Traveler's Checks

The Wikipedia Money supply table here lists traveler's checks as a component of M1 money.

You see it at FRED, too:

M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits...

I finally got tired of seeing traveler's checks listed as a component, and not knowing how significant a component it is. So I interrupted myself and graphed the thing:

Graph #1: Traveler's Checks as a Percent of M1 Money

Around 1980, traveler's checks peaked at less than one percent of M1 (money in circulation). Currently, less than twenty cents of every hundred dollars is in the form of traveler's checks.

Bill Mitchell, open-ended

Bill Mitchell:

There should be a plan to reduce unemployment and promote sustainable growth. Whatever the deficit that results once those goals are achieved is the appropriate outcome.

Whatever deficit we end up with is appropriate? I can't believe he said that! What if we are doing something wrong?

What if there is a contradiction between our assumption that printing money causes inflation, and our assumption that using credit is good for growth?

We might unwittingly decrease the money in people's checking accounts and increase the velocity of circulation. We might unwittingly cause an increase in the reliance on credit. We might unwittingly increase financial costs to the point that they hinder growth. We might see growth hindered, and do even more to encourage credit use.

We might have little success with our policies, and we might end up with lots of debt.

In such an environment, the one thing that must be done above all is to correct our flawed and conflicting assumptions. Until we do that, not even Bill Mitchell can design good policy.

Something old, something new

1. The problem is excessive private sector debt.

2. Bloomberg: EU Approves Jobs, Growth Plan With 10 Billion-Euro EIB Boost:

European Union leaders approved a 120 billion-euro ($149 billion) plan to promote growth in the 27-nation bloc that includes a capital boost for the European Investment Bank.

The government chiefs agreed on a 10 billion-euro capital increase for the EIB today as a centerpiece of the long-term growth plan...

“The growth agenda is a sign of our unrelenting commitment,” EU President Herman Van Rompuy said in a press conference in Brussels...

The Luxembourg-based EIB could use its capital infusion to increase its lending capacity by 60 billion euros and unlock 180 billion euros of additional investment, according to EU estimates.

With the extra capacity, the EIB can keep expanding its efforts to finance EU infrastructure projects. In January, the bank said it was on course to gradually return to pre-2008 lending levels...

Hoyer said the extra 180 billion euros in investments would take place between 2013 and 2015 if the EIB gets the extra capital, in an interview published today in Les Echos. Over the next three to four years, the EIB could make additional loans...

3. Yes, growth depends on the use of credit. But we already have lots of credit in use. We call it "debt". And it does not help us grow. Only *new* uses of credit help us grow. Old, existing debt is the counterbalancing hindrance to growth. We have so much old debt now that the new uses of credit have to be very very big or they are not effective. Thus we see massive Federal deficits and little economic recovery.

4. What we should have done for the 60 years before the crisis is the same that we must do when at last our economy recovers: We must use credit for growth, for that 3% or 4% or 5% of GDP increase we hope to achieve each year. Clearly, this kind of growth does not require debt to be 350% of GDP. 20% should be plenty. 50%, if we want to have a lot of financial assets.

5. The cause of the problem is excessive private sector debt. The solution is to reduce that debt. Until we reduce private debt, there can be no solution.

Lessons

The increase of GDP in Japan has been below the norm since the early 1990s, as this graph from Thought Offerings shows:

Graph #1: GDP (Japan) Flat since the Early 1990s

The response of the monetary authority was to increase money. You can see it in M1 relative to GDP:

Graph #2: M1/GDP (Japan) Rising since the Early 1990s

The ratio starts out low, but begins to rise just as GDP growth goes flat in the early 1990s. At its high point, the ratio is greater than one: The quantity of money M1 increased until it surpassed GDP.

Lesson 1: No recovery was created by increasing the money.


Despite the manipulations of money, debt in Japan remains high:

Graph #3: GDP (red) flat, M1 (blue) rising, Debt (yellow) above all

From McKinsey, via the Thought Offerings post, a breakdown of Japanese debt by sector. As hbl notes at Thought Offerings, "public debt expansion has exceeded private debt reduction":

Graph #4: Components of Japanese Debt

The graph shows household and financial debt roughly stable since the late 1980s. It shows nonfinancial business debt stable until the late 1990s, then declining.

And it shows government debt increasing more and more since GDP went flat. As one reads in the Manifesto that I did not sign,

government debt [in Japan] now exceeds 200% of annual GDP

All of that increase in government debt has not restored the Japanese economy, even after 20 years and more.

Lesson 2: No recovery was created by replacing private debt with public.


It didn't create inflation, either. Neither the money increase nor the government debt increase created inflation.

Those changes created neither the raging inflation that many people warn of, nor the "bit" of inflation many see as a way to "erode" debt.

Graph #5: Inflation in Japan (Source: Trading Economics)

Lesson 3: There was little or no "erosion" of debt by inflation.


Lesson 4: Try debt forgiveness.

Robert "Norquist" Barro

The dickish Wall Street Journal now demands that you subscribe, or it won't show you the story you came to see. So I have to go back to Noah for this Barro quote:

To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies.

I'm looking at this: "especially clarity about future policies".

Barro is saying we should tweak tax rates and regulations one last time, and never fiddle with them again.

Perhaps he should ask economists and policymakers to sign a pledge promising never to consider any policy but his. Which leads me to ask a question:

What, then, is economics for?

Noahbot

((Oops, i had it saved in draft mode. Now it's late.))

From Robot Barro? at Noahpinion:

After relying on the dubious hypotheses of C. Mulligan to diagnose the slow recovery, Barro offers his prescription (and it is here where I really become annoyed):

To achieve a real recovery, government policy should focus on individual incentives to work, produce and invest. Central here are tax rates and regulations, including especially clarity about future policies. In a successful policy package, the government would get its fiscal house in order and make meaningful long-term reforms to entitlement programs and the tax structure.

So, basically, the recommendation is "the exact same bunch of policies that Republicans have been pushing on America without pause since the days when people listened to 8-track tapes." Cut taxes, cut spending, deregulate. Cut taxes, cut spending, deregulate. Cut taxes, cut spending, deregulate. Cut taxes, cut spending, deregulate. We get it!

So now it's time for me to haul out all the old counterarguments to the standard Republican program.

Perhaps Noah should haul out some new arguments. But if you don't mind, I'd rather talk about "individual incentives to work, produce and invest."


I don't know much about microeconomics. But I know it interferes with macro.

Hey, I'm an "individual". You don't see me at "social network" sites. You don't see me parroting Rush Limbaugh or Paul Krugman or Keynes, or anybody. The guy I agree with most -- Steve Keen -- I don't even go to his site, so as not to confuse my own thinking with his. I am an individual.

You can do everything in your power --

No, scratch that.

Let's push the magic button and pretend for a moment we can do everything that everyone says we ought to do to fix the economy. We can increase taxes and cut taxes, we can spend more and spend less, we can regulate and deregulate, all with no conflict and no contradiction. Magic, remember. So, what?

So, all of it is micro. All of it affects the players, or the "economic actors", or the "individuals". This is after all the whole point of Barro's prescription. And Noah agrees with it: "I mean, I like 'individual incentives to work, produce, and invest'. That sounds awesome to me; sign me up."

All of it is micro. None of it is designed with an eye on macro balances.

I always talk about the quantity of circulating money and the accumulation of debt and the ratio of these two numbers. People object. I think people object because I'm not doing micro: I'm not talking about individuals.

I am one, remember?

There is no economy composed only of individuals. The economy is transaction. The economy only exists when individuals meet, agree, and exchange things of value. The individuals are the actors, or the transactors I guess. The place where they meet and agree and exchange things is the economy: the macro environment.

No matter how many wonderful incentives you create for individuals, if you put those individuals in a bad economic environment, the outcome will be disappointing.


An example: Economists fail to see the danger of debt accumulation. Why?

"[O]ne person’s debt is another’s asset," Krugman says. Krugman is looking at debt as merely an agreement between two individuals. In such analysis there is no possibility that debt can become excessive. How could it? Surely, no amount of debt these two generate could be enough to create troubles for the economy! Oh, they may hurt themselves, but they cannot harm the economy... But what if there is an environment of too much debt?

You know the answer.

Survivor Bias

From Pommygranate: Ten Things You Should Know About Hedge Funds:

In order to keep the client money rolling in, HFs have to show to the world that they really do make outsized returns. Hence these ever ingenious folk have come up with a unique concept - 'survivor bias'. This means that the HF Indices showing overall returns exclude those HFs that have gone bust (about 1 in 5 each year) so bolstering the average returns. Neat, huh?

I looked it up. Investopedia says

Definition of 'Survivorship Bias'
The tendency for mutual funds with poor performance to be dropped by mutual fund companies, generally because of poor results or low asset accumulation. This phenomenon, which is widespread in the fund industry, results in an overestimation of the past returns of mutual funds.

Also known as "survivor bias".

And Wikipedia:

Survivorship bias is the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that didn't because of their lack of visibility. This can lead to false conclusions in several different ways.

In finance, survivorship bias is the tendency for failed companies to be excluded from performance studies because they no longer exist. It often causes the results of studies to skew higher because only companies which were successful enough to survive until the end of the period are included.

Finally, Freakonomics:

Think of the Dow Jones Industrial Average, which indexes the stock prices of 30 of the largest and most important U.S. companies — until, that is, one of said companies does so poorly that it is booted from the index and is replaced by a company that’s doing better.

Over time, therefore, the DJIA reflects a different reality than many people presume. It is biased toward survivors...

History is written by the winners. To the victor go the spoils.

Breaking News: Computer Glitch Wipes Out Private Debt

Problem solved.

Untended, this pattern will repeat...

From mine of 3 December 2011:

Graph #1: The Interest Rate (black) and Debt-per-Dollar

1921: After a long increase, the interest rate peaks and begins a long decline.

A decade or so later, Depression. The Debt-per-Dollar ratio peaks and begins a long decline.

A dozen years or so later, interest rates and the DPD both reach a bottom and begin another long increase.

1982: The interest rate peaks again, and begins another long decline.

26 years later, the debt-per-dollar ratio peaks again. Again Depression, and another long decline.

Untended, this pattern will repeat until it destroys the political entity responsible for the US Dollar.