Nuanced Monetarism

In The General Theory, Maynard Keynes said

we can draw the line between "money" and "debts" at whatever point is most convenient for handling a particular problem.

In Capitalism and Freedom, Milton Friedman wanted

to carefully manage the quantity of money, but he didn't care what money was managed, what monetary aggregate. It didn't concern him at all.

According to Keynes, where you put the dividing line between money and debt depends on the problem you're trying to solve. According to Friedman, it doesn't matter where you put the dividing line.

Something must have caused it

Yesterday's post was too brief to be so thumbs-downish. I didn't feel good about that, and I want to take a longer look at Marcus Nunes's post today.

Marcus opens with an excerpt from Mian and Sufi that lays out their picture of "why the housing bubble tanked the economy and the tech bubble didn’t":

The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending. What about the tech crash? In 2001, stocks were held almost exclusively by the rich. The tech crash concentrated losses on the rich, but the rich had almost no debt and didn’t need to cut back their spending.

An interesting picture, from my perspective.

Marcus then quotes David Beckworth, who disputes Mian and Sufi's view. Beckworth admits "it is true there was far more U.S. household debt leading up to the Great Recession" than the 2001 recession. But he considers debt a symptom, not a cause. "In my view," Beckworth says,

the underlying cause was interest-rate targeting central banks running up against the ZLB... The failure by central banks to get around the ZLB caused most of the household deleveraging, not the other way around. Monetary policy, in other words, was too tight during the crisis.

Monetary policy was too tight, Beckworth says.

Relative to what?

I don't read much Beckworth so I don't know, but I imagine he'd say money was too tight relative to the needs of the economy.

To this straw Beckworth I must reply: That's not specific enough.

If money is tight, then obviously it is tight relative to the needs of the economy. But interest rates are at the zero bound. That's as loose as money can get. So the problem cannot be that interest rates are too high.

In the same David Beckworth post that Marcus Nunes quoted, Beckworth says

the real problem is the ZLB. Debt, itself, is not the problem. This is because for every debtor there is a creditor who could provide offsetting spending if the interest rates adjusted down to their natural rate level. This adjustment process is impeded when the natural interest rate is negative since nominal interest rates cannot go below zero percent.

Now, Steve Roth responds to the "for every debtor there is creditor" part of that. I think it's the best banks are not intermediaries argument I've ever seen. But I'm going to skip right over it, because I have a different concern.

Beckworth says debt only became a problem because "the natural interest rate is negative". Okay, but why is the natural rate of interest negative? Sunspots?

C'mon, David. Something must have caused it.

Interest rates are as low as they can go. We can't fix the problem by lowering rates more. So it's obvious to me that the problem is NOT that interest rates are too high. The problem is NOT that money is too tight. There must be some other problem, that is related to money and interest rates.

That problem is debt: excessive private sector debt.

Look: Lowering interest rates did fix the problem, before we got to the ZLB. It worked by making credit less expensive. Other people may offer complicated explanations, but if you lower interest rates you make credit less expensive.

But now we've reached the lower limit and credit is still too expensive. That's Beckworth's argument I think. So, suppose it's true. How can we make credit less expensive when interest rates are low as they can go?

Let me ask the question another way: How can we make total debt less expensive, without lowering interest rates? Only one way: Reduce the size of total debt.

The trouble is, we need some interesting new economic policy to make it happen. Because as things stand now, the only way available to us to reduce the size of total debt is to pay debt down. And paying debt down takes money out of circulation. And then you get the situation where interest rates are at the zero bound and money still seems too tight.

17 May 2014 EDIT: Changed "Other people may have complicated explanations" to "Other people may offer complicated explanations"

Marcus comes up empty

Marcus Nunes:

The fact is that in after 2007 the poor man was doubly penalized. On the one hand his nominal income took a plunge and insult was added to injury when his job was taken away! The chart compares nominal income growth (NGDP) during the two cycles. Is it hard to see why consumer spending (and all the other components of GDP) and employment crashed?

The chart shows a big drop in Nominal GDP during the Great Recession.

Looking at that big drop, Marcus says it is easy to see "why consumer spending (and all the other components of GDP) ... crashed".

Marcus says, in other words, that the reason all the components of GDP crashed is that GDP crashed.

Sir, that explains nothing.

One interesting thought

Gavin Kennedy: A metaphor is a metaphor

GK at Adam Smith's Lost Legacy :

In treating a metaphor as a real entity which they believe actually operates in society you end up with fantasies. When these fantasies are believed by economists, including Nobel Prize Winners, you leave reality and belittle claims to economics being a science.

Fungal Inflation

Kinda makes you miss the good old days when we didn't need the fungus excuse to raise prices. Oh, sure, there were newsworthy shortages of toilet paper and sugar and Cabbage Patch dolls, back when. But at least we didn't have to worry about the Cabbage Patch fungus.

Myth in 'The Myth of the Great Moderation'

From a five-minute video you can see at Lars P. Syll... naked capitalism... heteconomist... EconoMonitor...

Syll says "Just watch it", but I can't. I have to say something. When I see something wrong, I have to say something. Don't you?

Here's a snapshot from the video:

Third item on the lists says there was a change from "wage-led growth" to "debt-led growth". I have trouble with that. It suggests new borrowing grew significantly faster in the later period. But that's not correct.

Back in March, at New Left Project, Andrew Kliman evaluated Sam Gindin's take on the global economic crisis. Kliman wrote:

According to Gindin, workers’ incomes stagnated as their wages declined or grew slowly. This not only boosted profits but also contributed substantially to the growth of the financial sector as workers became 'dependent on credit' in order to keep their standard of living from falling. In particular, they 'came to depend heavily on their homes as collateral for borrowings.'

However, although Gindin cites a lot of data elsewhere in his article, almost no hard evidence accompanies this account of capitalism under 'neoliberalism,' and the hard evidence fails to support much of it. Since something like this account has become conventional wisdom among much of the Left, it is important to review the facts in detail.

According to Kliman, the "conventional wisdom" is not correct. He says

the share of personal consumption spending funded by consumer credit––i.e. all household borrowing except for home mortgages––did not rise over time. In other words, consumption did not increasingly come to depend on consumer credit.

Consumption did not increasingly come to depend on consumer credit.

That assertion of Kliman's stopped me cold the first time I read his article. It should make you stop, too. It should make you second guess yourself, as it did me.

Well, maybe you don't like second guessing yourself. But I'm pretty sure you do like this: the Fisher Dynamics of household debt. As Mark Thoma said,

this research knocks a hole in the story that it was lack of self control ... that caused the increase in household debt prior to the financial crisis

When Thoma says it wasn't a lack of self-control, he means it wasn't increased borrowing that caused debt to increase. At Thoma's link, JW Mason summarizes the research:

It’s a well-known fact that household debt has exploded in recent decades, rising from 50 percent of GDP in 1980 to over 100 percent on the eve of the Great Recession. It’s also well-known that household borrowing has increased sharply over this period. ... In fact, though,... while the first [of these] is certainly true, the second is not.

Mason says the same thing as Kliman: We think consumption increasingly came to depend on credit since 1980, but that's not correct.

Now you have to stop and think.

Now you have to take a step back from the conventional wisdom. Doesn't matter how cute that five-minute video was.

We have to get this right.

Debt grew faster after 1980 than before, not because of an increase in borrowing, but because of the disinflation.

Squaring the circle

From The world economy may well be stuck in neutral for years:

It is now nearly seven years since the start of the financial crisis, yet despite growing evidence in America and Britain of a return to relative normality, something remains profoundly broken at the heart of the world economy. One manifestation of this – much discussed among the officials, finance ministers and central bankers gathered in Washington this week for the spring meeting of the International Monetary Fund – is the persistence of unnaturally low interest rates...

Very low interest rates are, in essence, the natural corollary of a stagnating economy.

Money has rarely been as abundant and cheap, but there is nowhere productive for it to go.

Unfortunately, no meaningful way of squaring the circle is offered.

"Money has rarely been as abundant and cheap, but there is nowhere productive for it to go."

That's not quite right. There is nowhere profitable for the money to go in the productive sector. That's what they mean, I think. But it's not what they said. And being unclear on that small point is the reason there seems no way to square the circle.

There's too much money in finance. Not enough money is spent out of finance. Basically, not enough money is pissed away. Money that you piss away is how other people make a profit. If you refuse to do anything with your money other than count it, nobody can profit at your expense.

If the people with all the money all hang on to it, nobody can make a profit. As long as nobody can make a profit, there is nowhere profitable for money to go. And when there's nowhere profitable for money to go, people say things like "there is nowhere productive for it to go."

Maybe the problem is excessive debt.

Syll quotes Roger Farmer:

The NK economist accepts Milton Friedman’s concept of the natural rate of unemployment which asserts that, in the long run, there is a unique equilibrium level of unemployment associated with stable inflationary expectations. If inflation appears, following a recession, a policy maker who accepts NK economics will infer that the economy is operating above potential. If unemployment is now 6%, rather than 3%, it must be that the natural rate of unemployment has increased.

Okay, but why has the natural rate of unemployment increased? Sunspots?

C'mon, Jack. Something must have caused it.