Friday, July 15, 2016

The promise of vigor


(Not investment advice. Policy advice.)

In March I wrote

We are at the bottom now, ready to go up.

The way to read the debt-per-dollar ratio is ... that when the downtrend ends and the uptrend begins, the economy for a while is very, very good.
...
I think the economy is going to be very good, pretty soon.
...
We're right there right now. DPD is ready to go up right now.
...
This is not going to be your typical anemic recovery. This is going to be the full tilt, rapid output growth, rapid productivity growth, high performance boom.

I can't promise you it'll last long, because the level of debt is already very high. But it'll be a good one while it lasts.

In April I wrote

I predict a boom of "golden age" vigor, beginning in 2016 and lasting eight to ten years. It has already begun. In two years everyone will be predicting it.

Tom Hickey observed: "Art goes out on the limb."


How's Things?


It is now July. Marcus Nunes on the 14th of this month quoted The Wall Street Journal of the same date:
Could the cause of the next U.S. recession be too much growth? That is one risk of an unprecedented environment in which investors are betting heavily on a perpetually weak economic expansion.

If markets are wrong–and the economy surges instead of sputters–the bad bets could roil the financial system, some economists are increasingly warning.

“Ironically, one can think of a scenario where a stronger-than-expected expansion leads to financial trouble, which in turn puts into question the expansion itself,” said former International Monetary Fund chief economist Olivier Blanchard.

Mr. Blanchard is the latest prominent economist to warn that a surprise upturn in growth may force the Federal Reserve to raise rates faster than investors expect.

It looks like Olivier Blanchard is "the latest prominent economist" to follow me out on the limb :)

But I can't figure out what Blanchard sees, to make him expect an upturn in growth. All I get from the WSJ article is hokum:

The IMF’s former top economic counselor [Blanchard] said, in an interview even before last Friday’s job numbers, the American economy was looking strong. Wage inflation data suggests the unemployment rate—at 4.9% in June—is running at near full capacity, or the “natural rate,” and growth is slightly higher than the long-run ability of the economy to expand, he argued.

All I get from the WSJ article is that the economy is "looking strong" because rising wages suggest the economy is "near full capacity". Our economy is pushing the limits of growth, they say, and we need to do something about it: We need to raise interest rates.

Near full capacity? RGDP growth can't see five percent! Capacity Utilization is down to 75%. Unemployment is low only because the numbers have been doctored. To claim that we are pushing the limits of growth is to show that you are out of touch with the economy.

I'm being polite, Olivier.

Oh, and then this:

"if employment, wages and inflation rise at a speedier clip than many investors currently forecast, it could cause an economic hiccup"

Well, "hiccup" is cute, but that remark is class war stuff. Which reminds me of the archaic definition of the word investment: "the surrounding of a place by a hostile force in order to besiege or blockade it."


I'm not sure why Blanchard expects to see improved economic growth. Myself, I called vigor because financial costs are down:

Graph #4: The Fall and Rise of Household Debt Service Payments
Financial costs have fallen from 13% to 10% of Disposable Personal Income. And now consumers have 3% of DPI to play with. Look at the extreme right end of the blue line on the graph: The line is starting to go up again. Already.

That's an unmistakable sign of growth.

What's more, the big downtrend (highlighted in red) is at least twice the size of the early-1990s downtrend. And that one is what made the good years of the latter 1990s possible.

You remember those good years, right? Do you remember Allan Greenspan talking about anecdotal evidence?

Here's Izabella Kaminska:

At the time, the data didn’t seem to fit the prevailing reality. The incredible and seemingly unstoppable growth Greenspan was seeing on the ground was at odds with his economic models, which instead were signalling an imminent rebalancing on the back of wage pressures and implied inflation.

Greenspan held off on raising rates because of anecdotal evidence, and it paid off. We must consider doing something like that again. Household debt service is now at a low point, and ready to go up. Just like in the 1990s.

One can see the sharp fall to a bottom, the beginning of an upturn, and the promise of vigor over and over in the data:

  •  Total (Public and Private) Debt per Circulating Dollar
  •  NonFederal debt to Circulating Money
  •  Total Debt to Base Money
  •  Private non-financial debt to base money and to Federal debt

and in the one you really need to consider, Private Debt relative to Public Debt. The promise of vigor is everywhere, if you look.


Dealing with Inflation


All the asset inflation we got for the past eight years, that was okay I guess. But at the slightest hint that wages are going up, Blanchard wants to bring the hammer down.

Blanchard is right, though: Sooner or later, we'll have to do something about inflation. The trouble is, it makes no sense to wait eight years for stronger economic growth, and then raise interest rates to prevent that stronger growth from happening.

Blanchard says we cannot wait:

“When the Brexit smoke clears, if, as I expect, it clears, then the Fed should tighten,” said Mr. Blanchard. And given that it takes roughly a year for interest rates to have a substantial effect on the economy, that means the Fed can’t wait too long to raise the cost of borrowing to temper inflation.

Smoke clears quickly. Blanchard wants to raise rates soon.

It's nice that he and I agree on Brexit: The panic was uncalled for. But you can see Blanchard is just itching to raise rates. He wants to raise rates to constrain growth even before there is inflation. A year before there is inflation, the WSJ suggests. Therefore I must say to Mr. Blanchard the same that I said to Mr. Summers:
We need interest rates low to get economic growth so that we can raise interest rates and undermine that growth. This is your plan for the economy.

That's what we do all the time, I know. That doesn't mean it makes sense. And if you stop to think about it, you'll see it doesn't make sense. But you might have to think about it. And you definitely have to stop.

What I'm saying is that some of the fundamental thinking that underlies economic policy is wrong. It has become wrong. It used to be right, but it isn't right any more, because the economy is different now.

What I'm saying is that we have to find a new and better way to fight inflation. We can no longer rely on ready-made solutions that we implement without a thought. We have to develop new solutions that we will one day implement without a thought.

What I'm saying is that we have to stop using interest rates to fight inflation. We have to fight inflation a different way.


Remember back when the crisis was news? One of the things they worried about at the Federal Reserve was deflation. People had cut back their borrowing. People were paying down debt. So the Federal Reserve was worried about deflation.

I shouldn't have to write another sentence. You should know what I'm thinking.

Paying down debt is a way to fight inflation. Policymakers don't have to raise interest rates and choke off growth to fight inflation. We just need policies that encourage people to pay down debt rather than accumulating it.

We can fight inflation by paying down debt. We can keep interest rates low to encourage growth, and pay down debt to fight inflation. We can put it in the tax code. It could be punitive, but it ought not be.

And if we are willing to create those new policies, we can have a permanently low accumulated debt. We can find ourselves at a good place on the debt-per-dollar curve and at a good place on the private-debt-to-public-debt curve and all the other curves. And then we can achieve the permanent quasi-boom.

4 comments:

The Arthurian said...

1. Policies for the accelerated repayment of debt allow interest rates to remain low.
2. The investors' problem that Blanchard sees is thus resolved painlessly.

The Arthurian said...

Bill McBride: "Three and a half years ago I said that looking forward I was the most optimistic since the '90s. And things are only getting better."

I'm saying we were at the bottom in the first quarter of 2016, things are now getting better, and we should expect vigor comparable to the '90s.

The Arthurian said...

For more on the good years of the 1990s, see my Talk about having things backwards! from 2011.

The Arthurian said...

See also 2020 vision from back in February.