrast, the share of household mortgage credit issued by banks rose from about 20 to 50 percent of all credit.

In our time, arguably the most significant form that rent extraction has taken is in the household credit markets, especially household mortgages. The contrast is with loans to non-financial business for production.

B&H are concerned about the growth of mortgage debt, comparing it and non-fi business debt as shares of, well, as shares of different things. Here are the two debt series, shown as percent of TCMDO -- the series formerly known as total credit market debt owed:

Graph #3: Household Mortgage (red) and NonFinancial Business (blue) Debt as % of "All Credit"

Mortgage debt (red) runs consistently below 20% of "all credit" until 2005. It reaches a maximum of 21% in 2006, then falls. Mortgages never come close to "50% of all credit" in the U.S. data. Good grief!

Non-financial business debt (blue) climbs to near 35% in 1974, then falls consistently till the crisis. But clearly in the U.S. data, the fall in the blue line is not matched by a rise in the red line. Non-financial business debt was not crowded out by mortgage debt. And the "plummeting" in the 1990s and 2000s is curvier but not faster downhill than the plummeting between 1974 and 1990.


I should say I had to guess what data to use for these graphs, and sometimes B&H use multiple-country averages that I cannot duplicate. I'm just using U.S. data from FRED. Still, Graph #3 doesn't show anything comparable to what Bezemer and Hudson describe. Nor does Graph #1. Nor does Graph #2.

I can't duplicate the Bezemer and Hudson graphs. But I can inspect the U.S. data for the changes and levels and patterns they describe. If their argument is valid, I should be able to find some evidence that supports it in the graphs that I make, the graphs of U.S. data.

I don't find that evidence.

A Look at Mortgages in Bezemer and Hudson's "Finance is Not the Economy"

Bezemer and Hudson:

Mortgage credit is extended to buy assets, mostly already existing. It generates capital gains on real estate, not income from producing goods and services. The distinction becomes blurred to the extent that mortgages are used to finance personal consumption (especially “equity loans” to homeowners) or new construction, but that is a minor part of the total volume of mortgage loans.

I sold my house so I could afford a bigger house. I bought my new house from a guy who was building himself a new house. So the guy who bought my old house, and me, and the guy who sold me his old house were in a real sense working together to divide the cost of one new house into three affordable parts.

In this economy, how else can you afford a house?

Bezemer and Hudson are telling you that me and the guy who bought my old house contributed nothing to GDP. I say we did contribute, because without our help the guy who sold me his old house could not have build himself a new house.

A Look at Causation in Bezemer and Hudson's "Finance is Not the Economy"

Bezemer and Hudson:

In Figure 2, based on calculations by Dirk Bezemer, Maria Grydaki, and Lu Zhang (2016), we plot the correlation of income growth with credit stocks scaled by GDP. This provides a proxy for the growth effect of credit over time. The trend is downward from the mid-1980s, and from the 1990s the correlation coefficient is not significantly different from zero. Credit was no longer “good for growth,” as many had for so long believed (from King and Levine 1993 to Ang 2008).

A major reason for this trend was that credit was extended increasingly to households, not business.

The growth effect of credit has been downward since the mid-1980s, they say. The reason they give for the decline is that "credit was extended increasingly to households". The argument makes sense. I mean, households are consumers, not producers. It's almost intuitive, now they point it out.

I hate arguments like that. Dangerous arguments. Arguments that make so much sense you think you don't need to actually look and see if they are supported by the data.


Consider household debt relative to other, more comprehensive measures of debt:

Graph #1: Household Debt as a Percent of Private NonFinancial (red) and Total Debt (blue)

The blue line shows household debt as a share of total credit market debt: drifting downward from a 30% share in the 1960s. Yes, up a little just before 1980, but that didn't cause any Global Financial Crisis. Yes again, up a little after 2000. By the timing of it, you might say this was the increase that caused the crisis.

And yet, household debt runs higher on the graph from the early 1960s to the early 1980s than it was at its pre-crisis peak. Household debt was a smaller share of total debt on approach to the crisis than it was in the early 1960s and the two decades that followed. Given this fact, my view can only be that the increase in total debt was the real cause of the crisis. Household debt just went along for the ride.


The red line on the graph shows household debt as a share of private non-financial debt. Private non-financial consists of non-financial business debt and household debt. For half a century, from the early 1950s to the early 2000s, household debt was about half of private non-financial debt. The other half was non-fi business debt.

It varied, of course. Household debt ran as low as 46% and as high as 54% of private non-financial. But until the 2000s it was always within four points of the 50% level.

Looking at that red line on Graph #1, you could say that the household share has increased since the mid-1980s. There was a brief dip in the latter 1990s, but the trend was upward from the mid-80s to 2006.

Bezemer and Hudson say the "growth effect of credit" has been falling since the mid-1980s. They say that the growing household share is responsible for this decline. But in the mid-80s, household debt was at the bottom of its normal range. It had nowhere to go but up.

Household debt was on the low side of private non-financial for two decades, from 1970 to 1990. After it escaped the low side, climbing above the 50% level in 1991, it remained within its normal range (below 54%) for a decade.

Based on Graph #1 we can say Bezemer and Hudson seem to suggest that the increase from low normal to high normal was the problem, and that the fall of the growth effect began the moment household debt started rising from bottom in the mid-80s. But that view just doesn't make sense.


The household share was at bottom in the mid-80s. Are Bezemer and Hudson saying it was an insufficiency of household debt that caused the "growth effect" to fall? Obviously not. But perhaps they should.

When household debt reached peak share in the mid-90s, it was no higher than it was in the mid-60s. It is interesting to note that both of those highs occurred during good economic times.

Graph #5: Household Debt relative to Private Non-Financial Debt

This coincidence should raise doubt about Bezemer and Hudson's dangerous argument that a high household share of debt is the cause of our economic troubles.

If our troubles started in the mid-80s, as Bezemer and Hudson say, then perhaps the source of troubles is not that household debt is a high percentage of private non-financial, but that household debt is just plain high, like private non-financial debt, and private financial debt, and credit market debt in general.

Suddenly pervasive?

Yesterday I quoted Bezemer & Hudson from Finance is Not the Economy. Here again is that quote:

Growth in credit to the real sector paralleled growth in nominal U.S. GDP from the 1950s to the mid-1980s — that is, until financialization became pervasive. Allowing for technical problems of definitions and measurement, growth of bank credit to the real sector and nominal GDP growth moved almost one on one, until financial liberalization gathered steam in the early 1980s.

Credit growth paralleled GDP growth until financialization became pervasive.

What's the meaning of those four bold words?

Could it mean that the financialization was gradual, and gradually became pervasive? That's more or less what happened, as I see it. We had creeping financialization all along, visible in the data even in the early 1950s. But it didn't become pervasive, or problematic, say, until the 1980s. Or, until the 1970s. Or, until the 1960s. It depends who you ask.

Come to think of it, "problematic" is the better word for the view that I hold. But Bezemer and Hudson say "pervasive". So now I'm not so sure they are describing the view I hold. They seem to be describing a different view, one in which financialization suddenly emerged everywhere in the 1980s and was suddenly a problem everywhere. They say finance grew "almost one for one" with GDP until the early 1980s. And then it was suddenly a problem everywhere.

I'm not comfortable with that view. I don't think it is realistic. I think it is rather like telling a story of the bad witch who suddenly gains control of the village. It's a story for children. Financialization didn't happen overnight.

Total Credit to the Real Sector as a Percent of GDP

In my view the change only seemed to be sudden; that is how it seemed, not how it was in fact. It's perception versus reality. For we could live with finance. And we could live with more finance, with financialization. To some degree, finance benefits us even now.

I think finance was always pervasive: It was always everywhere in our economy. But in the 1950s there was only a thin layer of finance, insignificant and beneficial. In the 1960s we still found it beneficial, though harmful effects arose as finance deepened. Then in the 1970s, though debt grew bigger and more problematic, the cost of it got lost in inflation. Finally, in the 1980s as inflation subsided and debt appeared to be burgeoning, we were suddenly able to see the harmful effects that had long been there.

As Bezemer and Hudson put it: "Credit was no longer 'good for growth,' as many had for so long believed".

Credit was no longer good for growth because we got too much of it and it was choking us. That much should be obvious. The more subtle point is that credit grew all thru the 1950s and 60s and 70s and 80s, and the nineties and the naughts. Credit grew because it was our policy to make credit grow, because we thought credit was 'good for growth'.

Financialization didn't happen by accident. We made it happen.