Imposes on itself (by design of policy)

Peter Martin:

If we add up the national debts of all the world's countries, subtracting any claimed surpluses, it reportedly comes to about $57 trillion.

Tom Hickey:

These morons apparently don't realize that all money is created by crediting and debiting accounts. Money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated the unit of account of that jurisdiction, so that all debt as someone's liability is someone else's asset, which nets to zero.

Since money is not only someone's debt (a payable) but also someone else's credit (a receivable), it is just as true to say that the world owns over 57 trillion in financial assets expressed in USD, as it is to say that the world owes 57 million in financial liabilities. Doh.

Marko at Peter Martin's:

The tautology of assets=liabilities isn’t hard to grasp or accept , but one is left with the feeling of “so what?”.

Exactly: So what. The fact that debts and credits are equal and "net to zero" does not mean there is no cost involved. The cost of debt does not cease to exist because debts and credits net to zero. The cost of debt only ceases to exist when the debts are paid off and the credits are actually zeroed out.


Peter Martin is talking about national debts -- the debt of governments. But it isn't so much the debt of governments around the world that is a problem. Private sector debt is the problem, because it directly impacts private sector growth -- which is to say, it impacts economic growth.

If you think debt is good for growth, I have to say you have the terminology wrong. Debt is what's left over, after the use of credit has had its beneficial effects on growth. Debt is the cost that offsets the benefits of credit use.

Funny thing is, if you follow Peter Martin's link, you see that the national debts of all the world's countries add up to about 57 trillion dollars. But if you look at just the U.S. part of that, and then add in U.S. private debt, you come up with more than 57 trillion dollars. The big part of this is a cost burden that the U.S. private economy imposes on itself.

This cost is the reason we cannot attain satisfactory economic growth.

What is Debt?

Debt is a measure of credit that has been put to use, and a record of required repayment.

Debt is a cost.

Greenspan bailed at the peak

From Wikipedia:

Housing bubble

In the wake of the subprime mortgage and credit crisis in 2007, Greenspan stated that there was a bubble in the US housing market, warning in 2007 of "large double digit declines" in home values "larger than most people expect". However, Greenspan also noted, "I really didn't get it until very late in 2005 and 2006."

Greenspan "got it" late in 2005, and bailed in January, 2006.

Did he retire? No:

He currently works as a private adviser and provides consulting for firms through his company, Greenspan Associates LLC.

He "got it" very late in 2005. He left the Fed on 31 January 2006.

Graph #1: The Dots Represent January 2006, the Month Greenspan Left the Fed

Quite a coincidence, huh?

// Via Random Eyes: http://newarthurianeconomics.com/fredbrowse/#50x

The metabolism of the economy

From my development blog, dated 31 July 2013, apparently never posted.

Krugman recently had two in a row on inflation and the politics of economics. I'll try to ignore the latter.

#1

July 29, 2013, 4:57 pm

The She-Devil of Constitution Avenue

I’ve spent five years and more watching the inflationphobes, who weren’t particularly sensible to begin with, descend into shrill unholy madness. They could have reacted to the failure of their predictions — the continued absence of the runaway inflation they insisted was just around the corner — by stepping back and reconsidering both their model and their recommendations. But no...

I’ve been saying for a long time that we aren’t having a rational argument over economic policy, that the inflationista position is driven by politics and psychology rather than anything the other side would recognize as analysis.

#2

July 30, 2013, 8:52am

Triumph of the Doves

When we first entered this crisis, economists and economic pundits quickly sorted themselves out into two camps. One camp — the “doves” — basically said, we’ve turned into Japan; we’re a liquidity-trap economy in which even large deficits won’t drive up interest rates and even huge expansion of the Fed balance sheet won’t cause inflation. The other camp said that we weren’t Japan, we were or soon would be Weimar, or maybe just the 1970s: high rates and high inflation were just around the corner.

These differing views reflected fundamental differences in economic models — differences that tended to be associated with political leanings, although there are a handful of politically conservative market monetarists out there.

And history has given us as decisive a test of rival economic theories as I’ve ever seen.

In the first couple of years, as the data kept coming in favoring the liquidity-trap view, I kept hearing accusations that those of us citing these data were “cherry-picking”, that the evidence was actually running the other way. I don’t hear that so much now — it’s just too obvious that the promised inflation and rate surge never materialized.

For me, the squabbling over who-is-right in economics isn't economics. It's politics. And it is the least interesting thing. I quoted those last few lines because of the last bit of it -- "the promised inflation and rate surge never materialized."

Sounds pretty final, doesn't it? "Never" is a long time. It might be too early yet to make that judgment call.

I did a post the other day...

By the way, in mine of 4 June I related the Depression-era increase of the monetary base to inflation. I made reference to "three massive spikes" of inflation in that era. You can see those three spikes, in red, on the graph below. Each spike occurs approximately eight years after the corresponding spike in the monetary base:

Graph #3: The Rate of Money Growth (blue) and the Rate of Inflation (red) 1925-1970

Eight years is a long time, certainly longer than I would have thought. But the economy was unresponsive in that era, and this could account for the eight-year delay.

There is a fourth blue spike on the graph, just a hump really, between 1950 and 1955. Perhaps it is related to the Korean War? Anyway, about five years later there is a red hump of roughly equal size. This time there is only about a five-year delay between the monetary inflation and the price inflation.

Why five years instead of eight? Perhaps because the economy was more responsive... because the economy was growing again.

Finally, beginning around 1960 there is another increase in the blue, the monetary base. And sure enough five years later there is an increase, a comparable increase in the red, in the rate of inflation.

I never looked at this before. The relation is remarkable. I suppose I should point out that the relation seems to break down by 1970.

But you know, I don't think the relation breaks down by 1970. I think time is relative, and the eight-year delay which turned to a five-year delay which turned into a much shorter delay is all part of some pattern that has to do with the "rat-race" or the metabolism of the economy or something like that.

During the Great Depression there was a huge lag. Some time later, the lag was only half as long. Later yet, the lag was practically gone. That's why Milton Friedman was evasive about lag time. He couldn't pin it down.

Mindset

On 6 March I started out looking at David Glasner's Why Fed Inflation-Phobia Mattered. Today I want to start out by dropping the topic of inflation. Not that it's not important. But the view that there is a causal relation between inflation and the quantity of money, reliable as it may be, is a conclusion. I want to look at "the policy stance of the Fed and the state of the economy" (Glasner's words) without immediately summing everything up in a single word.

The March 6th graphs showed a decade-long slowing of base money growth -- a slowing that occurred twice in the past hundred years. Two decades separated by seven show the slowing, and both of them ended in economic catastrophe. Here's the graph I linked at David Glasner's:

Graph #1: The Rate of Base Money Growth
A Repeating Pattern Emerges

Glasner pointed out that there was a drop in 2000, an increase in 2001, and then a long downtrend. The FRED graph shows it, and also shows a drop in 1921, an increase in 1922, and then a long downtrend. I downloaded FRED's "percent change from year ago" base-money values for Graph #1. I took the values for the 1920s and the 2000s and put them together so I could compare the two downtrends:

Graph #2: Remarkably Similar Downtrends

Glasner's long downtrend started at the end of the 2001 increase, in September, 2001. The previous long downtrend started at the end of the 1922 increase, in February 1923. Those two dates are aligned at zero months from the start of the downtrend on the X axis.

Remarkably similar downtrends.


What could be the source of this similarity? Could policymakers of the 2001-2007 years have simply been copying the policy of an earlier era? I don't think so. I think they were guided not by a desire to create another Great Depression, but by their own mindset. It is this mindset that Glasner brings to our attention in his "inflation-phobia" post.

Again, I will refrain from drawing any such conclusions. But I will say that the mindset at the Fed in the 2001-2007 must have been similar to the mindset at the Fed in the 1920s.

What mindset? Ask anybody -- they'll tell you pretty much the same thing Glasner seems to be saying: it was an excessive and unnecessary focus on inflation. Yeah, but ask a member of the deliberating body and they'll tell you it's a bit more complicated than that.

Maybe just now is not the best time for me to be saying such a thing, what with the recent release of FOMC transcripts. But it seems to me that there must be a lot of cherry-picking of those transcripts. ("I spiced up my summary by quoting from and commenting on some of the more outrageous quotes that O’Brien culled from the transcripts," Glasner writes.) Scandalous nugget-hunting. They're all doing it: Everybody's seeking the most scandalous nugget.

I'd say they are hypocrites, but I really think it's all just part of the mindset. It's like they can't help it.


What other elements of economic policy might be affected by this mindset? Well, besides monetary policy there is fiscal policy. Tax-and-spend policy. Tax-and-borrow, somebody called it. Really, it is taxing and spending policy, whether they do a lot or a little, and whether they balance the books or not. That's the "policy" part of it, making decisions about those things.

Anyway: fiscal policy.

In the first decade of the new millennium, monetary policy "tightened the screws" and gave us a downtrend in base money growth.

In the last decade of the old millennium, the Clinton years, fiscal policy tightened the screws and gave us a downtrend in Federal budget deficits -- fiscal policy.

Same mindset.

Similarly, in the 1920s, monetary policy "tightened the screws" and gave us a downtrend in base money growth. The same downtrend, only 80 years earlier.

In the same decade, fiscal policy tightened the screws and ran a budget surplus every year:

Graph #3: The Federal Budget, Balanced Before World War One, and in Surplus After

Same mindset.


In an essay titled Liberalism and Labour, given as a speech in 1926, Maynard Keynes said:

As things are now, we have nothing to look forward to except a continuance of Conservative Governments, not merely until they have made mistakes in the tolerable degree which would have caused a swing of the pendulum in former days, but until their mistakes have mounted up to the height of a disaster.

He said it in 1926, three, almost four years before the crash of 1929 and the Great Depression. How did he know?

The mindset. He recognized the mindset.

Personal Interest Income

Unless one is wealthy there is no use in being a charming fellow. Romance is the privilege of the rich, not the profession of the unemployed. The poor should be practical and prosaic. It is better to have a permanent income than to be fascinating.

- Oscar Wilde

Everybody wants a bigger nest egg. Everybody wants to be financially secure. Everybody wants to be wealthy. Sure. And when times get tough, everybody wants it more. And it only seems right that, if there are policies designed to help you get a bigger nest egg, to help you become financially secure, to help you build and maintain wealth, then we ought to embrace those policies and strengthen them, and cultivate them in every way possible.

That's how it seems, for sure.

Interest Rates: Up till the 1980s... Down thereafter.

Personal Interest Income relative to GDP: Up till the 1980s... Down thereafter.

Personal Interest Income relative to Compensation of Employees: Up till the 1980s... Down thereafter.

Personal Interest Income relative to Corporate Profits: Up till the 1980s ... Down thereafter.

Personal Interest Income relative to Monetary Interest Paid: Down till the 1980s and down thereafter.

Personal interest income declines as a share of monetary interest paid, as a rule.

The September 11th Response

Maybe not the same numbers, but certainly the same pattern

In Why Fed Inflation-Phobia Mattered, David Glasner writes

If you look at the St. Louis Fed’s statistics on the monetary base, you will find that the previous recession in 2001 had been preceded in 2000 by a drop of 3.6% in the monetary base. To promote recovery, the Fed increased the monetary base in 2001 (partly accommodating the increased demand for money characteristic of recessions) by 8.5%. The monetary base subsequently grew by 7% in 2002, 5.2% in 2003, 4.4% in 2004, 3.2% in 2005, 2.6% in 2006, and a mere 1.2% in 2007.

A quick check at FRED turned up the pattern Glasner describes:

Graph #1: Base Money Growth Rate, 1998-2008

And that graph reminds me of another. The pattern Glasner describes is one we have seen before:

Graph #2: Rate of Base Money Growth, and a Repeating Decline

Glasner argues there is a link between Fed policy and the Great Recession:

The point is that for at least three years before the crash, the Fed, in its anti-inflationary zelotry, had been gradually tightening the monetary-policy screws. So it is simply incorrect to suggest that there was no link between the policy stance of the Fed and the state of the economy.

The pattern Glasner identifies is a repeating pattern. The growth of base money declines until a bottom is reached, and at that bottom the "state of the economy" is best described as the onset of depression. This happened not once, but twice in the last hundred years.

No promises, but two from Reddit

For a long time, things that wanted to be written were waking me up in the wee hours. More recently, not so much. For the last month, the daily posting felt almost forced. Then I spent a week working on a 'real world' project in the garage, and now I've got nothing. No posts written and scheduled for a week ahead. And nothing seems worth writing about.

Not sure if it's just a matter of catching up, or if I should say the posting will be intermittent for a while. I like writing, and I think writing every day has made me better at it. So I want to keep up the daily thing. But I'm not making any promises.

Here are two posts I found on Reddit that just might be worth writing about:

Fixing Inequality Won't Hurt the Economy by Matthew O'Brien in The Atlantic. And the Reddit link.

Clarifying ‘Secular Stagnation’ and the Great Recession by Andrew Kliman at New Left Project. And the Reddit link, with my comment.