They are all going up again

The replacement for NCBTCMDODNS

It's a mouthful, NCBTCMDODNS. I think of it as NCB...TCMDO...DNS: Nonfinancial Corporate Business... TCMDO... Domestic Nonfinancial Sectors (with TCMDO being Total Credit Market Debt Outstanding -- or whatever nomenclature has replaced that, this week).

No matter. It's defunct. It's (DISCONTINUED), as FRED puts it. So you don't want to go there.

But I do want to go there. I need the data.

It's okay. There is a replacement for the discontinued series. I finally found it: BCNSDODNS.

It's not a TCMDO series; it's a "dodness", a DODNS. It's BCNS DODNS. I play these name games to help me remember. BCNS, I guess that stands for Business Corporate Nonfinancial Something.

(I made that up.)

I'm documenting the thing so I can find it again the next time I need it.

BCNSDODNS is the replacement for NCBTCMDODNS

Changing the world

Let me repeat part of what I said last time:

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

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

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

I shouldn't have to write another sentence. You should know what I'm thinking: Paying down debt is a way to keep prices from going up.

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


Everybody and his relentlessly unimaginative brother is focused on interest rates. We argue always about how soon to raise rates and how much to raise them, but no one ever considers just turning away from interest rate policy. Rates must go up, or they must not, we say, and say not another word about it. Relentlessly unimaginative.

We cannot solve our economic problems by choosing between raising and not raising interest rates. We have squeezed the life out of our economy. We have raised rates to reduce inflation and lowered rates to get growth, then raised again and lowered again, and repeated this insanity until until no gap remains between too little growth and too much inflation. We squeezed the gap to nothing, then squeezed some more. And now we try to have inflation and we still don't get adequate growth.

Using interest rates to manage the economy is no longer an acceptable strategy. We can no longer rely on this ready-made solution. We need a different way to fight inflation, one that can become the new standard solution to this economic problem.

I need you to understand the significance of what I'm saying. I want us to stop doing a thing that everyone thinks is the only way to fight inflation. I want to fight inflation a different way.

I want to change the world.

The promise of vigor

(Not investment advice. Policy advice.)

In March I wrote

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

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

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

In April I wrote

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

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

How's Things?

It is now July. Marcus Nunes on the 14th of this month quoted The Wall Street Journal of the same date:

Could the cause of the next U.S. recession be too much growth? That is one risk of an unprecedented environment in which investors are betting heavily on a perpetually weak economic expansion.

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

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

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

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

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

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

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

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

I'm being polite, Olivier.

Oh, and then this:

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

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


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

Graph #4: The Fall and Rise of Household Debt Service Payments

Financial costs have fallen from 13% to 10% of Disposable Personal Income. And now consumers have 3% of DPI to play with. Look at the extreme right end of the blue line on the graph: The line is starting to go up again. Already.

That's an unmistakable sign of growth.

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

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

Here's Izabella Kaminska:

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

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

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

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

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

Dealing with Inflation

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

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

Blanchard says we cannot wait:

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

Smoke clears quickly. Blanchard wants to raise rates soon.

It's nice that he and I agree on Brexit: The panic was uncalled for. But you can see Blanchard is just itching to raise rates. He wants to raise rates to constrain growth even before there is inflation. A year before there is inflation, the WSJ suggests. Therefore I must say to Mr. Blanchard the same that I said to Mr. Summers:

We need interest rates low to get economic growth so that we can raise interest rates and undermine that growth. This is your plan for the economy.

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

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

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

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


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

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

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

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

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

BOE: Broad and Narrow Money

FRED has been busy:

FRED has added 127 series from the Three Centuries of Macroeconomic Data research project published by the Bank of England. These data cover national accounts and other financial and macroeconomic data in the United Kingdom going back to the late 17th century.

Going back to the late 17th century. This I love. A first look:

Graph #1: Broad Money (blue) and Narrow Money (red)

Mostly invisible before the 1970s. And pretty much like the US, narrow money starts going up like crazy just as broad money starts to fall.

Here is the ratio:

Graph #2: The Ratio of Broad to Narrow

Quite a hump there, beginning around 1960.

The ratio runs close to five-to-one for 80 years, suddenly starts going up around 1960, suddenly runs into trouble around 1990, and suddenly starts to drop around 2006.

Remarkably, when it falls, it falls right back to where it was for the 80 years before 1960. I wish we could say everything is back to normal now. But that's probably just what the BOE was thinking when they decided to slow the growth of narrow money. It's probably why they picked the five-to-one level to normalize narrow money growth.

I wonder how the graph looks if we chop off the big increase and look at what's left.

Graph #3: The Ratio of Broad to Narrow, before 1970

At the start, zeroes before 1880. At the end, tight to the "5" line from the end of 1955 to the end of 1961, then suddenly starts the increase that we saw on Graph #2.

Other than that: a high point in 1889 and a low in 1896; a sudden drop in 1914; an increase beginning in 1925 with peaks in 1932 and 1936; and a low point in Q1 1946. The highest point occurs in the 1930s, where the ratio almost reaches 6-to-1.

In 2006 it was more than 32-to-1.

A thing we knew in '62

If you want to get productivity up, shoot for full employment.

Hold the presses. The posts I have scheduled for Wednesday and Thursday have to get pushed back 24 hours to make room for this.

There is a PDF floating around, used to be at the Cowles Foundation at Yale but it's not there now...

Got it.

seven pages... Potential GNP: Its Measurement and Significance by Arthur Okun. First published in 1962, it is the original source of Okun's law.

I love these old studies, from back when econ hadn't yet gone bad.

Anyway, Okun has something on page six, something about productivity. Something too important to get lost in the bitstream.

Okun writes:

The record clearly shows that manhour productivity is depressed by low levels of utilization, and that periods of movement toward full employment yield considerably above-average productivity gains.

If you want to get productivity up, shoot for full employment.

Splashing on populism like aftershave

At the Financial Times, Voters deserve responsible nationalism not reflex globalism by Larry Summers. The subtitle's a tingler: "Agreements should be judged not by how many barriers are torn down but whether people are empowered". Larry Summers, splashing on populism like aftershave.

The opening gambit:

It is clear after the Brexit vote and Donald Trump’s victory in the Republican presidential primaries that voters are revolting against the relatively open economic policies that have been the norm in the US and Britain since the second world war.

Relatively open, compared to what?

It's not slightly open or reasonable open policies that people find objectionable. Trade policies after the second world war were reasonable and somewhat open. That is no longer the case. What we have now is forced-open policy, policy to delight the global megacorporation. Policy to submerge national sovereignty in a flood of claims that expanding free trade will improve the economy.

Whose economy? The global megacorporation.

Mimesis is the sincerest form of flattery

Excerpts from D.C. Somervell's two-volume abridgement of Arnold J. Toynbee's A Study of History

In a growing civilization a challenge meets with a successful response which proceeds to generate another and a different challenge which meets with another successful response. There is no term to this process of growth unless and until a challenge arises which the civilization in question fails to meet--a tragic event which means a cessation of growth and what we have called a breakdown

In our civilization, the challenge we fail to meet is -- well, one of them was the Great Depression. Before the Great Depression, the Long Depression. More recently, the so-called Great Recession. A repeating (almost rhythmical) economic challenge.

Toynbee continues:

Here the correlative rhythm begins. The challenge has not been met, but it nonetheless continues to present itself. A second convulsive effort is made to meet it, and, if this succeeds, growth will of course be resumed.

The great depressions of the capitalist era are the rhythmical challenge which we have failed to meet.

Rather than dealing with the monetary imbalances arising from extreme inequality, the dominant minority attempts to solve the problem by imposing globalization on the world. This solution fails.

The nature of the breakdown can be summed up in three points: a failure of creative power in the creative minority, which henceforth becomes a merely 'dominant' minority; an answering withdrawal of allegiance and mimesis on the part of the majority; a consequent loss of social unity in the society as a whole.

Mimesis: the deliberate imitation of the behavior of one group of people by another as a factor in social change.

When the U.S. was doing well, our policies were imitated everywhere:

By growing 5% in real terms, the U.S. experienced a sharper expansion than any other major nation. Even the most optimistic forecasts for 1965 turned out to be too low... Figuring that the U.S. had somehow discovered the secret of steady, stable, noninflationary growth, the leaders of many countries on both sides of the Iron Curtain openly tried to emulate its success.

- Time Magazine, 31 December 1965

These days, not so much. These days, it seems terrorist groups inspire the most mimesis. Meanwhile, Britain wants out of the EU, Scotland wants out of Britain, Quebec wants out of Canada, and Texas wants out of the USA.

Withdrawal of allegiance and mimesis.

fdhbfr

You thought it was gibberish didn't you, the title. But it snot.

f = Federal
d = Debt
h = Held
b = By
f = Federal
r = Reserve

Those six letters make up most of the series name for two data series at FRED:

I checked the check boxes for both series and clicked Add to Graph. Result:

Graph #1: FDHBFRB and FDHBFRBN at FRED

I'm in a mood, so you get the default shape of the graph as demented by FRED.

There's that big up-thing on the right there, what with the crisis and all. I don't care about the big up-thing. I'm gonna cut it off like a finger in a gory movie.

Graph #2: FDHBFRB and FDHBFRBN thru 2007

Now there's not so much that's interesting to look at, except what I want you to look at. Bumps. One bump between 1985 and 1990, and one that seems to peak at 1995. Goose bumps: The Fed was goosing the economy.

I'm gonna go in and edit the graph and set the units to "Percent Change from Year Ago" for both series. So we can see the growth of Fed holdings of Federal debt.

Well shit. I did that, the graph changed, and the cut-off-finger years magically re-attached themselves to the graph. (The graph ends at 2016 again, not 2007 like I want.) So I cut them off again:

Graph #3: Percent Change from Year Ago for the Data Shown on Graph #2

There. Maybe you can see a hump centered between 1985 and 1990. And the second hump between 1990 and 1995. Yeah but there's humps all over the place. I have to move the data to Excel.

Odd, isn't it, how "bumps" changed to "humps" when the graph changed from "Billions of Dollars" to "Percent Change from Year Ago".

Number one, I want to take the two data series and average them together. That way I end up with one data series for the period shown.

Next I want to take and put a Hodrick-Prescott on it, to improve the visibility of the trend in the data.

Done. And it came out better than I expected:

Graph #4:Average of the Two FRED Series (blue) and the H-P Trend (red)

An H-P high around 1966, another high in late 1985, one in 1993, and one in 2002.

//

Okay. This being Saturday, the wife made me breakfast. I came back to the computer an hour or so later, ready to double check the dates of those four highs in the H-P trend line.

Nothing. No Excel file. It's gone. Where the hell is it?

Not on my desktop (where I put everything).
Not in my downloads folder. I didn't download the data from FRED.
Not on the list of recent files in Excel.
Not on the list of recent files in the Windows menu.

Where the hell is it? I know I created the file: I used it to make Graph #4.

Oh you know what? It probably got saved where Excel files go when you choose to open them rather than downloading them.

Like that. So, where does the file go when you "open with" like that? I have to do another one to see. Open it and check the path.

The Temp folder. It goes to the Temp folder in the Local folder in the AppData folder in my folder in Users. If I can remember all that.

So what's in the Temp folder?

Looking for an Excel file... not the first one... the second one I think.

Copy to Desktop.
Open.
Yeah that's it. The source for Graph #4 is there. Got it. Okay. I must have forgot to save the thing to the desktop immediately after I opened it, and it went to the default place. Temp.

You thought it was a virus, didn't you.

//

What I want to do now, I want to look at Real (inflation-adjusted) GDP and RGDP per Capita, percent change of these:

Graph #5: Percent Change from Year Ago for RGDP per Capita (blue) and RGDP (red)

I want to download the data, average the two together (as I did above) and figure the Hodrick-Prescott for it.

Graph #6: Average of the two RGDP Series (blue) and the H-P Trend (red)

Okay.

Now we're getting to the good stuff. (I have not seen it yet, myself.) I want to take the Hodrick-Prescott from Graph #4 (Fed Holdings of Federal Debt) and put it on a graph with the Hodrick-Prescott from Graph #6 (RGDP). This will let us compare the growth-rate trends.

So this next graph shows the H-P for Fed holdings of Federal government debt, in blue. And it shows the H-P for RGDP growth, in red:

Graph #7: H-P Trend from Graph #4 (blue) and H-P Trend from Graph #6 (red)

I would want to argue that RGDP responds to changes in Fed holdings. Looks like there are some timing issues to deal with. Variable lags. But my day's energy is all used up and I don't want to get into it now. Maybe another day.

I will say only that the blue line shows policy, and the red shows the result of policy.

// (afterthoughts)

The constant used in the H-P calculations is 1600; all data are quarterly.

Here's my Excel file. Note, the file contains Kurt Annen's VBA code for the Hodrick-Prescott.