The New Arthurian Economics

Private Debt 2012 (5): Consumer Credit

2012-02-02T04:00:00.000-05:00

The log scale does what? I forget. Shows the growth trend, or something, right?

Graph #1: Total Consumer Credit Outstanding (Log Scale)

When did consumer credit grow at its fastest? Immediately after World War Two.

When did consumer credit growth stabilize? Mid-'50s. After that, it's a straight line.

When did consumer credit growth slow? Oh, 2008 and since. But you know that. Also, briefly, around the 1990 recession. I've pointed to that time before, a time when slack was created in the financial system.

So now... If we say private debt is the problem... The question is: When did the problem start? Not in the '80s. Not in the '70s. In the '70s it hit the fan, and in the '80s we fixed it the wrong way. (Obviously, nobody tried to slow the growth of debt in the '80s.)

If debt is a problem, then the growth of debt is a problem. And that problem started immediately after World War Two.

Here's the same info, Total Consumer Credit Outstanding, shown this time as a percent of GDP:

Graph #2: Total Consumer Credit relative to GDP

Again we see the dramatic post-war increase, and an abrupt end to that increase. This time the change occurs in the mid-1960s, around the time of the long forgotten "near-recession" of 1966.

After that, the line trends flat until the early 1980s. Probably this is due to the rapid inflation of those years, which increased incomes and increased the size of additions to consumer debt, but made existing debt balances relatively smaller and easier to pay.

If it was inflation that changed the trend, or even if it wasn't, clearly there was a trend-change in the mid 1960s. My argument would be that already by the mid-1960s we had so much debt that the growth of debt could not continue apace, but had to slow. And also that it was causing problems like inflation.

Some things cannot be said often enough. Excessive private debt is the problem.

Debt: The Good, the Bad and the Ugly

2012-02-01T04:00:00.000-05:00

At The Institute for New Economic Thinking, Lee Price interviews Moritz Schularick regarding his research into private debt. I have transcribed a portion of the interview, beginning about 3:40 in:

Q: What's led you to believe that you would have an even better understanding if you had a breakdown of the types of private credit?

A: That's where the link comes in to the title of our project -- finance and the welfare of nations -- is that the economic function played by lending differs substantially... It's not the same thing whether a bank extends credit to a company for a productive investment, or whether a household borrows from a bank to finance the purchase of an already existing house or an already existing apartment.

One is positively linked with economic growth and development. The other one is a financial transaction that, from a consumer point of view might seem beneficial, but it's much less clear what the welfare implications are of these housing booms.

Q: So you'll also be looking at whether investment was occurring that would improve the capacity to repay the debt later.

A: Right. This is crucial focus of them going beyond the aggregate credit data will be to as far as possible try to distinguish between lending and debt that was used for productive purposes, productive investment, to the degree we can define that, and lending that went into construction, went into mortgage lending, etc, to see whether there are different economic implications... consumer lending being the third kind ...

Now I'm gonna say this is a waste of time, investigating these differences.

And you will misunderstand, and you will think I cannot see the obvious differences between productive and nonproductive uses of credit. And then I could quote Adam Smith, or quote myself quoting Adam Smith to show you that I *DO* see the differences that Moritz Schularick sees and wants to study. And I say let's move along here, we don't have time for that.

Back in the 1970s, at the end of the Golden Age, the only way to keep the economy growing gangbusters was to let prices go up. And when policy suppressed inflation, policy suppressed growth. And growth never recovered.

Why? Because already by the end of the Golden Age, financial costs were making the productive sector less profitable. More to the point, those same costs were making the financial sector more profitable.

So then, when Supply Side economics made things better for business, it was finance that benefitted most. And since there was no thought given to reducing the reliance on credit, or to reducing private debt, or to reducing the financial costs to the non-financial sector, the productive economy never recovered. But finance grew.

At Angry Bear, Steve Roth responds to a Jazzbumpa post:

...the finance industry has created a huge pyramid of new financial assets (ultimately funded by bank fractional reserve lending/money printing). That new money is "locked up" in those assets, but it was created for that purpose in the first place. If real investment had offered similar risk-adjusted prospective returns, banks would have created money for that purpose.

Which raises the question: how to make real investment more attractive than financial investment? I'd start by taxing financial-investment returns at the same rate, or higher, than real business profits. Rather than at a lower rate, as we do now...

This is exactly right. Finance grew, and production didn't, because finance was more profitable than production. And the question is exactly right: how to make real investment more attractive than financial investment?

Roth suggests using taxes to make finance less profitable. I like the idea. That's what taxes are for. Yet I must insist that the problem is simpler and the analysis cleaner than Steve Roth has seen.

When the productive sector increases its reliance on credit, it increases its own costs, reduces its own profits, and increases the profits of finance. Ergo, the growth of finance.

Finance is the problem, gentlemen, because finance is the problem.

In an interview I reviewed a while back, Robert P. Brenner made the following points:

1. The basic source of today’s crisis is the declining vitality of the advanced economies since 1973, and, especially, since 2000.

2. Since the start of the long downturn, state economic authorities have tried to cope with the problem of insufficient demand by encouraging the increase of borrowing, both public and private.

3. A stepped-up assault by employers and governments on workers’ wages, working conditions, and the welfare state ... prevented the fall in the rate of profit from getting worse.

Yes, exactly. However, Mr. Brenner fails to emphasize the fact that the cost of finance was a central element in the decline of wages and profit.

The problem with finance is cost. Sure, yes, yeah, if we use all our borrowed money for consumption spending it's not as good as if we use it all for productive investment. Probably. But no one yet sees that the fundamental problem with credit use is the cost of credit use. Robert Brenner misses it. Steve Roth misses it. Moritz Schularick misses it. And you miss it too.

When there is so much debt that the economy can no longer function, it doesn't really matter anymore whether that debt was used for productive purposes. The problem is cost. At this stage, today, the only thing that matters is the cost.

What?

2012-01-31T18:52:00.001-05:00

What does this mean?

The problem is that the austerity if undermining the banks and the “markets” broadly defined by reducing real GDP growth and destroying the motivation for private households and firms to expand credit within safe parameters.

From the conclusion of this post.

Now, I don't know how you would calculate this...

2012-01-31T04:00:00.000-05:00

The quote is from Top Ten Austrian Economics Lies and Mistakes at the Recovering Austrians site.

45% of prices we pay for our daily needs are compensation for capital costs incurred by the producer.

... but that's what I'm talking about: embedded interest costs, due to the excessive reliance on credit (as measured by excessive debt).

From Krugman's "Notes on Deleveraging"

2012-01-30T04:00:00.000-05:00

Krugman writes:

My preference is to leave financial-sector debt out of the picture, because it’s conceptually very different from nonfinancial debt. Think of it this way: compare two banking systems, one in which banks directly lend deposits out to customers, another in which many deposits are lent out through the interbank wholesale market, and then lent on to nonfinancial customers. The second system will show much higher financial-sector debt, and it is in some real sense more risky than the first, but the real economy isn’t more highly indebted than in the first case. In general, financial-sector debt is about the internal organization of intermediation, and it’s not the same kind of thing as when households or business run up a lot of debt.

In the middle of refusing to acknowledge that financial debt should be counted, Krugman says the system with more debt is in some real sense more risky.

In some real sense more risky.

So Krugman prefers not to count financial-sector debt because it's conceptually different from productive-sector debt. What, it doesn't have a cost? Of course it has a cost. And the cost of it is borne by the non-financial sector, even though it is financial-sector debt. The interest of money is always a derivative revenue.

And don't forget: When we had the crisis, it was a financial crisis.

One of the big problems with excessive debt is the threat of cascade failure: One debtor defaults, causing his creditors to default, causing their creditors to default, and before you know it the whole economic system is fallen into ruin. This was the trouble with Greece of course -- not just that Greece would go, but that Greece would take down Europe, and then Europe would take down the United States.

When you consider cascade failure, it is important to consider financial debt as part of the potential problem. For the cascade will be working its way through the financial sector on its way to the productive sector.

The fundamental problem with debt, of course, is the cost of it. Now consider one borrower, me, and one lender, you, and between us a system of financial intermediaries. Maybe there are two intermediaries in the chain; or maybe there are seven. No. Consider an economy where the financial system has grown beyond its economies of scale, so that what used to be a chain with two intermediaries now is a chain with seven. What are our options?

Either it costs me more (and you receive less interest income) because of the long chain of intermediaries who make money when I borrow a dollar from you, or I pay no more and you receive no less, but the intermediaries are squeezed.

If it costs me more and you receive less interest income, this is bad for the productive economy, bad for demand, bad for growth.

If the intermediaries are squeezed, the risk of cascade failure increases.

In the real world, our world, both things happened when debt became excessive. From the start, it was bad for growth. At the end, the financial sector was in crisis.

Easy to See

2012-01-29T10:00:00.000-05:00

At Broad Oak Blog, an ephemeral link in the sidebar -- Steve Keen: giving money to debtors 3x more effective than giving it to banks

Keen:

In the second half of the lecture, I use the model developed in the first half to show that money is not neutral in a credit-based economy–a higher rate of money creation results in a fall in unemployment–and also model a credit crunch. I also model two government policies to counter a crunch: giving money to the banks (which Obama did) and giving it to the debtors (which the Australian government did). Conventional money multiplier theory argues that the former is more effective; I show that the latter is about three times better than the former.

Yes.

It's very simple.

1. There's too much debt; that is the problem. So the solution is to reduce debt.
2. If you "give money to the banks" you're not reducing debt.
3. If you "give money to debtors" there's some chance they will reduce their own debt.

Quantitative easing started out as a plan to buy up toxic assets, to relieve the banks of risk. Sure, and the Federal Reserve took on that risk by taking on those assets.

But why were the assets "toxic"? Because people couldn't afford to make the payments.

The money that the Fed created from nothing to buy those assets would have been better used to pay down debts that people couldn't pay. The banks would have got the money anyway, and the toxic assets would have been destroyed.

I don't know how you would calculate a number and say it's three times better my way or Steve's way or Australia's way, than it is to do it the Fed's way. But it is easy to see which method would would better, and which method has not worked.

What is the meaning of this?

2012-01-29T04:00:00.000-05:00

Keywords

2012-01-28T12:00:00.000-05:00

From Google's Webmaster Tools, the five most frequently used keywords for this blog:

Debt, money, economic, policy, growth.

I'd say they got it just right.

A little JKH paradigm riff

2012-01-28T04:00:00.000-05:00

At Asymptosis a few days back, something wonderful from JKH:

Finally (for now), here’s a little JKH paradigm riff on the role of accounting in economics:

Consider a change in the economy between point A and point B.

The following things are true:

a) A and B as economic conditions can always be represented in accounting terms

b) Economic behaviour determines the change from A to B

c) Standard accounting identities always hold * – at A, B, every point in between, and every point before and after

d) The LEVEL of the numerical accounting variables within the identities can change from A to B, but not the identities themselves as generic accounting truths

e) BEHAVIOUR determines the change in the LEVEL at which the identities hold

f) The identities CONSTRAIN behavioral outcomes, such that c) is always true

* This assumes of course that identities are always correctly formulated, including for example various permutations around S, I, national saving, closed economies, etc.

MMT recognizes all of this, I think. It’s not necessary to be an MMTer to understand it, but it’s a big plus for their camp, IMO.

IMHO, there are two people (outside of MMT) who I always think of immediately, in terms of their understanding of the relationship between accounting and economics.

I think Paul Krugman understands it (even though he’s demonstrated occasional wobbliness in understanding the details of central bank accounting).

And I think John Maynard Keynes understood it. I think it infuses the GT, and that his ripping apart of the classics using the fallacy of composition at a general level was informed by his inherent understanding of the mathematically closed nature of double entry bookkeeping. (Sorry, that’s not such a humble observation on my part, so maybe I should attribute my own paradigm at least in part to Keynes.)

One reason I mention Krugman is that this accounting identity stuff is quite prominent in his bashing of Chicago in “Dark Age of Macroeconomics”, etc. including recently. If you read Krugman’s posts closely, he’s very careful about putting accounting in proper context, which is what this is all about. He’s very cognizant of the required logical relationship between economic behaviour and accounting.

The value of accounting principles to economics is in the discovery and elimination of mathematical error.

Economic behavior always determines what happens in the economy; and human nature cannot be changed.

The LEVELs of numerical accounting variables -- economic quantities -- can and do change. These levels are what concern me, always. Changes in levels can and do result in imbalances which make the economy inoperative. As a result of excessive private debt, for example, the rate of economic growth slows; and forty years of policy devices intended to boost private-sector credit use have not solved the problem.

The LEVELs must serve as a guide to policy; the purpose of policy is to guide behavior.

LEVELs above all.

Just a touch of doublespeak

2012-01-27T23:00:00.000-05:00

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Whirring the fact

2012-01-27T04:00:00.000-05:00

Notes on the Graeber interview

I listened to the PBS interview of David Graeber repeatedly and transcribed some chunks of it.

The first Q&A, which begins around 0:45...

Q: "What were the first debts, as we understand debt today?"

A: Well
That's an interesting question
is its how moral debts -- the sense of obligation, promises (because debt is really just a promise) -- turning into something that can be quantified and transferred
and for that reason you can transfer them from one person to another
and in a way that's exactly what money is, they're debts that we can transfer.

Debt is not "just a promise". Debt is a promise to pay. Money is the payment.

Perhaps money started out as debt. I don't care.

The dining room table started out as a tree. I don't go around saying the table is a tree. That would be wrong.

The second Q&A, which begins around 1:15...

Q: When did debt become a negative?

A: It's hard to trace
It seems to go back to the very beginnings of written history
but there's always the terrible ambivalence about it
because if you look at history on the one hand
not paying your debts is the essence of immorality but
people who lend money are almost universally also considered to be evil
that's one of the mysteries I was trying to resolve
there is a sense of moral confusion about debt
it seems like in a way both parties to a transaction are at least in terrible moral peril
and probably actually both sinners and bad people.
So there is a sense that people are constantly
whirring the fact that basic economic relations causes everyone to be bad

That is interesting, both the borrowers and the lenders are "sinners". Reminds me of Benjamin Franklin's "Neither a borrower nor a lender be."

Interesting, but completely beside the point, if you want to understand the economy. Mysteries and moral confusion. To understand people maybe it is relevant.

I don't know what word "whirring" is supposed to be. Makes a good title, though.

The third Q&A, which begins around 1:52...

Q: What kind of things changed debt over time"

A: The most significant pattern that I found was
whether the predominant form of money is virtual money, is credit money, what we have now
or whether people are actually using gold, silver, bars, coins
in everyday transactions.

For most of human history virtual money -- it's nothing new -- virtual money has actually been the predominant form.

Now when people recognize that,
that money is just a promise that we make to each other
then money doesn't seem quite so ineffable
it doesn't seem quite such a moral absolute
if i owe you money
well if there's a problem, we renegotiate it...

It doesn't matter whether money is made of precious metal or paper or electronic blips. It matters if there is an extra cost associated with using it. The DPD graph shows that when that cost gets too high, we get a depression. It's very simple, really. Nothing about moral absolutes or effability.

The economy is transaction, and the problem is always cost.

Fragments, after I got tired of transcribing:

Around 3:28 she asks about the debt ceiling. Graeber calls it "a moral myth".

Around 3:43 he says: "When people start talking about debt they're not really talking about economics they're talking about morality."

Not me. When I start talking about debt, I'm talking about a cost problem. But yeah, Graeber was talking about morality at 3:28, and at 1:15.

Around 4:00 Graeber says "dollars ARE debt".

The table is a tree.
The table is a tree.
The table is a tree.

I think I just discovered what "whirring the fact" means.

Private Debt 2012 (4b): "private-sector deleveraging"

2012-01-26T05:00:00.000-05:00

Krugman, 22 Jan 2012, Notes on Deleveraging, links to the McKinsey Global Institute report on debt and deleveraging. The McKinsey page says

history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.

What I've been saying. In order to get the economy to grow, we must reduce private debt. Not public debt. Private debt.

The "history" to which McKinsey refers would look something like this:

Graph #1: Debt per Dollar, 1916-1990

Up until we had a Great Depression...
Down until we got a Golden Age... and
Up again, until we could bear it no longer...

Graph #2: Debt per Dollar, 1916-2010

Like that.

Oh, and yes, the public debt fell continuously all during the Golden age. And when it was low and could go no lower, there was an end of the Golden Age, and the start of troubles that continue to this day.

Graph #3: The Federal debt compared to the rest of Total Debt

And that's the way it is...

Private Debt 2012 (4): When does private debt grow?

2012-01-26T04:00:00.000-05:00

Some things cannot be said often enough. Excessive private debt is the problem.

Last week we looked at Federal debt. We used the Federal component of total debt, where total debt was measured as FRED's Total Credit Market Debt Owed, or TCMDO.

This week we will look at all the rest of TCMDO, everything but the Federal component. And I will call it "private" debt. The red line here:

Graph #1: Total debt (blue) and Private debt (red)

I want to eliminate the blue line and just look at the red line, private debt And I want to look at the growth of that debt. So I will show "percent change" values, as I did last time to show the growth of Federal debt.

Graph #2: Percent Change from Year Ago, Private debt

Last time I highlighted the significant uptrends in government debt, and we saw that those uptrends occurred during recessions. I won't highlight the graph this time, but you can see on Graph #2 that for private debt, the downtrends generally occur during recessions. Just the opposite of the Federal debt. And the uptrends in private debt typically occur between recessions, when the economy is growing. As you would expect.

So now, I want to take the red line (total private debt) from Graph #2 and show it together with the blue line (total Federal debt) from last week's Graph #2:

Graph #3: Percent Change from Year Ago, Federal and Private debt

Wiggly lines. But if you look at the red line, it seems to be almost centered on the 10% line, dropping off perhaps toward the end. The blue line, on the other hand, has three really sharp spikes. These are associated with the recessions of 1974, 1982, and 2008.

Between those recessions, the blue line seems to be all over the place. Actually it fell a lot from 1984 to 2001 and from that low point there is another huge spike that doesn't look like a spike because it starts out from such a low point.

But before those recessions, before the 1974 recession, the blue line is quite tame. At the start, it seems to be almost centered on the zero line, maybe one or two percent, until the near-recession of 1966-67. Then a couple hefty spikes seem to push the trend upward. Even so, the blue line does not break through the red line and rise above it, until the 1974 recession.

Those sharp blue spikes of 1974 and 1982, and the premonitions in 1967 and 1970, are increases in government debt. The spikes show that our economy was already in trouble at that time. Already in trouble, in the 1970s.

But if we were already in trouble in the 1970s, then we must look for the problem in the 1950s and 1960s.

In the 1950s and early '60s, Federal debt growth was relatively slow -- averaging perhaps 2% per year. Federal debt growth was slower than GDP growth. Meanwhile, private debt was growing at a rate of 8% to 12% per year. And private debt continued to grow at that rapid rate, until accumulating debt created financial costs that led to severe recessions in the 1970s, forcing those large counter-cyclical increases in the Federal debt.

The economic problems of the 1970s and since, have their origins in the private debt growth of the 1950s and '60s.

Brief note

2012-01-25T16:00:00.000-05:00

The post from 4 o'clock yesterday morning disputes the view presented in the David Graeber interview, that the Nixon decision of 15 April 1971 removed the "boundaries on the amount of money that could be printed".

The post from 4 o'clock this morning disputes the view presented in the David Graeber interview, that the Nixon decision of 15 April 1971 led to "debt spinning out of control".

Which is it? Is it printing too much money? Or is it too much debt? The interviewer, certainly, has no idea. Moreover, she has no better idea after the interview than she had before.

In order to understand the economic problem of our time, it is necessary to distinguish between money and debt.

August 15, 1971 and the "pendulum swing away from an economy based on hard currency to one based on virtual money, or credit"

2012-01-25T04:00:00.000-05:00

Clonal recommends this interview with David Graeber, author of “Debt: The First 5,000 years”. In the intro to the interview (and in the related text) the speaker says that President Nixon, by taking us off gold,

began what anthropologist and author David Graeber says is the latest pendulum swing away from an economy based on hard currency to one based on virtual money, or credit, which can lead to debt spinning out of control...

Sounds reasonable, right? Well, I disagree. No surprise there, I guess.

If going off gold in 1971 is the reason debt went "spinning out of control," then I think we should see a noticeable increase in debt after 1971. We should see that increase soon after 1971. And we should that increase get bigger over time, as debt gets more and more "out of control". Yeah, sort of like this:

Graph #1: Total Credit Market Debt Owed

But the thing of it is, until the crisis, the blue line on Graph #1 was increasing all the time. So of course it is higher at the end than at the start. And of course it looks worse after 1971 than before. Glancing at a line that "goes up" does not provide the strength of evidence we need if we are to accept the interview statement. Not for me.

On Graph #1 I highlight what looks like a temporary increase in the general pattern of increase. This distortion of the general pattern, like the swelling from a bug bite, begins in the mid-1980s and tapers off to nothing by the mid-1990s. What I'm looking for is a change that begins the same way, but never tapers off. If debt "spins out of control" because we went off gold in 1971, there is no reason for the increase to be temporary, and every reason to expect the increase to be permanent and to grow larger.

Furthermore, the timing of the temporary increase on Graph #1 is wrong. It does not come shortly after President Nixon took us off gold. It comes shortly after President Reagan started making changes to economic policy.

Still, Graph #1, overall, does show increase that looks like an "out of control" increase in debt. Yes, I agree that it does. But again, there is the timing problem, the absence of any change associated with the Nixon policy action. I am therefore forced to reject the view presented in the Graeber interview, that the growth of debt in our lifetime is in any way a consequence of "going off gold".

To finish that thought: I think "going off gold" was a policy response to conditions that demanded action; and I think the particular "condition" demanding action was the increase in total debt that had happened before 1971. But that's just me.

Did "going off gold" create the debt problem? No.

Did going off gold make the problem worse? Yes and no. Going off gold allowed debt to continue growing and therefore allowed the debt problem to grow worse. But going off gold did not cause debt to grow worse.

As I have it, the mindset that thinks going off gold -- or any policy -- is "a good idea because it allows debt to continue growing" is the cause of the problem. That mindset has been the cause of the problem since the end of the second World War, and remains the problem today.

FRED provides TCMDO (Total Credit Market Debt Owed) numbers for every year from 1950 to 2010. Conveniently, the Nixon gold action occurred 21 years after the start-of-data. I broke up the FRED data into three periods of equal length: 1950 to 1970, 1970 to 1990, and 1990 to 2010. If going off gold was the turning point that allowed debt to "spin out of control" then we will be able to see this in the difference between debt growth before 1971, and after.

I used an old trick from Milton Friedman, and figured the debt numbers for each period relative to the period average. I think of this as making three separate graphs, for each graph finding the "center" of debt, and then stacking the graphs one on top of the other with the centers lined up. This way I can compare three 20-year increases in debt, and I am not befuddled by the fact that each subsequent increase starts where the previous increase left off.

I am looking for evidence that the Nixon gold policy of 1971 allowed debt growth to go "out of control", or that it did not. On the horizontal axis of the graph below, years are represented by the numbers "0" through "20". To figure out what those years are, add the year-number to the start date in the legend. For example, year "0" for the blue line represents 1950, for the red line 1970, and for the gold line 1990. Year "6" for the blue line represents 1956, for the red line 1976, and for the gold line 1996.

Graph #2: Comparing Three Periods of Debt Increase

The blue line on Graph #2 shows the growth of debt for the first period, 1950 to 1970. This line starts out higher than any other, and ends up lower (except for the crisis effect in year "20", when the gold (2010) falls below the blue. The blue line shows the slowest rate of increase.

The red line shows the growth of debt for the second period, 1970 to 1990. This line starts out lower than any other, and ends up higher. It shows the fastest rate of increase. So far, Graph #2 seems to support the view that the Nixon action of 1971 did result in "out of control" debt growth. But we're not done evaluating the graph!

The gold line shows the growth of debt for the third period, 1990 to 2010. This line starts out extremely close to the blue (1950-1970) line. And it stays close to the blue line for the whole period: extremely close from the "0" year (1950, 1990) to the "14" year (1964, 2004) before rising briefly and then collapsing in crisis.

The 1950-1970 period shows the slowest rate of increase. 1970-1990 shows the fastest. But then 1990-2010 shows an increase that is nearly as slow as 1950-1970. In other words, if Nixon's 1971 decision to separate money from gold had any effect at all, that effect dissipated by 1990. Given the profound significance of the Nixon decision, the effect of such an act would never dissipate, in my view. Therefore I must conclude that despite the significance of the Nixon decision, it had little consequence for the growth of debt.

Going off gold opened no floodgate. Going off gold, by itself, did not lead to debt spinning out of control.

As a point of interest, the red line starts out low because it ends up high, and because we are "centering" each 20-year period on the others. So again, this confirms that the red line -- 1970 to 1990 -- shows more of an increase than either of the other two lines.

Looking at that red line, I see a kink (an increase) around year "7" and another around year "13". These are changes in the pattern of debt increase. Year "7" on the red line is 1977, six years after the Nixon move. Year "13" is 1983, three years after the election of Ronald Reagan.

In the years before 1977, the red and blue lines appear to run parallel, red perhaps increasing slightly faster than blue, but this is not definitive. I conclude that red and blue in these years (1970-1976 and 1950-1956) show essentially the same pattern of increase. So there was no "spinning out of control" after 1971. At least, not for several years after 1971.

Did the Nixon move contribute? Did it facilitate the growth of debt? Of course. It was part of a policy dedicated to the increase of credit use and the accumulation of debt. Evidently there were other parts to that policy as well, one around 1977, and one around 1983.

Evidently it was always thought wise to use credit and to let debt accumulate:

Graph #1 repeated: Total Credit Market Debt Owed

I think the apparent strength of Graeber's argument arises from the precision of the date he chooses as a turning point: A well-defined moment. How could he be wrong?

But he *is* wrong. He is wrong because he picks one moment and says that moment defines the start of the problem. He is wrong because the moment he picks is only one of many moments, moments of policy, moments when the idea was this policy will allow debt to continue increasing, and that's good -- moments that could only lead to a very bad ending.

If there was any single turning point that opened the floodgates of debt, we would see a flood happen after that point, and no flood before. There is no such point. Debt was always increasing, as the graphs all show. It was always policy to encourage credit use and the accumulation of debt.

It is our policy -- always encouraging debt -- that is the problem. And if you bristle at the thought, let me suggest that your reaction is typical. It is this view, your view, that leads again and again and again throughout history to the crises David Graeber describes, crises that must result from a policy of perpetual debt accumulation.

Ken

2012-01-24T22:26:00.002-05:00

Keen:

The difficulty in developing a monetary dynamic macroeconomics comes not from the tools themselves, but from the beliefs that have to be abandoned to employ them

Keynes:

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

Almost forty years ago...

2012-01-24T04:00:00.000-05:00

PBS: Are we slaves to debt? David Graeber on the history of spending more than we have

Almost forty years ago, on August 15, 1971 President Nixon took America off the gold standard, declaring, “We must protect the position of the American dollar as a pillar of monetary stability around the world” — which meant, among other things, that there were really no longer boundaries on the amount of money that could be printed.

The interview statement suggests by innuendo that if we look, we will find an unbounded increase in the quantity of money after 15 August 1971.

I will look.

Graph #1: Base Money (Log Scale)
No change related to 15 August 1971

Graph #2: M1 Money (Log Scale)
No change related to 15 August 1971

Graph #3: M2 Money (Log Scale)
No apparent change related to 15 August 1971

Graph #4: M3 Money (Log Scale)
No apparent change related to 15 August 1971

Graph #5: MZM Money (Log Scale)
No change related to 15 August 1971

Graph #6: Total Credit Market Debt Owed (Log Scale)
Possible 15-year increase following 15 August 1971

Only one of these graphs offers even a hint of increased growth, after President Nixon took America off the gold standard -- the graph of total credit market debt, or TCMDO. Of course, TCMDO is the "near money" that is furthest from money, least subject to control by the Federal Reserve, and most responsive to private sector financial decisions. TCMDO increases not by printing money but by lending it.

If you think you see a hint of post-1971 increased growth in Graph #4, let me point out that M3 is the next most distant "near money" after TCMDO. Again, it is not the money-printing that the government did, but money-lending within the private sector, which caused the change that you see.

A colorful look at the yearly change in all the monies and near-monies shown on the graphs above:

Graph #7: Percent Change from Year Ago for
the series shown in Graphs #1 through #6

All in all these trends may show a general increase from the early 1950s to the mid-1970s, followed by stabilization or downtrend to the most recent years shown. All in all, no well-defined increase following 15 August 1971.

The PBS intro's focus on printing money is the wrong focus. There was no acceleration of money-printing following President Nixon's decision of 15 August 1971. The problem is *NOT* that "there were really no longer boundaries on the amount of money that could be printed."

Karl Smith

2012-01-23T20:04:00.002-05:00

At Modeled Behavior:

I tend to think ... that the private debt overhang is not necessarily a big deal.

Year of the Dragon

2012-01-23T04:00:00.000-05:00

Chinese New Year, 23 Jan 2012

What I know about dragons: They are big hoarders of lethargic wealth. They live in gated communities or other hard-to-reach places.

I know that their hoards are money that is not circulating.

I know that the gold miners have to work twice as hard to produce gold to replace the gold trapped in the dragon hoards.

I know that the dragons capture most of the newly produced gold, so that the miners' work solves no problem.

I know that in good times, their hoards look to us like "the ford foundation" and "the bill and melinda gates foundation" and we think that they do good work. And they do. But their hoards interfere with circulation. The hoards make good times go bad.

I know that dragons arise as dark ages approach.

Wikipedia:

Smaug was intimately familiar with every last item within his hoard, and instantly noticed the theft of a relatively inconsequential cup by Bilbo Baggins. According to Tolkien, his rage was the kind which "is only seen when rich folk that have more than they can enjoy lose something they have long had but never before used or wanted."

Encyclopedia of psychology and religion, Volume 2
By David Adams Leeming, Kathryn Madden, Stanton Marlan
via Google Books

A couple good brief stories there, St. George and the dragon, Beowulf, more. But then the book takes these tales of hoarding and recoup, and turns them into psychobabble:

As C.G. Jung writes, "[t]he treasure which the hero fetches from the dark cavern is life: it is himself, new-born from the dark maternal cave of the unconscious..."

That's not what I'm talking about. There is no metaphor, no analogy in my description. The concept of the "dragon's hoard" applies directly to our present economic situation. And the stories of dragons convey the size and scope of the dangers that arise when the hoards absorb too much of society's wealth.

The Wealth Report, June 22, 2011:

According to the annual World Wealth Report from Merill Lynch and Capgemini, the U.S. had 3.1 million millionaires in 2010, up from 2.86 million in 2009. The latest figure tops the pre-crisis peak of three million.

David Cay Johnston of Reuters, October 19, 2011:

There were fewer jobs and they paid less last year, except at the very top where, the number of people making more than $1 million increased by 20 percent over 2009.

The median paycheck — half made more, half less — fell again in 2010, down 1.2 percent to $26,364.

CNN Money, May 9, 2011:

Despite the Great Recession, which wiped out $15.5 trillion in household wealth in the United States alone, the number of millionaires in this country and abroad will grow rapidly over the next decade.

Dragons arise as dark ages approach.

//UPDATE 23 Jan 2012: I have removed the Huffington Post quote (which said "median income fell") at the request of David Cay Johnston (who actually said the "median paycheck" fell. By email, Mr. Johnston points out that "Wages are only one component of income."

Mr. Johnston's First look at US pay data, it’s awful at Reuters is excellent.

Never thought of this before

2012-01-22T04:00:00.001-05:00

When people used the precious metals for money, as in ancient Rome, when savings started to accumulate in few hands there was an incentive to melt down the coin to make jewelry or ingots or whatever. And the more the money was debased, the greater the incentive, among the wealthy, to melt it down and retrieve the precious metals. This is not true of paper money.

Paper does not melt, and there is nothing precious to be retrieved by burning it. So today, when money starts to accumulate in few hands, it stays in the form of money. If you want gold you buy it, and then the seller gets the money. But the seller is not going to melt it down, either. So the money never goes away.

Therefore inflation, or debasing the money, must have an entirely different result for us than it did in ancient times.

An Artist on SOPA

2012-01-22T01:56:00.002-05:00

This is not about 'piracy'... What this is about is control -- not of content, but of artists. Production companies don't want to have to give up that comfortable, exploitative relationship. They don't want to give up the position of power...

An interesting take on the SOPA question, from Xauri'EL Zwaan at After the Crash.

On the Table: "About" gibberish

2012-01-21T04:00:00.000-05:00

Causes of Economic Recession By Kimberly Amadeo, About.com Guide	me
Economic recessions are caused by a decline in GDP growth, which is itself caused by a slowdown in manufacturing orders, falling housing prices and sales, and a drop-off in business investment.	Economic recessions are not caused by declines in GDP growth. Recessions are declines in GDP growth.
The result of this slowdown is falling employment, and rising unemployment, which causes a slowdown in retail sales. This creates a downward spiral in manufacturing and increased layoffs.	One is left wondering how this downward spiral ever reaches an end. From Kimberly's description, it sounds endless.
A stock market decline, known as a bear market, can either be a result of a recession but is often a cause itself.	Either/or, not either/but. Just how little time did they put into this about-dot-com page, anyway?
But what usually causes the slowdown in the first place?	Finally!
Each recession has its own specific causes, but all of them are usually preceded by a period of irrational exuberance.	Okay...
This is also known as a business cycle.	So, the business cycle causes recessions?

"The economy" and "the economics"

2012-01-20T12:00:00.000-05:00

Rothbard:

It should be recognized that most business-cycle theories – Keynesian, Marxist, Friedmanite, or whatever – and remedies are grounded in the assumption that the cycle stems from some deep flaw in the free-market economy.

Keynes:

If, indeed, it were true that the existing real wage is a minimum below which more labour than is now employed will not be forthcoming in any circumstances, involuntary unemployment, apart from frictional unemployment, would be non-existent. But to suppose that this is invariably the case would be absurd...

Obviously, however, if the classical theory is only applicable to the case of full employment, it is fallacious to apply it to the problems of involuntary unemployment — if there be such a thing (and who will deny it?).

Keynes points out a flaw in the theory. Not a flaw in the economy.

Rothbard is confused.

Miss Construe and the seamless web

2012-01-20T04:00:00.000-05:00

From Rothbard:

As economic theory developed and deepened, it became obvious that there was an inherent conflict between standard "micro-economic" theory, and factual observations of the business cycle. For theory tells us that, in the market economy, there is a continuing tendency to eliminate error and to "clear the market"; there is a tendency then, for losses to be minimized. So how could there possibly be periodic clusters of severe business losses, which constitute the onset of the panic, crisis or depression? The conclusion that most economists and observers unfortunately came to was that microeconomics does not realistically apply to the "macro" level.

Rothbard recognizes the "inherent conflict between standard "micro-economic" theory, and factual observations of the business cycle." Then he says:

It should be recognized that most business-cycle theories – Keynesian, Marxist, Friedmanite, or whatever – and remedies are grounded in the assumption that the cycle stems from some deep flaw in the free-market economy. But if micro-theory is correct, then it must apply to the "macro" sphere as well. The economy is not some entity split between a micro and macro half; it is a seamless web, inextricably linked together by the use of money and the price system. Therefore, whatever applies to one part of it must apply to all. The explanation for business cycles must somehow be integrated with the explanation of the micro-economy.

Rothbard betrays his special interest by defending the free market against criticism of "some deep flaw".

But of course, the flaw is not in the economy. The flaw is in the economics. See, for example, the logic of Rothbard's economics: Assume that "micro-theory is correct," and proceed from there.

And so we see – and this is the great insight of the "Austrian" theory of the trade cycle – that micro and macro economics are in harmony after all. The free market does tend to adjust harmoniously without boom and bust, without incurring clusters of severe business losses. It is government intervention in the market that creates the business cycle, and unfortunately makes the corrective adjustment of recessions necessary.

Rothbard takes the argument where he wants it to go, rather than letting the economy point the way.

Private Debt 2012 (3): When does government debt grow?

2012-01-19T04:00:00.000-05:00

Some things cannot be said often enough. Excessive private debt is the problem.

I want to look at the growth of debt. I want to see when the Federal debt grows a lot, and when it doesn't.

Here's the graph we started with last week:

Graph #1: The Federal component of TCMDO debt

I want to look at the growth of debt. But first: How do we measure growth?

Wikipedia says Economic growth is measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP).

So... percentage change in the thing you are measuring. Good enough. It's the answer I expected, anyway.

So to look at the growth of Federal debt, or growth rate I guess, I want to look at the percentage change in the Federal debt. I can do that:

Graph #2: Percent Change from Year Ago, from Graph #1

Here, I took Graph #2, highlighted the significant uptrends, and used it for Graph #3:

Graph #3: Federal debt growth, with uptrends highlighted

Every highlighted uptrend but one coincides with a vertical gray bar, and every vertical gray bar except the first coincides with a highlighted uptrend.

Every significant uptrend in Federal debt growth but one coincides with recession, and every recession except the first coincides with a significant uptrend in Federal debt growth.

The one highlighted increase that does not coincide with recession occurred around 1967. There was no recession that year, but there was a near-recession in 1966-67. So while no vertical gray bar appears at that point on the graph, economic conditions were in fact recessionary, just as at every other highlighted uptrend on the graph.

The one gray-bar recession that does not coincide with a highlighted uptrend appears right at the start of the Federal debt data on Graph #3. In my view the blue-line uptrend which coincides with that recession was not significant enough to merit highlighting. Nonetheless, there is in fact an uptrend there, which coincides with the gray recession bar on the graph.

There is a strong, reliable relation between recession and Federal debt growth.

If you want to minimize the growth of Federal debt, you must minimize the occurrence, duration, and severity of recession, and you must restore health and vigor to the U.S. economy.

"...persuading economists to re-examine critically certain of their basic assumptions..."

2012-01-18T16:00:00.000-05:00

Again, from the Krugman link to Understanding Eurozone debt developments by nation by Gianluca Cafiso at VOX:

Debt-to-GDP ratios started to increase in Europe in 2008. This was when governments undertook measures in an effort to avoid things getting any worse...

"Debt-to-GDP ratios started to increase ... in 2008."

Started to increase in 2008.

Oh -- and by "debt-to-GDP ratios" Cafiso means government debt. Debt to GDP ratios started going up in 2008 when governments started rescuing the financial sector. But what was the financial sector doing, I wonder? And how was the financial sector doing it for 60 years without increasing debt-to-GDP ratios??? Of course, the financial sector DID increase those ratios.

Apparently, Cafiso does not look at private debt. Private debt doesn't count, when one speaks of debt, apparently. So there was some unidentified problem in the financial sector, to which governments responded by dramatically increasing their debt. And the problem that concerns Cafiso is this government response.

This is what happens when people assume credit use is always good for growth.

Tell Congress: Don’t censor the Web

2012-01-18T04:44:00.003-05:00

This didn't do it for me...

... but this did:

Google links to a petition you can sign.

I signed it.

The cause of the cause of the cause... of the problem

2012-01-18T04:00:00.000-05:00

Krugman links to Understanding Eurozone debt developments by nation by Gianluca Cafiso at VOX. The paper provides a bit of history:

Debt-to-GDP ratios started to increase in Europe in 2008. This was when governments undertook measures in an effort to avoid things getting any worse – they put in place stimulus packages and rescued large financial institutions.

"Debt-to-GDP ratios started to increase ... when governments ... rescued large financial institutions."

So now, what was the cause of the problem? Not the government debt. Government debt is the result of the problem. The problem was the private debt that grew to its breaking point.

The problem was that private debt was ~~allowed~~ encouraged to grow to its breaking point.

The problem was the policy that encouraged growth of private debt.

The problem was the thinking that created that policy.

The problem was the flawed assumptions underlying that thinking: the assumption that credit-use is good for growth; and the assumption that if there is inflation it must be due to printing money and cannot be due to credit-use.

I cannot trace the problem back beyond this point.

Are EU listening?

2012-01-17T04:00:00.000-05:00

From Bloomberg:

Sweden Shows Europe How to Cut Debt, Weather the Recession: View
By the Editors: Jan 4, 2012

Sweden faces a difficult year, like every other European economy, but unlike the rest of the European Union, it’s equipped to cope. There are lessons here...

Shortly before Christmas, the Riksbank cut its benchmark rate for the first time since 2009 to 1.75 percent. The NIER predicts further reductions this year in response to a weaker economy and slower inflation. This prospect underscores the seriousness of the situation -- and how valuable it is at such times to have an interest rate to change.

The value of monetary independence is the first and most important Swedish lesson.

Gosh golly gee. When the economy takes a baseball bat to your head, suddenly you can see the there are problems with the whole European Union thing. Gosh golly me.

Please note that every news article that brushed up against the EU on the way to its creation made a point of saying the union would improve economic conditions.

Personal Bankruptcies

2012-01-16T04:00:00.000-05:00

Going through comments of the last couple months. There are several I would like to follow up on. Here's one that required only a Google search.

On mine of 18 November 2011, Jazzbumpa quoted me

It is possible to assert that no individual owes more debt than he can afford

and responded

But it is not possible for that assertion to be correct, or there would be very few personal bankruptcies.

I was not making the assertion, of course. I was assessing a trend. Anyway, it struck me to look at personal bankruptcies. Didn't find anything at FRED. But I did find this graph from BankruptcyAction:

Pretty good increase since the mid-1980s. And a suspicious-looking fall in personal bankruptcies around 2006.

And I did find these remarks from Smart Debt Repair:

Bankruptcy Law Change

In 2005 the U.S. Government passed legislation that made it more difficult for the average person to file for bankruptcy. This came at a point when the number of Chapter 7 bankruptcy filings were skyrocketing.

The law changes have meant that it is now compulsory for anyone attempting to file for bankruptcy to first undergo credit counselling. The government also attempted to stem the tide of Chapter 7 filings by creating new restrictions on who can file under Chapter 7 based on income.

Essentially, if your monthly income is greater than the median income for your state and you can pay $100 or more towards your debt each month, you have an obligation to file under Chapter 13.

The theory behind this change was to force more people to take action that would let them keep their homes, reducing other relevant social problems. All this doesn’t seem to have worked very well when one considers the state of the housing market and general economy in the U.S. and world today.

Alexander Hamilton's "National Bank"

2012-01-15T04:00:00.000-05:00

The St. Louis Fed offers FRASER, a "digital library of historic economic and banking publications and archival material". I went to The First and Second Banks of the United States, clicked Browse All Available Text, and selected this PDF:

National bank
Date: December 13, 1790
Authors: Hamilton, Alexander, 1757-1804

Citation:
Hamilton, Alexander, 1757-1804, 1790, National bank, from The First and Second Banks of the United States, accessed Dec 25, 2011 from FRASER, http://fraser.stlouisfed.org/docs/bankunitedstates/asp_v1_018.pdf

Well, aren't you in for a treat!

The "he" in the following excerpt is Hamilton:

Previously to entering upon the detail of this plan, he entreats the indulgence of the House towards some preliminary reflections naturally arising out of the subject, which he hopes will be deeded neither useless nor out of place. Public opinion being the ultimate arbiter of every measure of government, it can scarcely appear improper, in deference to that, to accompany the origination of any new proposition with explanations, which the superior information of those to whom it is immediately addressed, would render superfluous.

What a suck-up!

The following are among the principal advantages of a Bank:

First: The augmentation of the active or productive capital of a country. Gold and silver, when they are employed merely as the instruments of exchange and alienation, have been not improperly denominated dead stock; but when deposited in banks, to become the basis of a paper circulation, which takes their character and place, as the signs or representatives of value, they then acquire life, or, in other words, an active and productive quality...

It is a well established fact, that banks in good credit, can circulate a far greater sum than the actual quantum of their capital in gold and silver. The extent of the possible excess seems indeterminate; though it has been conjecturally stated at the proportions of two and three to one.

A quantity of money that is two or three times the quantity of gold and silver coin. Imagine that!

When Adam Smith wrote of it, some 24 years earlier, he estimated a quantity of paper money equal to the quantity of gold and silver coin:

When paper is substituted in the room of gold and silver money, the quantity of the materials, tools, and maintenance, which the whole circulating capital can supply, may be increased by the whole value of gold and silver which used to be employed in purchasing them. The whole value of the great wheel of circulation and distribution, is added to the goods which are circulated and distributed by means of it.

(Adam Smith, The Wealth of Nations, Book 2, Chapter 2)

All of that paper -- an amount equal to, or perhaps two or three times the total value of the coin of the realm -- is somebody's debt. Or more accurately, that paper was created when people took on debt.

Hamilton imagined a quantity of debt that was two or three times the quantity of gold and silver coin. Today we do not use gold and silver coin, so we cannot make that comparison. But at the peak in 2007, we had a quantity of debt that was 35 times the quantity of M1 money in circulation -- the money we receive as income.

What is financial debt?

2012-01-14T04:00:00.000-05:00

Financial debt is the debt that is needed to permit the growth of debt of the productive sector. Think of it as an underlying cost.

Graph #1 shows financial debt as a percent of total (public and private) debt:

Graph #1: Financial Debt as a percent of Total Debt

From less than 5% of debt in 1960, financial debt increased to more than 30% of total debt in the new millennium. That is a big increase in the underlying cost of the debt carried by the productive sector.

And if we judge by the way the uptrend stopped short after the 2001 recession, it looks like that increase was unsustainable.

How can that be?

This is how:

Graph #2: Financial Debt as a percent of Productive Debt

Financial debt rose until it was almost half as much as all the non-financial debt counted in total (TCMDO) debt. Almost half. That means that for every dollar of interest some poor sucker might have been paying on his own debt, he was paying almost 50 cents more for the underlying debt of the lenders who lent him that money.

Excessive reliance on credit is unsustainable policy.

Stories

2012-01-13T04:00:00.000-05:00

"And I had little difficulty in determining the objects with which it was necessary to commence, for I was already persuaded that it must be with the simplest and easiest to know..." -- Descartes

PeterC at Heteconomist, 18 December 2011:

The main insight of Polanyi that I emphasized previously is that throughout history money had long been recognized as a social relation, or more specifically a debt relation, but that with the industrial revolution there was an attempt through the gold standard to tie money more closely to the market economy by making it a ‘commodity’.

I have trouble understanding the concept of money as a social relation. I can understand the economy as a set of social relations, as transactions: work done or value provided in exchange for money now or in the future. But the social relation "value exchanged for money" is by no means identical to the "money thing".

So I tend to think Peter's story is a load of crap. But I'm trying to understand, so I go back to his previous post.

Heteconomist, 17 December 2011:

The first thing that caught my attention was a passage from The Great Transformation. On page 71, Polanyi argues that in all social systems prior to the industrial revolution, “the economic order is merely a function of the social, in which it is contained”.

???

These are big concepts, the economic order and the social order, and the containment of order by order. I don't really know what those concepts mean, nor what Peter thinks Polanyi means. But the concepts are certainly big, general concepts. Peter's post sure sounds important.

"Prior to the industrial revolution." When was that? Let's say, before 1760. So what was the economy like, in the centuries before 1760?

Based on numbers from MeasuringWorth, there really was not much of an "economic order" at all, before 1760. No wonder the social order was dominant.

Do you suppose Polanyi included ancient Rome and Greece and Egypt and Babylon and stuff, in with "all social systems" "throughout history" up to 1760? I cannot say, but I doubt it. If I am wrong, let me know.

Meanwhile, suppose we consider civilization after the fall of Rome.

Peter and Polanyi say that throughout history (until the Industrial Revolution) money had been "recognized as a social relation, or more specifically a debt relation". Peter calls money a "fictitious commodit[y]". Let me provide some background to contradict that small piece of the Heteconomist post.

Regarding the early years after the fall, Carlo M. Cipolla writes:

Money, Prices, and Civilization in the Mediterranean World, Fifth to Seventeenth Centuries, by Carlo M. Cipolla. Gordian Press, Inc. New York, 1967. (C) 1956 by Princeton University Press

As a matter of fact, since the beginning of the fifth century Mediterranean Europe, like the rest of Western Europe, had fallen into a stage of economic life near that of primitive societies.... [p.3]

The general impression is that any commodity was considered a potential means of exchange, and coins were considered just like any other commodity, one among hundreds of possible means of exchange, sometimes particularly desired and sometimes not. [p.6]

...the very notion of money ...[in the examples given] was the primitive notion of a standard of weight. [p.7]

[This is] indicative enough of the direction in which the system of payments was moving. [p.7]

This vagueness in the notion of money when it was used as a standard of value was another step from the stage of 'monetary' economy in the direction of a 'barter' economy.[p.7]

Vagueness in the notion of money went hand-in-hand with the decline of society, according to the historian Cipolla. But money and society were two different things. Money was a "commodity". It was not a "relation".

With the beginning of modern times the social implications of the petty coins were completely changed. Through a progressive secular debasement the small coins were now reduced to very low units of value. On the other side, through the sixteenth century, the general level of prices and wages moved markedly upward. Consequently, during the sixteenth century it became more and more common to see gold scudi or gold ducati or big silver ducatoni in the hands of the wage-earning people, just as it became more and more common to see these pieces used as means of payment in local and petty transactions.

The gold coins lost the character of 'aristocratic money.' Their 'democratization' was indicative of the direction in which the times were moving. [pp.36-37.]

It is quite clear that money was not a "relation" at all, but rather a "thing" that was, and is, used for the storage and exchange of value.

Another writer offers a similar view. In The Wealth of Nations, Adam Smith wrote:

The northern nations who established themselves upon the ruins of the Roman empire, seem to have had silver money from the first beginning of their settlements, and not to have known either gold or copper coins for several ages thereafter. There were silver coins in England in the time of the Saxons; but there was little gold coined till the time of Edward III nor any copper till that of James I. of Great Britain. In England, therefore, and for the same reason, I believe, in all other modern nations of Europe, all accounts are kept, and the value of all goods and of all estates is generally computed, in silver: and when we mean to express the amount of a person's fortune, we seldom mention the number of guineas, but the number of pounds sterling which we suppose would be given for it.

The money was silver, according to Adam Smith. It was not a relation, whatever that may be supposed to mean.

But you will think what you want to think, regardless of what I say. I'm just saying, I don't like it when people make up stories to suit their worldview. And maybe it's just me, but when those stories are incomprehensible, they ought to be rejected outright.

Money is not a "social relation". Money is a "thing". Money was not "made into a commodity" by the gold standard. Money was always a commodity. If we refuse to accept such simple fundamentals, how can we ever hope to fix the economy?

Never overlook a lack of clearness and generality in the premisses.

Private Debt 2012 (2): Does Size Matter?

2012-01-12T04:00:00.000-05:00

Some things cannot be said often enough. Excessive private debt is the problem.

Suppose we look at the part of the Federal debt that is counted in Total Credit Market Debt Owed...

Graph #1: The Federal component of TCMDO

Yup, goes up. It's not the big one, though. Here's how that Federal debt -- the blue line -- compares to everybody else's debt...

Graph #2: The Federal component, and the rest of TCMDO

The red line, private debt, our debt makes public debt look small by comparison.

I'm not saying the Federal debt is small. I'm saying private debt is really big.

But Graph #2 does not show us much, apart from raw numbers. I want to compare the two debts mathematically. Simple division. The Federal debt divided by the rest of the debt. I want to see what happened.

Graph #3: The Federal component divided by the rest of TCMDO

Graph #3 compares the Federal debt to Private debt. It shows the blue line from Graph #2, divided by the red line from Graph #2.

Basically, the Federal debt does not look any bigger now than it was in 1970, when you compare it to everybody else's debt. But of course the Federal debt is bigger now. That's the point.

Everybody's debt is bigger now.

The King's Treasure

2012-01-11T04:00:00.000-05:00

When the money of a country is issued from the treasury of a king, the riches of the nation grow on the king's schedule.

As the king's treasury empties, treasure accumulates among his people. There comes a time when the king has expenses he cannot meet, and the wealthiest of his subjects come to him with a plan to create a bank that will lend the king money.

Eventually, the king's treasury holds so little, and his people hold so much, that the concept of "a king and his country" changes to "a nation". And the wealth of nations is no longer thought to be in the king's treasury, but in the busyness of his subjects.

The king gives up his treasure; his creditors lend theirs at interest. Both methods increase the wealth of the people. The one comes at a cost to the treasury; the other at a cost to the people.

There comes a time when the king can no longer freely dispense wealth from his treasury; at this point the money of the nation can no longer be backed by the king's treasure.

There comes a time when so little of the people's money comes from the king, and so much from the banks, that the cost of money becomes an obstacle to the progress of wealth.

The source of my understanding, the DPD graph, informs me that we must maintain a balance between the king's money and the bank's issue. The story above suggests that the cost of money -- the factor cost of money -- is the primary problem.

You might disagree, saying the problem is concentration of wealth. Yes, this is part of the imbalance today; there is no reason for us to disagree. Financial wealth, lent out at interest, is the bank issue that creates the cost that is our problem.

Still, the same problem could arise even if wealth were equally distributed. Financial wealth is "wealth" because it generates income. The income it generates is, for society as a whole, the factor cost of money -- a cost that competes with income arising from productive activity.

The problem is the cost that arises from excessive reliance on bank issue. It turns out, this time, that concentration of wealth leads this cost to become concentrated income for the wealthy. As far as I know, it turns out every time that way. But the problem is not the concentration; the problem is the cost.

I point out a cost that competes with wages and prices, interferes with the vigor of economic growth, and applies continuous upward pressure to prices.

What was it Keen said?

2012-01-10T20:00:00.000-05:00

Earlier, Keen said:

Without speculative borrowing ... the model generates a cyclical system which generally does not break down

"Generally". The model generally does not break down.

Or like, not as often, it doesn't break down as often if we avoid speculative borrowing, but it STILL DOES break down even it we avoid speculative borrowing.

And this is a MODEL that Keen designed. A perfect-world simulation. Our world, less perfect, is MORE liable to break down, even if we avoid the speculative borrowing.

Just to be clear.

The Debt Problem: Speculation or Excess?

2012-01-10T12:00:00.000-05:00

In recent comments, Jim distinguishes between productive and unproductive debt, and associates unproductive debt with speculation:

Unproductive debt is when you are borrowing against the hope that some asset will increase in price, but the only reason the asset will increase in price is because you and other people are borrowing to put money in.

Jim is in good company: Steve Keen has expressed similar views:

At some stage, the growth of unproductive debt had to falter, and when it did a serious financial crisis would ensue as aggregate demand collapsed.

Keen has also done Non-mainstream modeling of the GFC and reports that

Without speculative borrowing—defined as borrowing that finances speculation on asset prices but does not finance the construction of new assets—the model generates a cyclical system which generally does not break down; with speculative borrowing, the model almost inevitably approaches a crisis caused by the accumulation of debt

Despite all that, I claim that the problem is not speculation. The problem is excess. But I don't want to seem to say that speculation is harmless. In the white box I present a complete list of new arguments explaining the problems with speculation:

New arguments, meaning the things I have to add to that discussion.

The DPD graph shows continuous increase in debt since 1947. The economy passed through several different stages during that increase:

1. The golden age (1947-1973) (Dean Baker and John Schmitt)
2. The great inflation (1965 to 1984) (Meltzer PDF)
3. The Age of Speculation (since the mid-1980s¹)
4. The Macroeconomic Miracle (1995-2000) (Robert J. Gordon)
5. Sluggishness and Crisis (2001-present).

Stage One -- golden growth -- occurred because the DPD was low. Or I should say, because DPD was low, DPD did not inhibit growth.

Stage Two -- inflation -- occurred because the growing financial costs associated with growing debt were eating into profits. The inflation of the period was cost-push, though that is not widely observed.

Stage Three -- speculation -- developed as policymakers suppressed growth in order to suppress inflation, and then tried to find alternative ways to encourage growth. They removed the prohibitions against excessive speculation.

Stage Four -- the miracle of 1995-2000 -- occurred because the DPD had fallen, making the debt level relatively low again, briefly.

Stage Five -- sluggishness and crisis -- occurred as soon as the slack in debt had been used up.

Despite the various responses of the economy to the increase in DPD, (and with a brief exception before the 1995-2000 miracle) debt expansion was continuous since 1947.

People variously view the onset of problems with the onset of inflation, or the end of golden growth, or the advent of Reaganomics, or of the sluggishness, or of the crisis. But these all are problems that people have with the economy. They are none of them the economy's problem.

The economy does not care that we don't like inflation. It does not care that we don't like unemployment. It does not care that we don't like crisis. It does not care. These things we see as problems are simply the economy's way of dealing with disturbances or imbalances that we the people create.

For the economy, they are not problems. For the economy, they are solutions.

The economic problem began in 1947 when the DPD started to climb.

The problem began in 1947 with the growth of debt. This does not mean that the solution would have been to keep debt at its 1947 level. But we do have to find the best level, the best range for the DPD, the range that gives us the best tradeoff between the benefits of credit-use and the harm of accumulating debt. We have to find that range, and we have to keep the DPD there.

I hold that the best range is what we had some time before the end of the golden age: the early 1960s, when inflation was at its lowest and growth was spectacular. So I would like to say that the problem began in the latter 1960s. However, as long as people refuse to look at the trend of debt, I am forced to argue that the problem is not speculation, but excess, and that the problem began in 1947.

I do have something to say about speculation after all. Back when the economy was going gangbusters, people could make money by investing in the productive economy. But as debt and financial costs grew, profits fell in the productive sector and made such investments less appealing.

As productive investment became less appealing, speculative investment became more appealing. Thus the growth of speculation is itself a result of the growth of debt.

In summary then:

1. The problem of excess arose before² the problem of speculation, and
2. The problem of excess leads to the problem of speculation.

The problem is not speculation. The problem is excess.

^NOTES
1. The conclusion of the Keen post referenced above observes that "the superficially good economic performance during “The Great Moderation” was driven by a debt-financed speculative bubble". I therefore think it safe to apply the dates of the Great Moderation to the Age of Speculation.

2. The problem of excess debt was evident already in the late 1960s when financial costs were pushing prices up. By the early 1970s the problem was obvious as it led to the end of the golden-age growth.

NFA?

2012-01-10T10:00:00.000-05:00

An Interesting Summary

2012-01-10T04:00:00.000-05:00

In his abandonment post, PeterC offered an interesting summary of MMT:

MMT = (1) an understanding of monetary operations + (2) stock-flow consistency + (3) Minsky + (4) Functional Finance + (5) Job Guarantee

"Stock-flow consistency". I've heard the phrase a few times, but never caught the importance of it to MMT until I read Peter's post.

After reading it, I had a thought.

If you care about "stock-flow consistency" you should object to graphs comparing debt to income. You should want to compare debt to M1 -- to the stock that, when if flows, becomes income.

M1 is the money we use for income

2012-01-09T04:00:00.000-05:00

(Read the post title again.)

Two dimensional thinking in a three dimensional world

2012-01-08T04:00:00.000-05:00

On 22 December, PeterC abandoned MMT.

I assume everything was still all pure unadulterated MMT four days earlier when JKH commented:

MMT recognizes the inflation constraint as the legitimate constraint under a fiat system.

JKH continues: "This might take the form of MMT type policy responses in the face of undesirable inflation measure behavior". The "MMT type policy response" to inflation would I think be to increase taxes in order to "destroy" money. (I would say, in order to "take money out of circulation". Certainly, increasing taxes could do that, if you could get anybody to increase taxes, and if the budget was already balanced. But the word "destroy" is an insult to taxpayers.)

I have suggested linking individual and business tax rates to taxpayer indebtedness. This would be like the Fed raising interest rates to fight inflation, except it would be borrower-specific. If you didn't borrow a lot, your taxes would be lower. If you did borrow a lot, your taxes would be higher. But if you made "extra" payments on your debt, your taxes would come down. In other words, our policy would fight inflation by encouraging us to pay down our own debt.

(In today's depressed and heavily indebted economy, the above suggestion may sound like a bad idea. But I do not offer it as a solution to our present problems. I recommend it as normal policy for normal times. In normal times, such policy would prevent the kind of economic troubles that we find ourselves in today. It would prevent the heavy indebtedness, and prevent the financial crisis, and prevent the threat of debt-deflation. It would prevent the monetary causes of recessions and depressions and Dark Ages.)

I am not opposed to using tax policy for constructive purposes.

"MMT recognizes the inflation constraint as the legitimate constraint under a fiat system."

JKH's statement is my focus here. Because it means that MMT is willing to sacrifice GDP growth (and thus jobs) for the sake of price stability. Just like existing policy.

Oh, maybe the Fed picks a spot on the Phillips curve where unemployment is too high and inflation too low to suit MMT. MMT would pick a different spot on the curve, with more inflation and less unemployment.

I find other people's economics frustrating. The differences between Fed policy and MMT proposals are the differences of Flatlanders struggling for position on a line. Move the line, I say. Move the line. The solution is not to pick a different spot on the Phillips curve. The solution is to shift the Phillips curve back to where it was when our economy was good.

The Blue Pox

2012-01-07T11:34:00.002-05:00

Failed Banks - 2007 to Present

Source: The St. Louis Fed

"Money and Social Possibilities" (2): What's in your wallet?

2012-01-07T04:00:00.001-05:00

I have money in my wallet. I don't have social relations there.

From the heteconomist post of 18 December:

In response to my argument, JKH drew my attention to an interesting post written by David Andolfatto in March this year, in which he points out that money – irrespective of the particular system in place – is always what I have been referring to as a social relation and what Andolfatto describes more specifically as a ‘promise’.

I have a lot of trouble with this "social relation" concept of which PeterC writes. So I focus on it. Peter equates his "social relation" with Andolfatto's "promise". Perhaps this can help to clarify the meaning of the concept.

In David Andolfatto's post, the main point is that

condemnations of the Fed based on charges of creating money "out of thin air" are off the mark. The discussion should instead center on whether the Fed, as currently construed, is an institution that can be trusted to make good on its promises.

Andolfatto's purpose is to evaluate the phrase "out of this air" and its use as a criticism of the Federal Reserve. Developing the concept, he had this to say about promises:

Societies rely heavily on promising-making and promise-keeping. It is the foundation of all financial markets.

That's true. But the "promise" is "I'll pay you later". And "keeping" the promise means actually making the payment. And when I do actually make that payment, I do it by giving you the money that I promised to give you. Money is not the promise. Money is the fulfillment. Money extinguishes the promise. Money extinguishes debt.

I am looking at transactions here. Transactions are the economy.

Andolfatto continues:

I'd like to point out something about the promises you make. They are made "out of thin air." The promises that other people make are also made "out of thin air"...

The fact that promises are made "out of thin air" does not mean they are worthless.

The Fed creates fiat money (yes, out of thin air). But fiat money in itself does not constitute a promise against anything in particular...

But fiat money in itself does not constitute a promise against anything in particular, Andolfatto says. (Perhaps PeterC missed that part.)

The old textbooks say money is "a promise to pay". But these days, as DA says, money is not a promise to pay anything in particular. You cannot return a paper dollar to the issuer and get gold for it, or silver, or anything except maybe another a paper dollar with a different serial number, just to make you go away. Or maybe they will drag you away. The dollar stands on its own. Stands, or falls on its own.

So if money is not a promise OF anything and not a promise to DO anything, then it really isn't a promise at all. And if it isn't a promise, then it isn't a "social relation".

When you could get gold for your paper, the paper carried a promise. But now money carries no such promise. Money today is "fiat". This is something that "MMT" people like PeterC dwell on all the time. How can Peter miss the fact that money now carries no promise?

When people used money for gold, and exchanged gold receipts, the receipts were promises to pay gold. But the gold was the money, and the gold was not a promise of anything. Today, paper money is not a promise of anything.

The ideas which are here expressed so laboriously are extremely simple and should be obvious. I don't know anyway why everybody has this concern with explaining what money is. Money is what you are paid for doing work. Money is what you pay when you buy groceries. Isn't that enough? Doesn't that accurately identify money?

Used to be, you brought your gold to the goldsmith to keep it safe, and the goldsmith gave you a receipt for it. And you could go back later, bring the receipt, turn it in, and get back your gold.

But as things turned out, you could also exchange the receipt for some fresh eggs from the farmer, or maybe for some time with his daughter. And then the farmer could go to the goldsmith, turn in the receipt, and get gold for it.

The receipt was a promise to pay gold.

We don't do that anymore. We don't need to do it that way. We don't use the gold. We just use the paper. But some people want to keep the phrase "a promise to pay gold" and just drop off the last word. That's not how it is. The change from gold-backed money to fiat money was a huge change (as the MMT people unfailingly point out). It was not just the gold that disappeared. The "promise" disappeared, too. How the MMT people unfailingly miss this fact is beyond me.

Used to be, there was the gold, and there were the promises to pay gold. People accepted that the promises were "as good as gold" and everything went along fine for a while. And then one day somebody would discover there was not enough gold to meet all the paper promises, and then there were problems.

Today, we don't use gold. We use government-issued money, and bank-issued money. People accept that the bank issue is as good as government issue and everything goes along fine for a while. But for every dollar of bank-issued money somebody somewhere is paying interest.

As time goes by, the bank-issue grows faster than the government-issue. So interest costs increase, relative to income. Ever so gradually, this depresses living standards, depresses profits, depresses demand, depresses supply, and increases costs in the productive sector. Meanwhile, it makes the financial sector look healthy.

When we used gold for money, it was excessive bank issue that created problems in the money. Today, we use government issue for money, but it is still excessive bank issue that creates problems in the money.

Some things never change.

Afterword --

In a comment below, Greg has kind words for an excerpt from the above text, including this piece of it:

You cannot return a paper dollar to the issuer and get gold for it, or silver, or anything except maybe another a paper dollar with a different serial number, just to make you go away.

I read that somewhere. (I have no idea where.) Especially the part except maybe another a paper dollar with a different serial number. I definitely read that somewhere. And I think my wording may be close enough to what I read, that I want to attribute the thought to somebody. I don't mean to steal or plagiarize, but only to adopt an idea that helps to provide clarity.

Debt and Real Growth

2012-01-06T12:00:00.000-05:00

Jim provides two graphs:

Graph #1: Ratio of New Debt to New Growth in the Golden Age

Graph #2: Ratio of New Debt to New Growth in the Debt Bubble

The first thing you might notice is that both graphs show some big spikes in the gray bars -- in times of recession. That is to be expected. Recessions are disruptions, and the graphs show it.

Apart from the spikes, you might notice that the wiggles on Graph #1 are contained between the values 0 and 1 on the vertical axis. On graph #2, the wiggles run mostly between 0 and 20. So the wiggles on the second graph are something like twenty times the size of those on the first graph.

In other words, the amount of new debt (relative to the amount of new growth) in recent years is something like twenty times what it was in the golden age.

I slept on it, woke up at three, took the dog out, and then jumped into FRED.

Jim divides TCMDO by GDPC1: He divides total debt by real output. Actually he divides each year's change in debt by that year's change in real output. Extra dollars of debt, divided by extra dollars of output.

Having slept on it, I want to turn that ratio upside down. Real output is something we want; I put that in the numerator. And more debt is something we don't want; so I put that in the denominator.

The result of inverting the ratio should be that the trend is also inverted. Rather than being 20 times greater, the debt bubble numbers should be 20 times less than the golden age numbers. Or certainly, much less. (Don't hold me to the number 20. I'm just looking at trends and tendencies here.)

I took all the years I could get from FRED, to show the long trend:

Graph #3: Ratio of New Growth to New Debt

Since about 1980, the trend is flatline. In the years before 1980 the trend was down, but at the start and for a while there was a lot of new output for each new dollar of debt.

(In those earlier years, people had a lot of spending money, M1 money. All that money helped the economy grow. It wasn't only that the debt was less. It was the combination of a lot of spending money and only a little debt that gave us a golden age. Hey, if I had a lot more money and a lot less debt than I do, I'd be feelin pretty golden now, myself.

But anti-inflation policy reduced the quantity of money. And our use of credit -- "new debt" -- grew.)

Some big spikes in the early years on the graph. But it looks like from the mid-1950s to the early 1960s there was an uptrend in "extra output" per dollar of "extra debt". Then through the 1960s and into the 1970s there was a downtrend. Increases in output were still substantially greater than increases in debt, but the substantialness was fading.

In the substantialness you can see our golden age. In that fading you can see the demise of the golden age.

If you click the graph to enlarge it, you can see in the 1980s and 1990s almost twenty years of very minimal wiggles, as we got little new growth from each new dollar of debt. Unbelievably, then, after the year 2000 the wiggles disappear almost entirely. Ouch.

I keep hearing Crosby Stills Nash and Young singing and we've got to get ourselves back to the garden, and I keep looking at the late '50s, early '60s on this graph.

Don't know much about history...

2012-01-06T04:00:00.000-05:00

Krugman quotes Robert Samuelson saying that government debt was "modest" in the 1930s. Then PK shows a graph contradicting Samuelson.

I had to go back to Krugman's post a second time before I noticed that his post title is a line from an old Sam Cooke song.

First time I read the post, this comment from johnwerneken was right up near the top:

Stable money and a functioning economy are BOTH more important to most people than subsidized fake jobs for the unemployed. THAT is what the argument is about.

I thought John's comment was really good. He emphasized the same two goals I do: growth and price stability. To me he was saying: Why are we bickering over nonsense? Why can't we get the economy to work like it's supposed to work? He was saying that instead of sticking a finger in Samuelson's eye, Krugman should be talking about how to achieve BOTH growth and stable prices.

But not everyone read John's comment the way I did. Several people seemed to take offense at the word "fake" and the concept of fake jobs:

Only those who don't work for a living could conceptualize something like a "fake job".

How is a job 'fake' because the employer is the government? ...If you're a veteran, the next time you go to the VA and the nurse takes your blood pressure, ask yourself if her contribution to the economy is fake.

But, hey, if American voters are so fanatical in their hatred for government stimulus that they'd rather have another 10 years of dismal economy and risk world depression and global destabilization, I say give them what they want. Just don't whine about it later.

Thin-skinned twits, bickering over nonsense. But I'd best not say that. Because their skins are thin, and they're twits.

Listen, twits: Anybody old enough to remember a line from a Sam Cooke song from 1958 is old enough to remember when the economy was good. In a good economy, you don't have to have the government providing jobs, because the private sector is growing and healthy. And inflation is like nothing, or one percent. That's what we need to get back to.

Why can't we have an economy like that again? Or, better: How can we have an economy like that again? That is the question. Gosh, did somebody offend you by using the word "fake"? Is that really more important than fixing the economy?

Here, here's a band-aid for your thin skin: If the private sector can create enough jobs all by itself, that's good. Anything else is faking it. And this doesn't mean that the work is fake. It means the economic vigor is fake. And economic vigor is something we really don't want to fake. Okay? Feel better now? Mommy kiss it.

But please, if you want to fix the economy, don't take offense at every four-letter word.

Twit.

The same guy that said "give them what they want" also said this:

Sadly it turns out what you call "subsidized fake jobs for the unemployed" are the key to "stable money and a functioning economy."

Sadly. But it doesn't "turn out" that way. That's a bad guess.

It doesn't "turn out" that the government has to create jobs so that we can meet our two economic goals. The words imply that that is the way the economy works. It isn't. Yes, the economy has been behaving that way for some time now. But that is not the same thing. That behavior is the economy's response to a particular problem.

And anyway, given our tendency to generate credit-use in this country, if the government goes ahead and generates jobs, the outcome will not be anything like "stable money".

But why has the economy been behaving that way? Why can't we get a "functioning economy" without "subsidizing" employment? How can we make the economy "good"?

Everybody says debt is the problem. And "it turns out" everybody's right, except for one particular thing. It is not really the government debt that hurts private sector growth. It is private debt that's killing us.

Private Debt 2012 (1): Looks like thursday is Private Debt day

2012-01-05T04:00:00.000-05:00

Some things cannot be said often enough. Excessive private debt is the problem.

From Asymptosis: It’s the Private Debt, Stupid:

While everyone hyperventilates about government debt, they don’t seem to be aware of the massively greater load of private debt, and its spectacular runup compared to government debt:

This from Steve Keen’s latest.

The red line is private debt. The blue line is government debt.

It should be obvious where the problem lies.

I marked up a copy of Steve Keen's graph to show the "golden age" -- roughly, 1950 to 1970 -- and the years of the "macroeconomic miracle," 1994-2000.

Graph #2: Showing times of "golden" growth

At the start of the golden age, government debt was quite high, about as high as it is today. Private debt, the red line, was very low.

Because private debt was low, people were not burdened with debt. So people were willing to borrow: ready, willing, and able to borrow.

And because people were borrowing a lot, and spending a lot, the private economy grew a lot. That's the reason we had a golden age.

And because the economy grew a lot, the blue line fell a lot. Government debt fell (relative to GDP) because GDP grew at a healthy rate.

(Some people today suggest that we can use inflation to solve the problem of excessive debt. Well, inflation does make the burden of existing debt smaller. But if we are borrowing more during the inflation, we may not reduce the debt problem at all. Look at the decade of the 1970s on the graph. During that inflationary decade, the blue line fell almost not at all. And the red line went up a lot.)

At the start of the golden age, private debt was low. Debt was not a problem. In that era it was common for people to buy a new car -- a new car -- every three years. And still, debt was not a problem.

But we let debt accumulate. The red line went up. And eventually debt did become a problem. Financial costs killed the golden age.

Based on the experience of the golden age, policymakers knew that using credit should be good for economic growth. So policymakers did things to make more credit more available. And policymakers did things to get us using more credit. And the red line went up faster. But the economy still didn't do so well because there was already too much private debt, as a result of using all that credit.

Then in the late 1980s they took away the tax deduction for interest expenses. So the red line went up less quickly, and then turned, and actually came down a little bit. Private debt fell slightly, relative to GDP. The debt burden eased a bit.

And then around 1994, when our debt was relatively low, we felt like a burden had been lifted, and our borrowing started increasing again. The red line went up, really fast this time. And because we were borrowing a lot, and spending a lot, the private economy grew a lot. And once again, the blue line came down.

In the early 1990s the private debt burden fell a little. That's the reason we had the macroeconomic miracle of the later 1990s. But it couldn't last, because the accumulation of private debt was already excessive.

If you want the private economy to grow, you must begin with a low level of private debt. But if you let private debt accumulate, eventually it kills off growth.

We have many policies that encourage the use of credit. We have no policies that encourage the repayment of debt. We let private debt accumulate.

It's a problem.

Even under a gold standard.

2012-01-04T08:00:00.000-05:00

Even under a gold standard, government can still end up in debt.

From the Bantam paperback: A Game of Thrones, by George R.R. Martin, pp.193-194.

Littlefinger smiled and handed the paper to Ned. It bore the royal seal. Ned broke the wax with his thumb and flattened the letter to consider the King's urgent command, reading the words with mounting disbelief. Was there no end to Robert's folly? And to do this in his name, that was salt in the wound. "Gods be good," he swore.

"What Lord Eddard means to say," Lord Renly announced, "is that His Grace instructs us to stage a great tournament in honor of his appointment as the Hand of the King."

"How much?" asked Littlefinger, mildly.

Ned read the answer off the letter. "Forty thousand golden dragons to the champion. Twenty thousand to the man who comes second, another twenty to the winner of the melee, and ten thousand to the victor of the archery competition."

"Ninety thousand gold pieces," Littlefinger sighed. "And we must not neglect the other costs. Robert will want a prodigious feast. That means cooks, carpenters, serving girls, singers, jugglers, fools..."

"Fools we have in plenty," Lord Renly said.

Grand Maester Pycelle looked to Littlefinger and asked, "Will the treasury bear the expense?"

"What treasury is that?" Littlefinger replied with a twist of his mouth. "Spare me the foolishness, Maester. You know as well as I that the treasury has been empty for years. I shall have to borrow the money. No doubt the Lannisters will be accommodating. We owe Lord Tywin some three million dragons at present, what matter another hundred thousand?"

Ned was stunned. "Are you claiming that the Crown is three million gold pieces in debt?"

"The Crown is more than six million gold pieces in debt, Lord Stark."

Stories help us understand life.

2012-01-04T04:00:00.001-05:00

From the Bantam paperback: A Game of Thrones, by George R.R. Martin. Back cover.

In a land where summers can last decades and winters a lifetime, trouble is brewing. The cold is returning...

You need read no further to know that summer and winter in Game of Thrones will translate into stages of a long business cycle in the world we know: good times, and hard times.

From the Bantam paperback: A Game of Thrones, by George R.R. Martin. Page 41.

"The winters are hard," Ned admitted. "But the Starks will endure. We always have."

"You need to come south," Robert told him. "You need a taste of summer before it flees. In Highgarden there are fields of golden roses that stretch away as far as the eye can see. The fruits are so ripe they explode in your mouth -- melons, peaches, fireplums, you've never tasted such sweetness. You'll see, I brought you some. Even at Storm's End, with that good wind off the bay, the days are so hot you can barely move. And you ought to see the towns, Ned! Flowers everywhere, the markets bursting with food, the summerwines so cheap and so good that you can get drunk just breathing the air. Everyone is fat and drunk and rich." He laughed and slapped his own ample stomach a thump. "And the girls, Ned!" he exclaimed, his eyes sparkling.

In the summer, people do well. In the winter, not so much. Even in a land where summers last decades, and winters a lifetime. And yet there are even longer cycles of growth and decay:

From the Bantam paperback: A Game of Thrones, by George R.R. Martin, pp.185-186.

Jon shrugged. "No one cares where you sleep. Most of the old keeps are empty, you can pick any cell you want." Once Castle Black had housed five thousand fighting men with all their horses and servants and weapons. Now it was home to a tenth that number, and parts of it were falling into ruin.

Tyrion Lannister's laughter steamed into the cold air. "I'll be sure to tell your father to arrest more stonemasons, before your tower collapses."

Jon could taste the mockery there, but there was no denying the truth. The Watch had built nineteen great strongholds along the Wall, but only three were still occupied...

From The Roaring 80s by Adam Smith:

Kenneth Boulding, the distinguished economist, wrote that in the Great Depression, economists wrote about unemployment as if it were a bad hailstorm; then the Keynesian revolution gave some hope that nations could do something about the "economic blizzards" that had previously been considered as random as the weather.

What's wrong with FRED

2012-01-03T04:00:00.001-05:00

(Apart from revising the way they organize their data, I mean.)

FRED is fastidious about data integrity. Too fastidious. I think it's a problem.

At FRED, in the blue box at the bottom, under Monetary Aggregates we find

We often receive requests for monetary aggregates data that cover time periods prior to January 1959, the beginning date for the Board of Governors currently published monetary aggregates. Various data are available for these years, but not all data are consistent with the current definitions of the Board's monetary aggregates. This section discusses available data. The problem is not one of finding data; the problem is one of constructing monetary aggregates that are consistent with currently published definitions.

The problem is not to find the data. The problem is that the stuff they find doesn't match current definitions.

I wonder... If the economy changes, then perhaps it is appropriate that the definitions should change as well. If so, then the older definitions are not incorrect. They are correct for an earlier time. If this is true, then the older numbers are not "wrong" because they differ from newer numbers; they are merely "different". And hopefully, they are more relevant to the older period than current definitions would be.

Krugman ran into mismatched data definitions recently:

Source: Paul Krugman

I run into mismatched data definitions all the time.

Look at PK's graph. Suppose the graph showed only the "new series" numbers. It would be easy to think that the trend was always upward, and that it had never been higher than in the past few years.

Those would be very flawed assumptions.

It is far more important to know about the ups and downs than it is to have lines that match up perfectly. This is why FRED's fastidiousness is a problem. The fastidiousness is a cover-up of history. And I say that with love, because I do love FRED.

At FRED I click FRED Economic Data, then Monetary Aggregates, then M1 and Components to get a list of data series. Sorted by start date, the list offers two series beginning in 1947. Everything else begins in 1959 or after.

At ALFRED (Archival FRED) we read:

In general, economic data for past observation periods are revised as more accurate estimates become available. As a result, previous vintages of data can be superseded and may no longer be available...

So ALFRED offers older stuff.

But not the stuff I'm looking for. I click Monetary Aggregates: M1 and Components and sort the list of data series by start date. The oldest numbers that come up are for 1947. So it seems ALFRED offers not older data, but just older versions of current datasets.

One of the most pivotal books in all of economics was Friedman and Schwartz's A Monetary History of the United States, 1867-1960, a "monumental" work. Would you throw it away because its data definitions are not current?

No.

But FRED won't use it. At the blue-box monetary-aggregates link, FRED includes that monumental history as one of five "common sources of historical monetary data". They even offer downloads for M1 back to 1929. But they have not integrated the data into their normal data series.

At FRED, they not only know about these sources; they recommend them. But they won't use those sources themselves. I think it's a mistake. They should set it up in separate data series, just like they do with everything else. And add a footnote about the mismatch.

I use FRED graphs a lot. I think one of the benefits of using FRED graphs is that it's not my graph. It's from a known, trustworthy source. I use FRED graphs because I think it increases the confidence people have in the information I present.

But I'm left on my own with the mismatched data. At the start, I thought maybe I was doing something wrong, to get the mismatches. Nope: Even Krugman gets mismatches. And FRED'll tell you why that is. But they won't touch the old data, themselves.

I think they should.

This is what's wrong with "NGDP Targeting"

2012-01-02T08:16:00.000-05:00

From my 8 o'clock:

Krugman ... does not make clear the reasons that our economy grew like gangbusters after World War II despite (or, because of) all that government debt. Nor does he make clear the reasons that our economy failed to grow like gangbusters for the last 30 years because of (or despite) all that government debt.

For the first 30 years after World War II -- the Keynesian era -- the economy grew. For the next 30 years -- the era of Reaganomics -- the economy struggled to grow, and has since lost that struggle.

NGDP targeting is the idea that the Fed should not separate inflation from real growth when it sets policy, but consider them together. The idea is not to worry whether the economy is really growing or whether it's just inflation pushing the numbers up.

But we've struggled for the last 30 years, trying to get good economic growth. There is no reason to think that NGDP targeting will give us better growth than we have been getting. There's nothing to stop NGDP targeting from expressing itself entirely as inflation.

There is nothing to stop it from expressing itself as worse inflation, accompanied by declining output.

NGDP targeting does not solve the problem that hinders growth.

Okay, I'm nobody

2012-01-02T08:00:00.000-05:00

"Nobody understands debt," Krugman says.

He says people are wrong to worry about reducing the budget deficit. He calls this a "misplaced focus". Sure.

He says people are wrong to think budget deficits will "send interest rates soaring." "[T]hose rates," he says, "have dropped to historical lows." (Seems to be correct. But Krugman is just patting himself on the back here. Not doing economics.)

He writes:

Washington isn’t just confused about the short run; it’s also confused about the long run. For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.

Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing. They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments.

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

This was clearly true of the debt incurred to win World War II. Taxpayers were on the hook for a debt that was significantly bigger, as a percentage of G.D.P., than debt today; but that debt was also owned by taxpayers, such as all the people who bought savings bonds. So the debt didn’t make postwar America poorer. In particular, the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history.

"In particular," Krugman says, "the debt didn’t prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation’s history."

That's true. But Krugman does not explain it. He does not make clear the reasons that our economy grew like gangbusters after World War II despite (or, because of) all that government debt. Nor does he make clear the reasons that our economy failed to grow like gangbusters for the last 30 years because of (or despite) all that government debt.

He does not explain it. The reader is expected simply to embrace Krugman's dismissal of the significance of debt, and assume that we can have gangbusters again despite all that government debt. Or, because.

I agree: We can. But that's a far cry from actually having gangbusters growth again. And again: All of that growth of government debt, since Reagan or before, added to demand and should have pushed economic growth to gangbusters. Instead, economic growth just gets worse and worse and worse. And Krugman does not explain it.

Government deficits *DO* boost the economy. The reason the government deficits don't work for us is that private debt drags the economy down.

At the end of World War II the government had a lot of debt. But there was hardly any private debt. Private debt wasn't dragging us down, so government debt didn't hurt us.

Now, since the 1970s, the protections we put in place after the Great Depression have been preventing another Great Depression that would have wiped out private debt and let the economy grow again.

Since the 1970s private debt has been dragging the economy down. And since the 1970s government debt has been increasing in the effort to give us gangbusters. But every time they rescue the economy with government debt, private debt grows faster again. The plan to rescue the economy has failed because it has not rescued us from our own debt, private debt.

The way out of this dilemma is to reduce private debt.

Since the 1970s, Krugman's plan to "ensure that [government] debt grows more slowly than their tax base" has failed because private debt hinders growth.

So now: Who doesn't understand debt?

Hume

2012-01-02T04:00:00.000-05:00

From: Monetary Theory before Adam Smith by Arthur Eli Monroe, Ph.D. Assistant Professor of Economics, Harvard University. Glouster, Mass. Peter Smith, 1965.

Hume had little interest in the logical basis of the quantity theory, but was principally concerned with its qualifications. 'It seems a maxim almost self-evident,' he writes, 'that the prices of every thing depend on the proportion between commodities and money.' The only hint as to his reasons for this opinion is his remark, in another connection, that the precious metals 'are considered chiefly as representations.' It is not the absolute quantity of money and commodities, however, which is meant in the above statement, he carefully points out, but the commodities 'which come or may come to market,' and the money which circulates. Coin locked up and goods not sold obviously have no effect on prices. Hence it is that prices are lower in France than in some countries not having half as much gold and silver: people are in the habit of keeping large sums in their coffers, because the use of credit instruments is undeveloped, and much of the metal is in use as plate.

...the commodities 'which come or may come to market,' and the money which circulates.

Happy New Year!!!

2012-01-01T04:00:00.000-05:00

... Oh, sorry. Wrong year.

DeLong and Short of it

2011-12-31T08:00:00.000-05:00

DeLong (h/t Jazz):

In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates. By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990. Today, it is 8.4% of GDP, and it is not shrinking.

Jazzbumpa:

The yearly values for GDP growth since the 50's are contained in a collapsing envelope, indicated by the green trend lines. These lines converge at about 1.8% in 2028. Make of it what you will.

Graph #1

Graph updated 2 Jan 2012.

NYRs

2011-12-31T04:00:00.000-05:00

I was gonna say I'm not gonna try so hard this year to have a post every day. But I changed my mind. I AM gonna try so hard to have a post every day.

I'd like to organize my post tags slash labels better, and put a bibliography and some other stuff together for "pages". Dunno if "like to" counts as a New Year's resolution.

I want to write better descriptions. For example, when I wrote

...treating it as the kind of fact that always has been...

the "kind of" was kind of weak. I changed it to "sort of" but that was sort of weak, too. And they were both ambiguous: Did they mean "actually quite" or did they specify a type of fact? I went back-and-forth between kind of and sort of a few times, then suddenly settled on type of:

...treating it as the type of fact that always has been...

Words matter. John Madden used to talk about "the red zone". And then everybody was talking about "the red zone". Except one announcer, who kept talking about "the red area". It was just so wrong.

And I want to write stronger conclusions. In large part, this means that if I write a sentence and you are supposed to draw a conclusion from it, then I am supposed to actually write that conclusion, so that we both know what I was thinking.

And I want to avoid alienating people. (Yeh, I have to write that one down, or I won't think of it.)

In sum: better descriptions, better conclusions, and a better attitude.

Happy New Year.

p.s. More posts on private debt. I hereby resolve. At least once a month.

Maybe every week.

Keen

2011-12-30T19:03:00.001-05:00

Steve Keen took a survey and wrote about it.

The first question:

Is it important for the Commonwealth government to aim for a budget surplus in 2012-13? Why? Should it continue to aim for surplus even if international conditions worsen?

Keen's answer:

NO! It’s a nonsense neoclassical fantasy to blame this crisis on government debt, when its underlying cause has always been a private sector debt bubble that has now burst. Now that the private sector is finally deleveraging in Australia (after the First Home Vendors Boost delayed the process), the last thing we need is for the public sector to also be pulling money out of circulation, which is what a government surplus would do.

Keen does not "blame this crisis on government debt". Keen is right.

The cause, he says, is "a private sector debt bubble that has now burst." A debt "bubble" refers to rapid growth of debt. 'Rapid growth' of private sector debt is very close to what I say is the problem. I say the accumulation of private debt became unsupportable. Of course, the rapid growth of debt made the accumulation unsupportable sooner. But it would have happened anyway, eventually, when slowly growing debt reached an unsupportable level.

Finally, Keen says "the last thing we need is for the public sector to also be pulling money out of circulation". And I say we need to increase M1, which is money in circulation. See how close we are, me and Keen?

He says debt was growing too fast, and money isn't growing fast enough.

I say we must reduce the debt-per-dollar ratio.

Same thing.

Unexpectedly weak productivity growth

2011-12-30T04:00:00.000-05:00

Graph #3 from yesterday:

I want to see those increases in output per hour. So I turned off the log scale and looked at "percent change from year ago" values:

Not so obvious before 1960 where the recessions are close together, but after 1960 it seems that productivity spikes up immediately after a recession, then trends more slowly downward to the next recession. You can see it after the 1960 recession and maybe the 1970 recession and definitely after the 1974 recession and the 1982 recession and the 2001 recession.

It is worth repeating that the "normal" pattern is a rapid increase in productivity immediately following a recession, then a gradual decline continuing to the next recession. However, we do not see that normal pattern following our most recent recession. Instead we see a rapid increase in productivity, and a rapid decline.

"unexpectedly strong productivity growth"

2011-12-29T04:00:00.000-05:00

From the same Working Paper I referenced yesterday morning:

During the so-called “New Economy Era,” labor productivity (output per hour) played a key role in shaping the Federal Open Market Committee’s (FOMC) response to evolving economic conditions. Indeed, productivity discussions have a long history at FOMC meetings. For instance, unexpectedly strong productivity growth during the early 1980s generated arguments that would become familiar to participants more than a decade later.

Hmm. Productivity growth during the "New Economy Era" of 1994-2001... and productivity growth "during the early 1980s".

Went to FRED. Searched for output per hour. Found 26 series. Some are for manufacturing in other nations. Some have start-dates in the 1980s and 1990s. I sorted the results by start-date, selected the four domestic (U.S.) series with start-dates before 1960, and clicked Add to New Graph:

Graph #1: Four Measures of Output per Hour

Next, I looked at it on a log scale, because it was easy to do:

Graph #2: Same as the first graph, but on a Log Scale

I want to see the changes in output per hour. So I turned off the log scale and looked at "percent change from year ago" values:

Graph #3: Same as the first graph, but as Change from Year Ago

Not so obvious before 1960 where the recessions are close together, but after 1960 it seems that productivity spikes up immediately at the end of a recession, then trends more slowly downward to the next recession. You can see it after the 1960 recession and maybe the 1970 recession and definitely after the 1974 recession and the 1982 recession and the 2001 recession.

But not after the 1991 recession. From maybe 1993, productivity trends upward to 2000 or later. This difference corresponds to the "New Economy Era" (1994-2001) described in the working paper. This is the same period that Robert J. Gordon has called the U. S. macroeconomic miracle.

I want to focus now on Output per Hour in Manufacturing in the United States, the green line from Graph #3 above:

Graph #4: Output per Hour in Manufacturing (U.S.)

I see two spikes between 1982 and 1990. The first comes at the end of a recession. The second comes later, more like the result of a "miracle" than the aftermath of a recession. This, I suspect, is an indication of the "strong productivity growth during the early 1980s" noted in the working paper. Despite the date discrepancy.

Now I want to take Graph #4 and add to it in red the percent change numbers for base money:

Graph #5: Growth rates of Output per Hour (green) and Base Money

Between the 1974 and 1980 recessions the red and green lines quite clearly move in opposite directions. But that pattern changed. Coming out of the 1982 recession productivity and money growth peak twice, simultaneously, before the next recession. Then, beginning with the 1991 recession, both lines show a third peak, this time a double-peak. And in the latter 1990s -- the "new economy" years -- the red and green lines quite clearly move together.

The three peaks I point out, between the 1982 recession and the mid-1990s, are the same three bumps I have pointed out several times before on this blog.

The red line on Graph #5 shows the growth rate of base money. For the record, base money is money actually issued by the central bank of a country.

Those bumps in the money are part of a policy that allowed "unexpectedly strong productivity growth" to develop, ever so briefly.

It's a start

2011-12-28T18:53:00.002-05:00

Krugman:

Private debt... doesn’t directly make us poorer, but it increases our macroeconomic vulnerability.

Yeah. It makes financial crisis possible. It makes debt-deflation possible. It makes bizarre policy responses necessary, so that people question government more. And like that. Macroeconomic vulnerability.

Plus, it increases financial income relative to productive income. This is good for the growth of finance and speculation, and bad for the growth of output.

Excessive private debt is the original source of inadequate growth. Plus, it increases costs, and drives cost-push inflation. And like that.

Shocking answers

2011-12-28T04:00:00.000-05:00

Not long ago, at Asymptosis:

The Fed Always Thinks That Unemployment’s Not a Problem

Their model is obviously telling them that whatever (non-)actions they’re taking at the moment will solve the problem.

And their model is obviously, consistently, and wildly wrong — and always wrong in the same direction.

Altering that model to accurately predict unemployment, of course, would require that they allow more inflation in order to address both of their mandates.

And higher inflation utterly slams the real wealth of creditors.

And the Fed is run by creditors.

From the St. Louis Fed, Working Paper 2011-041A by Richard G. Anderson and Kevin L. Kliesen:

How Does the FOMC Learn About Economic Revolutions?
Evidence from the New Economy Era, 1994-2001

For monetary policymakers, and for business economists, a major challenge is tracking, understanding, and recognizing changes in the economy as they occur. Economists are fond of modeling economies as mathematical systems but some policymakers—former Fed Chairman Alan Greenspan, perhaps most notably—emphasized that model uncertainty causes monetary policy to be an exercise in risk management. In this framework, policymakers seek to learn about the changing economy even while they adopt policies that hedge against large unfortunate outcomes not well captured by the forecasting models.

Asymptosis and Greenspan agree that the models are a problem.

In Greenspan’s view, therefore, policymakers are rarely sure of which probability distribution they are confronting. Thus, the prudent course of action is an application of Bayesian decision making: (i) gather as much information as possible; (ii) quantify the probability of possible outcomes; and, (iii) act aggressively to hedge against potentially catastrophic outcomes (deflation or depression).

So the problem is perhaps not as simple as the Asymptosis post would have us believe.

I still haven't figured out "Bayesian". But the definition of "potentially catastrophic outcomes" is clear. It should be clear also that "hedging" against catastrophe suggests that policymakers have no clue what's wrong with the economy, nor how to fix it.

During the so-called “New Economy Era,” labor productivity (output per hour) played a key role in shaping the Federal Open Market Committee’s (FOMC) response to evolving economic conditions. Indeed, productivity discussions have a long history at FOMC meetings. For instance, unexpectedly strong productivity growth during the early 1980s generated arguments that would become familiar to participants more than a decade later. Questions such as: How much should the Committee risk its price stability goal to gamble that nascent accelerations in productivity will persist? If the Committee were to regard the risk as unacceptable and tighten policy preemptively—as suggested by inflation forecast targeting with models that do not incorporate the positive shock to productivity growth—how much output is lost? And, how does this interact with the FOMC’s dual mandate from the Congress to seek both price stability and maximum sustainable economic growth?

I have an advantage over the Fed. I don't operate in real time, setting policy based on the latest news reports. I just look at the past and evaluate trends.

But sometimes I have to wonder whether the Fed ever looks at the past and evaluates trends. Oh, sure, "unexpectedly strong productivity growth during the early 1980s generated arguments that would become familiar to participants more than a decade later." But more than a decade later the FOMC had progressed only toward greater uncertainty. "Knightian" uncertainty.

I can tell you why they are uncertain: They don't look for answers. They say things like "models that do not incorporate the positive shock to productivity growth" as though by calling it a "shock" all questions are answered. Don't stick your finger in the socket.

"Why, Mommy?"

"Because you'll get a shock."

It is an answer appropriate for children. It is not appropriate for the Federal Reserve.

In this article, we thus examine how monetary policymakers recognized and responded to the productivity acceleration of the 1990s.

The focus on self is not productive. Rather than examine how policymakers recognized and responded, it is necessary to examine the underlying causes of the productivity acceleration of the 1990s.

And as a hint in what direction the analysis should proceed, consider that the Federal Reserve sets monetary policy. The appropriate analysis is the analysis of monetary causes of the productivity acceleration of the 1994-2001 period.

A Stronger Argument is Needed

2011-12-27T16:00:00.000-05:00

In Debt and Growth in the G7, Paul Krugman writes: "I’ve written fairly often about the often-cited Reinhart/Rogoff claim that terrible things happen to economic growth if the ratio of debt to GDP exceeds 90 percent. It’s a claim that has been pretty thoroughly debunked," he says, linking back to his own stuff.

PK shows a graph of

the debt/GDP ratios of the G7 countries since 1946, together with a line representing the famous 90 percent threshold. What do we see? The answer is that the >90 club consists of the English-speaking nations in the immediate aftermath of World War II, Britain for a longer postwar stretch, Italy since the late 80s, Japan since the mid-90s, and a couple of years in Canada.

I would call his tone dismissive. Krugman notes the occasions when the ratio was over 90, but does not dwell on the problematic aspects of those occasions. Fair enough. His point is that debt above the 90% level isn't a problem. But he does not make a strong argument. He notes the facts and dismisses them.

Krugman provides one paragraph in defense of his view, and a summary line:

The English-speaking economies contracted in the years immediately after the war, not because of debt, but because Rosie the Riveter went back to being a housewife. Italy and Japan both experienced sharp growth slowdowns before their debt went so high, and you can make a strong case that slow growth caused high debt, not the other way around.

So this really looks like a case of spurious correlation...

The "Rosie the Riveter" line could be developed into an argument about an economy dealing with major changes due to the ending of a major war, but Krugman doesn't bother. Nor does he explain why the (presumably brief) contraction after the war was brief, nor why it was immediately followed by a golden age of economic growth. Here again, this could be a strong argument.

And as for Italy and Japan, PK says "you can make a strong case that slow growth caused high debt" (my emphasis). But Krugman does not make that case, either.

1. Krugman does not make clear that his discussion excludes private debt.
2. He dismisses claims that 90% is a problematic level for debt.
3. He admits there was a contraction after the war and provides an explanation but no evidence to support it.
4. He fails to point out the 25 years of superb growth that followed the brief contraction, and fails to show how this growth occurred despite (or perhaps because of) the high level of debt.
5. He fails to make the one "strong case" that he says can be made. And what is Krugman's strong case? "Slow growth caused high debt". Even if PK made this case, it would be a weak argument.

When you leave private debt out of the picture, it is difficult to show that private debt is the cause of the slow growth that "caused high debt".

Unit Labor Cost

2011-12-27T04:00:00.000-05:00

Nuance++

2011-12-26T04:00:00.000-05:00

From mine of the 22nd... from Wikipedia:

Within mainstream economics, levels and flows of public debt (government debt) are a cause of concern, while levels and flows of private debt (especially households and corporations) is not seen as being of central importance.

Okay. But there is "economic evolution". The economy changes all the time. Private debt has become a problem of central importance.

Consider that the Federal Reserve was not created until 1913. Fed policies have been developing since that time. And the U.S. was still on a gold standard until the 1930s. So the door was wide open for economic evolution in the decades after WWII.

As things stand today, there can be no doubt that private debt has become a problem of central importance. But perhaps there was a time when private-sector debt was never a problem. As I wrote in my series on the Free Banking era of 1836-1863:

money being tied to gold would have changed the nature of the problem. It would have changed the way the problem worked itself out.

"The early panics," Rothbard wrote, "seemed to be ten years apart: 1837, 1847, 1857..."

In those days, gold was money. Money was gold. Banks issued paper money that was exchangeable for gold. You'd come home from the market, or come home on payday, take the money out of your pockets, and put it on the kitchen table.

If it was mostly gold, that was obvious.

If it was mostly paper, that was obvious too.

When the money started to be mostly paper, people got concerned. They started taking their paper to the bank to get hard money for it. To get gold.

Zoom out and look at that, and you can see a "panic" develop.

In the 19th century there never got to be an extreme imbalance between money and debt like there is today, because it was easy to tell the difference between money and debt. If it was gold it was money. If it was paper it was somebody's debt. And panics flushed debt from the system frequently.

When money was gold it was easy to see the difference between money and debt. It is not so easy to see the difference anymore, because money is paper and debt is paper. Or today, both are "notations". Even harder to see.

Evolution.

In the Free Banking Era, there were frequent panics, too frequent to permit debt accumulation like the bizarre, inexplicable debt accumulation we have today. Those panics kept recurring every few years, flushing debt from the system. In the 19th century, frequent panics prevented debt from accumulating the way debt has been accumulating for us since World War Two.

So perhaps it is true that in the 19th century, private debt never became a problem. Or at least it was a self-correcting problem.

I'm quite certain it is true also that the great body of Western economic thought originated in that same 19th century. Oh, sure, there was Adam Smith a little early, and Maynard Keynes a little late. But in the years between those two men, the foundation of what we think of as "modern" economics developed.

Look at recent thought: It's mostly based on Say's law and Ricardian equivalence and on what Keynes called "classical" economics. It's mostly based on economic thought from a time when gold and recurring panics prevented debt from becoming a problem.

Evolution.

It's time to flush 19th century thinking from the system. It's time to accept the fact that private debt accumulates until it becomes a problem. People know it already. Debtors know it, and creditors know it too. The only people who don't seem to know it are our modern day 19th-century economists.

Odious policy

2011-12-25T11:01:00.000-05:00

From Wikipedia, the free encyclopedia:

Odious debt

In international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable.

I got that far, and I said Oh, yeah! This is how we solve the debt problem.

Such debts are, thus, considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state.

Well... it will take some work. Change "regime" to "policymakers", and "not debts of the state" to "not debts of the people" and that should take care of it.

The doctrine was formalized in a 1927 treatise by Alexander Nahum Sack...

According to Sack:

When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime.

Change "despotic regime" to "well-meaning and benevolent government". For a reason, say "because it mistakenly thinks it is in the best interest of the people to encourage their use of credit and accumulation of their debt".

Say "This bizarre and unnatural growth of debt was the result of a misunderstanding of economic principles, and consequently it falls with the demise of the policy".

That works for me.

And then I read the first footnote:

Graeme Smith A new euro crisis strategy: deny the debt The Globe and Mail 20 November 2011

And discovered that I was neither the only person nor the first to think we can reduce debt by treating it as odious. You have to be a subscriber to see the linked article. But you can also read it at http://www.europe-solidaire.org/spip.php?article23575.

Graeme Smith writes:

When demonstrators scream “Make the bankers pay,” or the equivalent in Greek, Spanish, or Italian, many of them are embracing a concept that has gained popularity during the crisis. It’s a deceptively simple way of dealing with a crushing sovereign debt: Declare the loans illegal, or “odious.”

I'm in.

The argument is that when a lender knowingly gives money to a corrupt or dictatorial regime for purposes that don’t benefit the country, the debt should be erased when the tyrant falls.

When lenders profit from incorrect and unsustainable economic policies, regardless of the purposes of those policies, the debt should be erased when the policies fall.

None of Europe’s finance ministers have proposed anything of the kind, but they have been forced to explain why not...

Ireland’s Finance Minister quickly dismissed the proposal as “deranged and crazy”...

Well, sure. Because the alternative to saying "deranged and crazy" is to say Yes, our policies were foolish. Yes, our policies were wrong.

Merry Christmas

2011-12-25T04:00:00.000-05:00

Maynard Keynes:

When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the accumulation of capital, we shall then be free, at last, to discard.

RGDP: Annual Change and a 21-Year Moving Average

2011-12-24T16:00:00.000-05:00

I was impressed by Jazzbumpa's 21-year moving average in his Disturbing Look at GDP Growth. So I decided to extend the 21-year M.A. as far out in time as I could.

For the U.S., the annual "Real GDP" numbers from Measuringworth run from 1790 to 2010. I figured "percent change from year ago" from that, so my first number is for 1791. And I figured a 21-year average and plotted it at the last year of the period, so my first M.A. comes in at 1811. So, I got a hundred numbers to look at.

Graph #1

Sorry about the scrollbar. Without it, Google Docs was just ignoring everything after the mid-1950s. Information overload, I guess.

A Christmas Story

2011-12-24T04:00:00.000-05:00

From FT via Gang8.

"The Meme that Refuses to Die"

2011-12-23T04:00:00.000-05:00

At EconoSpeak, a good one from Peter Dorman. (I can't take an excerpt from it; you sort of need to read the whole thing.)

In the comments, Don Levit asked a good question and I gave an impromptu answer.

I often have second thoughts when I don't put enough time into something I write. So I'm looking again at my reply, giving myself a chance to fine-tune it.

Anyway, here is my comment, tweaked:

Don's question is excellent:

How was the economy able to do so well for the years 1950-1980 with very little government debt, yet for the last 30 years, with huge government debts, median households have lower incomes?

The answer is found by comparing the level of government debt to the level of private debt. For it is private debt, not government debt, that holds back private sector growth.

For the last 30 years, private debt has been so vast that all of the growth of government debt we've had was not enough to generate vigorous growth.

For the 30 years before that, private sector debt was relatively low, so it was able to increase rapidly, creating vigorous economic growth.

The changes of the past 30 years -- Reaganomics -- skewed income toward the top. That's why the median income fell. And the fall of median income is a problem. But those changes were designed to solve a prior problem, the problem that GDP (total income) growth was too slow.

GDP growth was already inadequate in the 1970s, because of excessive private debt.

Nuance??

2011-12-22T04:00:00.000-05:00

Wikipedia:

Debt levels and flows

Debt is used to finance and pay for entreprises and business around the world. The levels of debt – how much debt is outstanding – and the flows of debt – how much the level of debt changes over time – are basic macroeconomic data, and vary between countries.

Within mainstream economics, levels and flows of public debt (government debt) are a cause of concern, while levels and flows of private debt (especially households and corporations) is not seen as being of central importance.

Apart from the spelling, there are at least two problems with this introductory bit of the article.

1. Debt is used "to finance and pay for" stuff.

No, it's not.

A debt is an obligation owed by one party (the debtor) to a second party, the creditor.

If I borrow a dollar from you to get a candybar from the machine, two transactions occur:
1. You give me a dollar and I give you an IOU.
2. I give the machine a dollar and the machine gives me a Milky Way.

Two transactions. The first one puts money into circulation and creates debt. The second one uses the money to make a purchase.

The second transaction is completed as soon as I have my candybar in my hot little hand. The first transaction is not completed until I repay the debt.

We might say debt is used "to finance" the candybar. But debt is not used to "pay for" it. The money I get in exchange for the IOU is what I use to pay for the candy.

I'm not inventing any stories here. I'm just trying to be clear about what happens.

2. Private debt is not seen as a problem.

No, it's not. It *IS* a problem, but it's not seen as a problem. And to be blunt, that is the reason we cannot solve the problem.

I've said it before, but you and I are like little versions of the Federal Reserve. The Fed puts new money into circulation by buying stuff from the private sector. So do we.

What's different is where the new money comes from. You and I have to go to the bank to get it. But the Fed *is* a bank, so they don't have to "go" to the bank.

The Fed is a special case. That's where our money comes from. The Fed has a limitless supply of money that they are keeping out of circulation. That's their job, to keep most of that money out of circulation.

If they want new money, they can get it out of an empty box.

You and I are not so lucky. We have to go to the bank for new money. We, unlike the Fed, create debt when we create new money. And we, unlike the Fed, are obligated to pay back that debt.

Every dollar of debt is the record of a dollar somebody put into the spending stream, and has not yet removed from the spending stream.

Every dollar of debt is a dollar somebody has to pay interest on. The money used to pay interest goes into the financial sector. Maybe it came from the financial sector, or maybe it came from the productive sector, but it definitely goes to the financial sector. And most of it comes from the productive sector.

Interest is income to the financial sector. Interest is a cost to the productive sector. You don't need any more explanation than that to see why excessive levels and flows of private debt can become the problem of central importance.

The Interaction of Cycles

2011-12-21T04:00:00.000-05:00

But there is no ground to believe that there should be just one wave-like movement pervading economic life.

-- Joseph A. Schumpeter

Wandering through Google results for unemployment historical data the other day turned up The Natural Rate of Unemployment, a PDF by David Brauer of the Congressional Budget Office. (16 pages, lots of pictures.)

The paper is from April, 2007 -- shortly before the crisis. Brauer's Figure 2 shows a prediction based on pre-crisis thinking:

Brauer's Figure 2: Demographics and the Natural Rate of Unemployment

David Brauer writes:

In its summer 2006 forecast, CBO reduced its estimate of the current natural rate from 5.2 percent to 5.0 percent, reflecting a decline since the mid-to-late 1990s in the share of the labor force that is below the age of 25. That decline is attributable not to a change in the age mix of the general population, but to an unexpected sharp and sustained drop in the labor force participation rate of teens and young adults, most likely because of higher rates of school enrollment.

Weird science:

1. People can't find work.
2. People go to school to improve their chances of finding work.
3. The "labor force participation rate" falls because people are in school.
4. The "natural rate of unemployment" falls.

It's sort of like: People can't afford so much steak, so they switch to pasta. And then steak is taken out of the "basket of goods" used to figure inflation, and pasta is put in. Because of this change, the inflation rate number is less. This is sick-puppy arithmetic, all of it. And bad economics.

But that's not why I called this meeting.

I think it's a little funny that the projected rate is five point oh! percent. The number wants to convey more accuracy than it can hold, I think. And once that trend line hits 5.0, it is rock-solid. A straight-line projection out to 2015 and beyond. Laughable.

I also think it's a little funny that in 2006 when CBO reduced its projection to 5.0 percent, apparently they reduced it all the way back to the year 2000.

We have always been at war with Eastasia. But that's not why I called this meeting.

Here is the opening sentence from the Abstract of Brauer's paper:

This paper assesses the natural rate of unemployment—the unemployment rate that arises from all sources other than fluctuations in demand associated with business cycles.

A simple definition. Unemployment arising from all sources other than business cycles. And that brings us to today's agenda: the fluctuations that are associated with business cycles.

In his Kondratieff rejection piece, Murray Rothbard wrote:

... the market is a seamless web. All facets of the market are interconnected through the price system, and the profit-and-loss motive. Booms and busts spread throughout the system; that is precisely why they are important. It is absurd to think that one part of the economy can peg along on a nine-year cycle, another on a three-year cycle, and still another on a 25-year cycle, with each of these cycles barreling along on a hermetically sealed track, not influencing and modifying each other. In fact, there can only be one real cycle going on in the economy at anyone time.

Rothbard is right: It *IS* absurd to imagine completely separate cycles existing with absolutely no influence on each other. On the other hand, it is not absurd to imagine that more than one cycle might arise from economic forces generated by concurrent economic activity of billions of people spread over the face of a planet. Nor is it absurd to imagine such cycles themselves in continuous interaction.

It is, however, absurd to invent the notion of the non-interaction of cycles, pretend that others invented the notion, and then reject the work of others by saying that the non-interaction of cycles is absurd.

In Business Cycles (PDF, 385 pages apparently), on page 209 Schumpeter attempts to present an extremely simplified or "clean" version of the interaction of business cycles. He limits his presentation to three cycles only, "for the sake of simplicity". He eliminates not only other cycles but also "external disturbances" and also "Seasonals and Growth". And he makes his three cycles as regular and unvarying as possible by using "three sine curves the amplitudes of which are proportional to their duration".

Schumpeter warns that this is a great simplification: "Of course, we do not, as a matter of principle, postulate either internal regularity or sine form...

...we may look upon the charts as an illustration of all the boldest assumptions which it is possible, and to some extent permissible, to make in order to simplify description and to construct an ideal schema with which to compare observations. In particular, all cycles have four phases of equal length, amplitudes of plus and minus excursions are equal and constant, periods are also constant, and each of the two higher cycles consists of an integral and constant number of units of the next lower movement."

And then Schumpeter provides Chart 1, showing the interaction of cycles:

Take three extremely regular wave-patterns and add them together, and you get a surprisingly complex shape.

Schumpeter:

For the stranger to statistical technique the fact alone that extreme regularity of but three components may result in so very irregular-looking a composite should be instructive.

Schumpeter argues that the cycles *DO* interact.

I didn't find the reference, but Schumpeter also argues that if time and chance should bring the lows of various cycles together, the combined low would be deeper than any of the individual lows alone. You can see this behavior on his chart.

Schumpeter said this concurrence could explain the severity of the Great Depression. I don't necessarily buy that explanation of the Great Depression. But I certainly buy that such a thing could happen. So I have to reject Rothbard's assertion that "there can only be one" cycle.

Evolution

2011-12-20T04:00:00.000-05:00

Krugman:

David Warsh finally says what someone needed to say: Friedrich Hayek is not an important figure in the history of macroeconomics.

Thus ensued my first visit to economicprincipals.com ("David Warsh, proprietor"). It looks a bit like a newspaper column. Perhaps it induces me to read. Anyway, I do.

Warsh trashes, thrashes, and tongue lashes Hayek for 60 of 64 column inches. Then, something surprising happens: In the last four of those inches, Warsh has something nice to say about Hayek:

That said, it is pleasing to think that Hayek himself may yet turn out to have been a very great economist after all, far more significant than Myrdal or Robinson, when seen against the background of a broader canvas. The proposition that markets are fundamentally evolutionary mechanisms runs through Hayek’s work. Caldwell, of Duke University, notes that, starting with the Constitution of Liberty, “the twin ideas of evolution and spontaneous order” become prominent, especially the idea of cultural evolution, with its emphasis on rules, norms, and decentralization.

These are today lively concepts in laboratories and universities around the world. “It could have been that Hayek was running a different race, and the fact that he didn’t do well in the Walrasian race was that he wasn’t running in it—he was running in the complexity race,” says David Colander, of Middlebury College. Hayek may yet enter history as a prophet of evolutionary economics, a discipline dreamt of since the days of Thorstein Veblen and Alfred Marshall in the late nineteenth century but not yet forged, whose great days lie ahead.

Markets are evolutionary? I'll have to put that on my list of things to look into. That's a list that just keeps getting longer.

I can't say what Hayek meant by evolutionary markets, not what Warsh and the others mean by evolutionary economics. I can only say what I see:

The economy changes. It changes in response to policy. And it changes in response to internal imbalances and such. Exogenous and endogenous change.

If we lived as long as Struldbrugs we could see the big picture. But we don't. So we can see business cycles, but we can't see the ones that are a human-lifetime long or more, because we never get to see them repeat. And (not) seeing is (not) believing.

And this process of change... Looking at it from afar, it looks like cycles. But looking at it the way we get to look at it, it only looks like "evolution".

That's about it.

"Money and Social Possibilities"

2011-12-19T10:00:00.000-05:00

An interesting post I disagree with, at heteconomist.com.

Before the "so"

2011-12-19T04:00:00.000-05:00

Found this nicely organized site, with a bit of British flavor in the writing -- the Virtual Worlds section of Biz/Ed.

I have not figured out yet how to get from the home page to the page Google got me to. So I will skip over the niceties and get to the point.

From the Explanation of Interest Rate page:

The interest rate can be considered as the price of money.

It can be, but it shouldn't be. The interest rate is the price of credit, the price of using OPM, other people's money. Somebody said "OPM" back in the early '90s in one of the newsgroups, at 2400 baud, whatever -- long ago -- and those three letters stuck in my head. Useful.

That's from Milton Friedman, by the way: The interest rate is the price of credit.

Here's the rest of that first paragraph:

If you want to borrow money [the interest rate] is the percentage over and above the original loan that has to be paid back. This makes the interest rate a vital tool of economic management. A large amount of economic activity (both consumption and investment) is done on borrowed money, and so if the interest rate is changed it will either encourage or discourage borrowing and therefore tend to increase or decrease economic growth.

Know what gets me? These words:

A large amount of economic activity is done on borrowed money

Oh -- I don't deny it, not at all.

I object to taking that phrase and burying it before a comma and before the word "so". I object to taking that fact and treating it as a given, treating it as the type of fact that always has been and always shall be, world without end Amen. That's what I object to.

Sloppy it is. Even when the reliance on credit was low, you could easily say "a large amount of economic activity is done on borrowed money". Sure, and it would be true, too. HOWEVER...

The reliance on credit varies.

Sometimes, the large amount is about equal to GDP. Sometimes it is three times GDP or more. Sometimes the large amount is five times the amount of money we don't have to pay back. Sometimes the large amount is 35 times that money. The reliance on credit varies, and economic performance varies as a result.

Bury the Virtual Worlds phrase before the "so"... or insist that money and credit are the same thing... and you will never be able to understand the effect of varying the reliance on credit. The effect on the economy as a whole. The effect on economic performance.

The solution to the problem we cannot solve will be found in the place we do not look.

Long Trends in Monetary Phenomena

2011-12-18T04:00:00.000-05:00

On what basis, then, do the Kondratieffites presume to bracket 1940 with 1896 and 1849 and 1789 as the terrible years of Kondratieff troughs? Really, on one and only one ground: each of these years was a trough point for the index of wholesale prices. All the other alleged confirmations of the Kondratieff troughs were simply of prices, or else of monetary phenomena reflected in prices.

-- Rothbard

Three long data series are shown on Graph #1: Robert Shiller's interest rate (in black), my debt-per-dollar (in red), and a 5-year moving average of the "real" interest rate (in blue). The blue is the one that makes the graph look crazy with all its ups and downs, despite being averaged. The black line shows the three peaks that I identify as three longwave peaks. The red DPD starts later, and shows only two peaks.

The red is composed of two separate lines actually, because I have two mis-matched sources for debt numbers: Historical Statistics (1916-1970) and FRED (1959-2010). (You can see the same mis-match in Krugman.) Also, the red one is scaled down by half to bring it near the black and blue, for comparison.

Graph #1

The blue (real interest) line trends downward from the first black peak (1873) to the first black trough (1900). Black and blue then move upward together (if we ignore the exogenous "V" around the time of the First World War). Then black peaks (1921) and starts to fall, while blue continues to rise. Blue finally peaks with red (1931, 1933), then together these fall. (I second-thought this late peak, below)

Everything reaches a bottom together around 1946, then all begin to move upward.

Similar to the exogenous "V" of the First World War is an exogenous blue "U" from 1939 to 1951, bottoming in '46 and quite evidently related to the Second World War.

I think I see a third (exogenous?) anomaly from the mid-1960s to the early 1980s, caused by the high inflation of that period. If that is the case, I think the natural trend of the blue line would follow the red line from say 1962 to 1982.

After the black and blue peaks (1982, 1984), both interest rate lines trend downward -- just as they did from 1873 to 1900. But not as they did after the second black peak in 1921.

Now I am wondering about the blue peak at 1931. In 1928 the blue line is still on the downward path of 1923-1937. After 1937, war created an anomalous low. Perhaps after 1928, Depression created an anomalous high?

Yes, that makes sense: the blue line differs from the black by the rate of inflation. Three high periods of inflation -- WWI, WWII, and the seventies -- created three anomalous lows. And the one period of extreme deflation -- the Great Depression -- created an anomalous high.

If that is the case, and if we ignore the anomalies, perhaps there is a natural downward trend from 1923 to perhaps the mid-1940s. This would correspond to the earlier decline pattern (following 1873) and to the later decline pattern (following 1982).

I know, there is a lot of "if" in this analysis.

Treating the blue peak at 1931 as an inflation-related anomaly (rather than as trend), we are left with a blue line that runs up and down in a pattern much like the black: real and nominal interest rates moving together, except for episodes of high inflation or high deflation. Makes sense, I think.

Granted, there are almost as many anomaly years as normal-trend years.

The period between the peaking of interest rates and the peaking of debt-per-dollar is a period of financial euphoria.

There is a lot of "if" in the above analysis. Does that weaken my case?

Perhaps. But I think it weaken it less to say (as I say) that these unique events disturb the pattern, than it does to say (as Rothbard says) that these events create the pattern.

I agree with Rothbard that government actions sometimes create disturbances. When I look at my graphs, I can see those disturbances. But I also see a natural wavelike pattern only temporarily disturbed. And after each disturbance I see rapid return to the wavelike pattern. The First World War, for example, created a sharp drop in real interest rates. But after the war, the real interest rate trend returned to the pattern it showed before the war!

The disturbance in every case is a price disturbance.

The natural pattern itself arises from the accumulation of financial cost and the accumulation of financial wealth. These accumulations are monetary phenomena: imbalances, sometimes so severe that they topple governments.

EGADS!

2011-12-17T19:08:00.002-05:00

http://news.research.stlouisfed.org/2011/12/new-fred-category-structure/

New FRED Category Structure

We will soon be reorganizing the categories in our FRED database. During this process, users will still be able to access and search for all series.

After these modifications, FRED will have 7 main categories:

National Accounts
Population, Employment, and Labor Markets
Production and Business Activity
Prices
Money, Banking, and Finance
International Data
U.S. Regional Data

Several existing categories will be eliminated, and series listed under those categories will be moved to more descriptive categories. All email notifications for the eliminated categories will be updated. For more clarification, see the mockup of the changes. We intend to complete this transformation by the end of this year.

TFA (suffix)

2011-12-17T04:00:00.000-05:00

From yesterday:

Graph #1: Components of "Total Financial Assets"

I'm wondering what the red line would look like if we separated household assets from the assets of nonprofit organizations.

I went to FRED and did a search for balance sheet of households. FRED turned up a list of 47 data series. Every one of those series descriptions ends with the phrase "balance sheet of households and nonprofit organizations". Sometimes the information you're looking for just isn't so easy to find.

Reminds me of looking for data series on private debt.

TFA

2011-12-16T04:00:00.000-05:00

Found "Total Financial Assets" at FRED by accident just now.

Graph #1: Components of "Total Financial Assets"

Red: Household and Nonprofit Organizations
Blue: Nonfarm Nonfinancial Corporate business
Green: Nonfarm Noncorporate Business

Omitted are farm assets. Of course: Economists sure don't like them farmers. Also omitted: Financial business. I'm sure there's a good reason for that, too. And also the government. Perhaps because government "cannot save"...

I'm wondering what the red line would look like if we separated household assets from the assets of nonprofit organizations. ("Nonprofit" doesn't mean they don't make money. It just means they don't pay income tax on the money that they make.)

I added up the three components of TFA and showed the total in blue on a new graph:

Graph #2: Total Financial Assets (blue) and TCMDO (red)

What to compare it to? First thing that came to mind was TCMDO, Total Credit Market Debt Owed.

The distance between the lines was greater than I expected. So I tweaked TCMDO by taking out Federal debt held by the public, and adding in Gross Federal debt. The latter is a bigger number, and should make the red line closer to the blue.

Graph #3: TFA and (TCMDO less Net Federal plus Gross Federal debt)

Quite a bit closer. I suppose the difference includes farm assets. And foreign holdings maybe. Getting out of my depth, here.

But I was running out of interesting things to do with TFA. So I logged it:

Graph #4: Same as Graph #3 but on a log scale

Now I have something to say.

Just an impression, really. Looks like the closer the lines are to each other, the worse the economic performance. The bigger the spread, the better.

The lines were far apart in the 1950s and '60s, during the Golden Age. The lines came closer together during the troubled 1970s. After a brief separation in the early 1980s, the lines ran close together until the mid-1990s. During the Macroeconomic Miracle of the latter 1990s, the gap opened up again.

Then the gap collapsed completely, in two steps, in the 2000s.

Like I said, out of my depth. But I'm wondering if there is some relation between this gap-related behavior and the thing that is often called Net Financial Assets.

You pays your money...

2011-12-15T04:00:00.000-05:00

...or you saves it.

Second graph from yesterday:

Graph #1: Savings relative to Circulatings, 1915-1932

Here's the picture through 1936, the year Keynes published his General Theory:

Graph #2: Savings relative to Circulatings, 1915-1936

Here's how the picture looks through 1945, the year Franklin D. Roosevelt died:

Graph #3: Savings relative to Circulatings, 1915-1945

Here's how it looks for the full data available in the Historical Statistics, 1915-1970:

Graph #4: Savings relative to Circulatings, 1915-1970

Here's how it looks after combining Graph #3 with the numbers from FRED:

Graph #5: Savings relative to Circulatings, 1915-2010

Pretty good mis-match between the old and new numbers, but I can't help that.

The black line and gray shading way down low on Graph #4 show the same numbers as Graph #3, in proportion to the FRED numbers.

Those four FRED lines -- blue, red, green, and orange -- follow the same color scheme as the first graph from yesterday. Which one to use? Your choice. They all go up.

One of the big problems with policy is that it encourages savings. We think it wise to find ways to "enrich" people by enabling them to pile up claims to enjoyment without them ever intending to enjoy those claims.

That sharp decline

2011-12-14T04:00:00.000-05:00

From me, from yesterday:

Savings relative to circulatings:

Graph #1: Starts low. Ends high.

Looking at the red line, non-circulating MZM grows from equal to M1, to five times M1 by 2007, when a sharp decline sets in.

I'm using 2007 as the-peak-before-the crisis. Our Great Recession started late in 2007. I'm setting up 2007 as comparable to 1929. The Great Depression started late in 1929.

The first year that I have M1 and M2 money numbers for is 1915, 18 years before 1929. 18 years before 2007 is 1993. That's where my graphs will start, 1915 and 1993.

The last year that I have M1 and M2 money numbers for is 2010, three years after 2007. Three years after 1929 is 1932. That's where my graphs will end.

I give you "Savings relative to Circulatings" for the two comparable periods 1915-1932 and 1993-2010:

Graph #2

Graph #3

Just at the end there... See that sharp decline?

Piling up claims to enjoyment

2011-12-13T04:00:00.000-05:00

From Keynes, from yesterday:

...the maxims which are best calculated to "enrich" an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

Savings relative to circulatings:

Graph #1: Starts low. Ends high.

Blue is M2, red is MZM, green is M3, in each case with circulating money (M1) subtracted from it, and the difference shown as a multiple of circulating money.

And, for comparison, the orange line is total debt (TCMDO) with "circulating" money MZM subtracted from it, and the difference shown as a multiple of MZM.

Looking at the red line, non-circulating MZM grows from equal to M1 in 1959, to five times M1 by 2007, when a sharp decline sets in. A five-fold increase.

These non-circulatings are all of them measures of the claims to enjoyment that are not intended to be exercised at any definite time. In other words, they are measures of the absence of aggregate demand.

Our economic policies for the period shown on the graph have propped up aggregate demand by increasing various measures of money, and simultaneously undermined aggregate demand by increasing various encouragements to take those dollars out of circulation, and save them.

The Marginal Propensity to Consume

2011-12-12T04:00:00.000-05:00

I'm a slow reader. I don't do well with books like A Game of Thrones. But my pace helps a lot when I'm in The General Theory. My recommendation: Read the excerpt slowly and enjoy it. Keynes is wonderful.

From the conclusion of Chapter 10, TGT:

Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York.

Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the "financial" burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to "enrich" an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time.

Your mind wandered, didn't it. Start over and read slowly.

Two of a kind

2011-12-11T04:00:00.000-05:00

I never get enough of quoting Robert Lucas in his Irving Fisher moment...

macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved

...even when I'm feeling just a tad guilty for focusing so much on one guy. So I want to take this opportunity to share a similar quote from second economist.

In his Economics textbook, fourth edition (1958), Paul Samuelson imagines the words of a brave and careful economist of the day:

Everywhere in the free world governments and Central Banks have shown they can win the battle of the slump.

"But let us not be too arrogant," Samuelson warns:

The difference will be this: the age-old tendencies for the system to fluctuate will still be there, but no longer will the world let them snowball into vast depressions or into galloping inflations.

Sounds like: "The central problem of depression prevention has been solved."

A CPI Prism

2011-12-10T04:00:00.000-05:00

Graph #1

On the right, from the bottom up, we have

ORANGE: Apparel

PURPLE: Transportation

RED: Food

BLUE: All Items

GREEN: Shelter

GRAY: Medical Care

PINK: Education (Tuition, fees, & child care)

Perhaps the CPI goes up fastest for the things we value most highly, like education in a tough economy. And for things we are unwilling to cut corners on, like medical care.

And the CPI goes up most slowly where there is greater flexibility, as with apparel.

CPI for Food and All Items run very close together.

Oops, I forgot energy.

The Decline of Average Growth

2011-12-09T04:00:00.000-05:00

Start with Real Gross Domestic Product from FRED:

Graph #1: "Real" GDP

Look at the "percent change from year ago" picture:

Graph #2: Change rate, "Real" GDP

Download the numbers from that. Upload to Google Docs. Crop off the years before 1948, where Depression and global war exaggerated the numbers. Generate a 5-year moving average for what's left.

Graph #3: "Real" GDP change rate and 5-yr Moving Average

Looks to me that RGDP is trending down. But how can I make it more clear?

Eliminate the RGDP and just keep the moving average.

Okay. What else?

If RGDP was a straight line, trending down, I could make an "X" of it by putting a second copy of it on the graph, backwards. That graph would compare the oldest years to the newest years, and not-so-old years to not-so-new years, and like that. And it would be easy to see what was higher and what was lower.

That would work, even if RGDP wasn't a straight line.

It does work:

Graph #4: The Moving Average (blue) and Reversed Moving Average (red)

The actual moving average is blue. The reversed moving average is red. Where blue is high in the early years, the graph supports the view that growth has been declining. Where blue is high in the later years, it contradicts that view.

At the left side of the graph we see large blue peaks and small red peaks. That means growth was much better in the 1950s and '60s than in the recent years.

At the right side of the graph we see small blue peaks and large red ones. That means growth in the more recent years was not as good as in the early years.

N Andrews: Unemployment and Debt

2011-12-08T12:00:00.000-05:00

JzB analyzes a prediction regarding the employment/population ratio.

My mind goes to comparable disturbances. I want to look at the 1930s and before.

Oh. FRED goes back to 1948. Crap. Curse their data integrity.

Google turns up a Scribd file by N. Andrews: Historical Unemployment In Relation to Today. Just a few pages, lots of pictures, satisfactory spelling and punctuation, suits me fine. (Actually, I'm wanting to know more about N. Andrews.)

Andrews' first graph shows U3 and U6 unemployment back to 1900. I grabbed that graph to display it and, well look at that, it's a two-graph set:

Andrews writes:

Recent news portrays our current jump in unemployment as a serious event in the marketplace. But from a historical perspective unemployment, whether measured by U3 or U6, while high, is still lower then the two previous post-WWII peaks in the 70's and 80's. Another factor in the degree of harm a given level of unemployment causes in a society is to what degree the majority of the population is leveraged in the form of consumer debt.

Not my doing. I'm just reporting what I found. Andrews brings debt into the picture. Just like I do.

//

At The Economic Populist, a review of the N Andrews paper.

Evidently, it's Nelson Andrews.

A "Real Rate" Pattern

2011-12-08T04:00:00.000-05:00

Out with the dogs, my mind wanders to the comparison of DPD and the interest rate. Long term. Long wave. Mismatched peaks. I suddenly wonder whether the real interest rate would show the long wave also, and whether it might match up better to the DPD.

Silly me:

Graph #1

Later, it occurred to me to look for a trend in that mess.

Graph #2

Neh. Nothing at first glance surfaces to strike me as similar to a longwave.

But after looking at it a few times over a few days, I am seeing things:
1. A general downtrend from 1875 to 1900.
2. A general uptrend from 1900 to 1931 -- with a big, V-shaped hole in it, apparently associated with the First World War. I observe that the moving average returns to trend by 1922, despite that big hole.
3. A general downtrend from 1931 to 1947.
4. A general uptrend from 1947 to 1963.
5. Down from 1963 to 1977.
6. Up from 1977 to 1984.
7. Down from 1984 to 2006 or after.

I think the big V-shaped hole with a bottom at 1918 is exogenous. The general uptrend from 1900 to 1931 is the endogenous or default pattern for that period.

Other than that, I can't say how these trend changes fit into anybody's observations or predictions of the longwave pattern. I only point out that my description of real rate trends *is* a long wave pattern.

"The Kondratieff Cycle: Real or Fabricated?"

2011-12-07T04:00:00.000-05:00

Murray Rothbard's 1984 review of the Kondratieff cycle opens with references to "Soothsayers, palm-readers, astrologers, crystal-ball gazers" and "gurus and mountebanks". Rothbard puts ten paragraphs into the "soothsayer" theme before getting around to business cycles.

Paragraph eleven was really good, except for one bit I have scratched out:

Business cycles began a mere two centuries ago. ~~Despite the fevered hopes of some enthusiasts who claim to have observed business cycles going back to Methuselah,~~ before the late eighteenth century there was no such phenomenon. Of course, there were centuries in which business improved and the economy progressed and there were other centuries (the Dark Ages, the 14th and 15th centuries) when it went into a long secular decline. But, within shorter time periods, business pegged along in a rough straight line year after year. Business was either good, bad or indifferent, but it tended to remain that way steadily for many decades.

In other words, things were slow in the Dark Ages, then better for a while, then slow again in the 14th and 15th, then better again. Sounds like a cycle to me. Reminds me of David Hackett Fischer's The Great Wave, a study of the history of prices. Though Fischer might insist that a wave is not a cycle, I am satisfied to think of the pattern described by Rothbard and Fischer as a business cycle somewhere in size between the Kondratieff wave and the Cycle of Civilization.

Rothbard says, quite plainly,

It should be recognized that most business-cycle theories ... are grounded in the assumption that the cycle stems from some deep flaw in the free-market economy. But if micro-theory is correct, then it must apply to the "macro" sphere as well. The economy is not some entity split between a micro and macro half; it is a seamless web, inextricably linked together by the use of money and the price system. Therefore, whatever applies to one part of it must apply to all.

He denies there is a natural cycle to be seen in the economic data. Completely without evidence, mind you. Economics by proclamation. Robert Lucas picked up on that load of crap, gave us the concept of "microeconomic foundations," then announced that the problem of depression-prevention had been solved, and had barely taken a breath before a new crisis was upon us. Thankfully, Lucas is not part of this tale.

Regarding those business cycles that began some two centuries ago, Rothbard writes

Then, around the middle or latter part of the eighteenth century, something happened. A new phenomenon struck the world, occurring first in Britain, the most economically advanced country, and spreading to other advanced countries as they entered the market nexus of trade and finance. This phenomenon was a regular, continuing, wave-like movement of business activity.

Rothbard attributes this regular, continuing, wave-like movement to "the government and its banking system". Not to "the market nexus of trade and finance." And not to the "seamless web" of money.

These waves to which Rothbard refers are what we think of as the business cycle -- a cycle about a decade in length. He refers, for example to "the fact that the early panics seemed to be ten years apart: 1837, 1847, 1857..."

Rothbard objects, quite reasonably I think, to the idea that business fluctuations are "periodic". What he objects to specifically, it seems, is the view that the cycles have regular timing. I agree absolutely. On the other hand he describes "a regular pattern of euphoric boom, sudden crisis or panic, bust or contraction, and gradual recovery, succeeded without pause by another boom." It is the regularity of this pattern that establishes the cycle, not the regularity of its timing.

Much of Rothbard's paper is an objection to the regularity of timing:

One of the worst things about the "business cycle" is its name. For somehow the name "cycle" caught on, with its implication that the wave-like movement of business is strictly periodic, like the cycles of astronomy or biology.

But this is an objection only to the presumed clockwork regularity of the Kondratieff wave, and not to evidence of its regular pattern. Rothbard wants to throw baby with bathwater, regular pattern with strictly timed recurrence. Five times he refers to the presumed cycle-length of 54 years.

If I were to describe to you a cycle, that description would have to include an estimate of the duration of the cycle: perhaps ten years (for the business cycle) or 40 months (the Kitchin cycle) or twenty years (the Kuznets cycle) or Kondratieff's longwave (50-odd years) or Fischer's Great Wave (a couple hundred years) or Toynbee's cycle of civilization (a couple thousand years). The clearest, simplest way to distinguish one cycle from another would be to identify different approximate cycle lengths.

But apparently Mr. Kondratieff once said "54 years," and Mr. Rothbard wants to hold him to it. Rothbard wants to rigidly define a 54-year period for the longwave, and then reject the longwave and everything about it because of this regular timing. Rothbard's argument is a total straw man.

Later in the article, Rothbard complains because Kondratieff fails to be specific enough with his dates:

Kondratieff, writing in the mid-1920s, found it easy simply to fuzz over the peak dates, writing that his first peak came in "the period 1810–17," and the second in "the period 1870–75."

Rothbard refutes his own argument.

One of those longwave depressions described by Kondratieff turned out to be the Great Depression. Rothbard himself says, "No question that the late 1930s – a 'Kondratieff trough' – was a pretty miserable period." But then Rothbard turns around and rejects the longwave because not every Kondratieff trough is equally severe:

But wait! Is this really what we mean by a depression phase of a business cycle? After all, we are not really concerned about prices first and foremost. What really concerns us about a depression or recession is not that prices used to fall, but that there were and are sharp declines in production, clusters of bankruptcies and drastic increases in unemployment.

I on the other hand would give the old Russian extra credit for finding his longwaves before the Great Depression ever happened.

Rothbard writes:

What was wrong about the 1780s, for example? No particular depression there. And if we want to be generous and dismiss that "first trough" for lack of data or as only starting the whole thing, what about the alleged second trough? Fifty-four years from 1789 brings us to the "expected" trough year of 1843, a year in which everything was smooth sailing.

Let us then look more closely at the long contraction, or "long depression," phases of the Kondratieff cycle. To make any sense, they should in some way look and feel like depressions, like grim periods of decline in business activity. The first Kondratieff long depression was supposed to be the period 1814-1849. But these thirty-five years were by and large a period of great expansion, prosperity and economic growth for the United States, England and France, the three countries Kondratieff used for his statistical analysis. And what of the second Kondratieff depression, the period 1866–96? Was that in any sense a depression? For the United States, and to a large extent for Western Europe as well, this was the period of the most dazzling spurt of production and economic growth in the history of the world. Production and living standards skyrocketed. How in the world could three such glorious decades be called a period of secular decline?

Me, I don't know. I got "Real GDP per Capita" numbers from Measuringworth, annual numbers for the U.S. that go back to 1790. I graphed the period 1790-1900 and had Excel put an exponential trend on it:

Graph #1: RGDP per Capita, and Exponential Trend

Real output per capita starts out below-trend (in 1790) but five years later is clearly above-trend. It again drops below-trend around 1815. The distance below trend reaches its greatest between 1840 and 1845. Thereafter, output climbs back toward the exponential trend and finally rises above trend around 1865. After 1865, however, it falls below-trend again until around 1880. All of this matches up very well with the longwave dates laid out by Murray Rothbard.

Only after 1880, when output rises above-trend on the graph, does it contradict a longwave date. The longwave date Rothbard provides says that the long slump lasted until 1896.

Rothbard writes, "Kondratieff long "depressions" were really booms in everything that counted..." And yet it is easy to see from the graph that for long periods, output was either rising relative-to-trend or falling relative-to-trend. Such behavior may readily be called wave-like. And it fits Rothbard's Kondratieff schedule remarkably well.

It's not on the graph, but I'm wondering whether there was a financial boom after 1880, comparable to the financial boom we experienced in the past 30-odd years, that pushed total output up but created a different result in the non-financial sector.

As a matter of fact, there was a financial boom after 1880:

Graph #2: from Paul Krugman's Inequality and Crises PDF

Ironically, Rothbard writes:

The "long wave" had a brief vogue in the late 1930s, only to disappear until the 1970s, and since then it has had another and even bigger run. It seems clear that the times of fashion for the Kondratieff are a function of the economic climate of the day.

Interest in the Kondratieff wave goes in and out of fashion with "the economic climate of the day." The economic climate Rothbard describes is the longwave. But Rothbard chooses not to see it.

Cycling

2011-12-06T04:00:00.000-05:00

Delving a bit into cycles via Google I came upon Cycle Dawg's Swing Trade cycles blog. It appears to be a blog for traders, which I am not, and at a glance seems to cover TD cycles. Whatever they are.

The 34TD cycle is up. The 4.6TD cycle is up. The 22TD cycle, 11.2TD cycle and 2.8TD cycle are down....

"Trading Day" maybe: TD stands for Trading Day. I bet that's it.

I did like Cycle Dawg's blog-description text:

Cycles are a tool and should not be used to the exclusion of other tools. There is always the possibility (high probability long term) that the data will be misinterpreted or a relevant fact over looked. So use cycles to check your analysis, not as the only reason to make a decision.

Anyway, for Cycle Dawg, cycles are a tool. For purposes of trading, I can see that. For my purposes, which are apparently the observation and understanding of economic history, cycles are generalizations that (may or may not) emerge from the evidence.

A long time back I read The Kondratieff Wave, by James B. Shuman and David Rosenau (World Publishing, New York: 1972). In the preface the authors wrote of "a long wave that controls not only the economy but the way people act". In my notes on the book I wrote: "my problem with this is, the wave does not 'control the economy.' The wave is simply an observed phenomenon. The wave is a hint."

And again: On page 102 the authors wrote

The reasons for this shift [in federal budget deficits or surplusses counted by decade] are not difficult to understand if we understand the long wave and its influence on the economy.

And in my notes:

no, they have the wrong approach. The long wave is not a force unto itself which exists apart from the economy, and "influences" it. The long wave is simply observed to occur. The long wave is a hint.

I don't know why anyone would want to say that something caused the cycle or that the cycle caused something. It is much simpler than that: The things that occur accumulate into a pattern that may (or may not) be described as a cycle. If you want to know what the future holds, you can expect it to follow the same pattern as the past unless you recognize the historical pattern and its causes, and change the future.

At the Kondratyev Theory Letter, Eric Von Baranov writes:

I am torn here in explaining the cycle. One quickly gets to a chicken or egg situation where either new innovation defines the start of the wave or the limits to growth create the struggle for new innovation.

Von Baranov's hesitation is altogether appropriate. I don't understand why people think they always have to put causes on things. I say if you collect enough observations, you will find your conclusions among them. Cycles, like conclusions, arise from the evidence.

From eScholarship at the University of California, a paper of the title

A Spectral Analysis of World GDP Dynamics: Kondratieff Waves, Kuznets Swings, Juglar and Kitchin Cycles in Global Economic Development, and the 2008–2009 Economic Crisis

The paper provides some background:

A considerable number of explanations for the observed Kondratieff wave ... patterns have been proposed. As at the initial stage of K-wave research the respective pattern was detected in the most secure way with respect to price indices, most explanations proposed during this period were monetary, or monetary-related... Note that in recent decades such explanations went out of fashion, as the K-wave pattern ceased to be traced in the price indices after the 2nd World War....

Kondratieff himself accounted for the K-wave dynamics first of all on the basis of capital investment dynamics...

However, in the recent decades the most popular explanation of K-wave dynamics was the one connecting them with the waves of technological innovations.

This direction of reasoning was used by Schumpeter....

As for myself, I tend toward the monetary explanation.

A link I don't want to misplace, to Joshua S. Goldstein's The Predictive Power of Long Wave Theory, 1989-2004

Also, PDFs providing the full text of Goldstein's book Long Cycles: Prosperity and War in the Modern Age.

I spent only a few minutes at Goldstein's site. But this guy is good.

(Brushing it off) Like Lint

2011-12-05T04:00:00.001-05:00

From The Kondratieff Cycle: Real or Fabricated? by Murray N. Rothbard (1984):

Time is inevitably running out on the Kondratieffites. For there will be no Big Bang, no repeat of 1929. Pointing to problems in the economy, to stagnation, to stagflation, to falling commodity prices, to secular rises in the unemployment rate, while interesting and significant is not enough. It does not demonstrate the Kondratieff. After all, there are always economic problems. The point is that there is no permanent depression, and there is not, and will not be, any deflation.

How many years will it take before everyone sees that there has not been and will not be a "fourth peak"? And without such a peak, there can be no cycle.

The Domesday Book Online

2011-12-04T19:11:00.001-05:00

A taste of Life in the 11th Century:

Landholding and Feudalism

The system of landholding as portrayed throughout the Domesday Book was based on a rigid social hierarchy called the feudal system, imposed in England by William the Conqueror following his successful 1066 conquest. Rather than being owned, as is the case nowadays, land was held from a member of society higher up the social tree. At the top sat King William who granted land to tenants-in-chief - usually lords or members of the Church, in return for their assistance in the Norman Conquest. Next down the ladder came under-tenants who held land from the tenants-in-chief, and so it continued with the bottom of the ladder being occupied by peasants - villagers, bordars and cottars - who earned their opportunity to hold a small amount of land by working on the land of the lordship, and slaves, who held no land.

The basic unit of land in the Domesday Book is the manor; manors could be larger or smaller than just one village, but all consisted of land and had jurisdiction over the tenants. These were part of larger administrative subdivisions of land called hundreds (wapentakes in Danish areas of the country), which contained several manors and had their own assembly of notables and representatives from local villages.

"which correspond to the business cycle"

2011-12-04T04:00:00.000-05:00

From yesterday:

The longwave decline of interest rates (since 1981) displays a pattern of smaller peaks and valleys ~~which correspond to the business cycle~~.

See those crossed-out words there? They started as an afterthought, those six words. Then I stuck a "should" in there. Then I thought Well, it's easy enough to tell:

Graph #1: FRED GS10 Interest, Monthly (blue) & Annual (red)

Nope.

On the way up, the generalization applies. From the 1950s to 1981 it is quite evident that interest rates rise between recessions and fall during recessions. After 1981, that is quite evidently not the case. Also, 1974.

After 1981 interest rates fall during recessions and, except briefly, also fall between recessions.

Resistance is not Feudal

2011-12-03T12:00:00.000-05:00

Yet Robert was Ned's king now, and not just a friend, so he said only, "Your Grace, Winterfell is yours."

-- A Game of Thrones, "Eddard"

George Martin certainly captures the fealty and homage of the feudal relation.

Feudalism is a kind of order. Order is a property of the upswing of the cycle of civilization. Disorder is a property of the downswing.

Order can be seen in the movie Dune, in the structure of the society and the grandeur of the opening scenes.

Disorder can be seen in the Mad Max movies and in Waterworld. The gangs in these movies are too small and violent to be considered anything but gangs, and it is a long time before feudal order can arise. There cannot be a monetary economy again, until first there is order.

Such was the role of Alfred and Charlemagne, and of Grately.

Kimel writes:

So if you don't like the way the people that own the roads and the markets and the apartment you rent do business, you can't exactly up and leave without using their road or otherwise cutting across their land. And if they don't let you do it, well, you're breaking the law...

Reminds me of Grately, the law code imposed by King Athelstan around 930. In Domesday: A Search for the Roots of England Michael Wood wrote:

But no man now could be without a lord--so said Athelstan's Grately code. It was a symbolic moment, for in theory it embodied two central ideas: everybody could be brought to justice, and everybody could be taxed.

Grately brought order to society.

In Athelstan's time, power was concentrating but wealth was beginning to spread. In our time, wealth concentrates while power ebbs from the center.

Properties of the cycle.

Maybe something will turn up.

2011-12-03T04:00:00.000-05:00

Graph #1 (Graph #2 from yesterday's post)

The secondary peak in the interest rate lines up with the 1933 peak in the DPD.

In our time, interest rates are still falling. We have not got to the secondary peak yet. There will be real troubles when we do.

On the other hand, our debt has already peaked and is coming down. At the same stage last time (post-1933) the secondary peak was already behind us. Guaranteed: This difference is due to Fed policy since the crisis.

Whether we can sustain the low rates until debt has fallen to reasonable levels is another question entirely.

What am I, a philosopher now?

One other observation: The "indigo" band, the 1990-1993 drop in DPD, seems to be accompanied by attenuation of the minor peak in interest rates. Say again: The longwave decline of interest rates (since 1981) displays a pattern of smaller peaks and valleys ~~which correspond to the business cycle~~. It looks like there should have been one of those smaller peaks sometime in the 1990-93 period, but there was not.

I think the decline of DPD is the reason we missed that smaller peak.

Michael Hudson, historian

2011-12-02T19:13:00.001-05:00

Recommended reading: Debt and Democracy: Has the Link been Broken? by Michael Hudson, at NEP.

Plus, they get to write this off!

2011-12-02T12:00:00.000-05:00

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Oh, well. At least they have a sense of humor.

Longwave (3): Roy G. Biv

2011-12-02T04:00:00.000-05:00

Heck, I dunno. I do graphs with years on the horizontal axis and debt on the vertical.

I wanted to do a graph showing the relation between debt-per-dollar and Shiller's interest rate. Sort of like the Phillips Curve graphs that put inflation on one axis and unemployment on the other. No axis has years. I had to organize the data and create the graph a few times before I got a decent result.

Only decent. I was hoping to get pop-ups that identify the year of each point on the graph. Couldn't get that to work.

I did manage to break up the dots into color-coded chunks by date, as you can see.

Graph #1

Thing of it is, I don't know what to do with that graph. I have more confidence in my years-on-the-x-axis graphs. Like this:

Graph #2

But maybe something will turn up.

Playing the Numbers

2011-12-01T04:00:00.000-05:00

My father's birthday, today. Happy birthday, Dad.

Turns out, the "GS10" identification used for Robert Shiller's interest rate data is a FRED identification. Graph #1 shows monthly and annual patterns of FRED's GS10:

Graph #1: FRED GS10 Interest, Monthly (blue) & Annual (red)

I took the Shiller interest-rate numbers and condensed them to the January values only, for all the years in the Shiller file. Then I took annual values from the FRED GS10 as well. I combined the FRED numbers with Shiller's on the same graph. Graph #2 shows these together, since 1950:

Graph #2: Shiller Januaries (blue) & FRED GS10 Annual (red)

It's a toss-up. I guess you could even argue that Shiller's annual numbers (blue on Graph #2) look more like FRED's monthly values (blue on Graph #1) than FRED's annuals do.

I'll use the Shiller January numbers for the DPD comparison.

Shiller vs Shiller

2011-11-30T21:09:00.001-05:00

The Shiller interest rate numbers are monthly. Values after 1953 are from FRED maybe. Values before 1953 are calculated from annual numbers. Before 1953 the file contains numbers for January of each year, and calculated values for February thru December of each year. These calculated values produce straight lines from January to January, up until 1953:

Graph #1: Shiller Monthlies

The graph below uses only the January values from the same Shiller data:

Graph #2: Shiller Januaries

OMG!

2011-11-30T04:00:00.000-05:00

So I started looking at the Shiller file, and I saw stuff in there like this:

=B21*7/12+B33*5/12

What the... ??

Turns out, Shiller is taking seven twelfths of a previous actual number and adding it to five twelfths of a subsequent actual number, to calculate a monthly value. It is all like that, with a number for January of each year and calculated trend-values for the eleven intervening months, from 1871 all the way up to 1953. After that there are numbers for every month, rather than calculations.

Shiller is figuring points on straight lines that run from January to January. That's why the EconomPic graph appears relatively smooth (up to 1953), then jiggy:

Graph #1: 110 Years of Interest Rates (EconomPic)

In the previous post I wrote

Gotta go with annual, because otherwise I'm just making things up.

Apparently, sometimes it's okay to just make things up.

Okay. But instead of taking averages of Shiller's calculated values, I'm just gonna go with the actual values that are given for January of each year. That's definitely my plan for the numbers up to 1953. After that I could take averages of yearly values. But it would be easier just to go with the January numbers all the way through. We'll see.

Frequency Aggregation

2011-11-29T04:00:00.000-05:00

My DPD numbers are annual. I can go back to the 1940s or '50s with quarterly data, but before that it's all annual. So, annual it is.

Shiller's interest rate numbers are monthly. It makes for a spreadsheet with a lot of rows, something like 1600. Excel scrolls down well, but Google Docs goes at its own pace and you have time to see the numbers and notice whether they're increasing rapidly or not. While you wait.

That's not really the problem. The problem is that I want to compare the interest rate numbers to the DPD numbers on the same graph. So I need (or think I need) numbers with the same frequency: All monthly, or all quarterly, or all annual.

Gotta go with annual, because otherwise I'm just making things up.

So naturally I turned to Uncle FRED:

The FRED frequency aggregation feature converts higher frequency data series into lower frequency data series (e.g. converts a monthly data series into an annual data series). In FRED, the highest frequency data is daily, and the lowest frequency data is annual. There are 3 aggregation methods available- average, sum, and end of period.

The average, sum, and end of period aggregation methods all return lower frequency values with the same number of decimal places as the higher frequency values that are being aggregated. For example, a monthly series with values 100.1, 100.4, and 100.9 for the first 3 months of year is averaged to a quarterly value of 100.5 (i.e. 100.467 rounded up to 100.5).

FRED's GDP series numbers are quarterly, and when you convert them to annual, the default Aggregation Method is Average.

FRED's FEDFUNDS interest rate series shows monthly data, and when you convert them to annual, again the default Aggregation Method is Average.

I will therefore average Robert Shiller's monthly numbers to get my annual values.

FRED, I don't know what I'd do without ya.

The New Arthurian Economics

Private Debt 2012 (5): Consumer Credit

Debt: The Good, the Bad and the Ugly

What?

Now, I don't know how you would calculate this...

From Krugman's "Notes on Deleveraging"

Easy to See

What is the meaning of this?

Keywords

A little JKH paradigm riff

Just a touch of doublespeak

Whirring the fact

Notes on the Graeber interview

Private Debt 2012 (4b): "private-sector deleveraging"

Private Debt 2012 (4): When does private debt grow?

Brief note

August 15, 1971 and the "pendulum swing away from an economy based on hard currency to one based on virtual money, or credit"

Ke*n*

Almost forty years ago...

Karl Smith

Year of the Dragon

Never thought of this before

An Artist on SOPA

On the Table: "About" gibberish

"The economy" and "the economics"

Miss Construe and the seamless web

Private Debt 2012 (3): When does government debt grow?

"...persuading economists to re-examine critically certain of their basic assumptions..."

Tell Congress: Don’t censor the Web

The cause of the cause of the cause... of the problem

Are EU listening?

Personal Bankruptcies

Alexander Hamilton's "National Bank"

What is financial debt?

Stories

Private Debt 2012 (2): Does Size Matter?

The King's Treasure

What was it Keen said?

The Debt Problem: Speculation or Excess?

NFA?

An Interesting Summary

M1 is the money we use for income

Two dimensional thinking in a three dimensional world

The Blue Pox

Failed Banks - 2007 to Present

"Money and Social Possibilities" (2): What's in your wallet?

Debt and Real Growth

Don't know much about history...

Private Debt 2012 (1): Looks like thursday is Private Debt day

Even under a gold standard.

Stories help us understand life.

What's wrong with FRED

This is what's wrong with "NGDP Targeting"

Okay, I'm nobody

Hume

Happy New Year!!!

DeLong and Short of it

NYRs

Keen

Unexpectedly weak productivity growth

"unexpectedly strong productivity growth"

It's a start

Shocking answers

A Stronger Argument is Needed

Unit Labor Cost

Nuance++

Odious policy

Merry Christmas

RGDP: Annual Change and a 21-Year Moving Average

A Christmas Story

"The Meme that Refuses to Die"

Nuance??

The Interaction of Cycles

Evolution

"Money and Social Possibilities"

Before the "so"

Long Trends in Monetary Phenomena

EGADS!

TFA (suffix)

TFA

Ken