I know what I said yesterday

Yesterday I said the graph speaks for itself. Today I'm going to talk about it anyway.

Graph #1: Economic Growth is better when the Private/Public Debt Ratio is Low

The trend line of RGDP growth varies from above four percent (when the debt ratio is low) to below two percent (when the ratio is high). So I was wondering: What would RGDP look like if we had pegged the debt ratio at a reasonably low number, say 2.5%.

RGDP would have been generally higher. How much higher? Something like this:

Graph #2: With a Reduced Private Debt Burden, GDP Growth Increases

Speaks for itself.

Speaks for itself

George Selgin on abolishing the Fed

From On Free Banking, Monetary Rules, and Crusades:

In a fiat system free banking ceases to be a straightforward alternative to, or substitute for, central banking. That's so because the monopoly bank of issue is now responsible, not just for issuing paper currency, but for supplying the economy's standard money. There is, in other words, no monetary standard apart from that embodied in the central bank's liabilities. A "standard" U.S. dollar today is no longer a quantity of silver or of gold; it is a one-dollar Federal Reserve Note, or a one-dollar credit on the Fed's books.

It follows that, to simply abolish the Fed, in the strict sense of liquidating it (that is, parceling-out its assets to its creditors, and destroying and retiring its paper liabilities), would be tantamount to abolishing the U.S. dollar itself. Though it's still possible, and perhaps even likely, that some sort of new new banking and currency system would arise, that development would have to be accompanied by the prior or concurrent development of a new monetary standard or standards — a potentially fraught proposition. Some may well be willing to risk such a radical change; but no one could predict its results with any degree of confidence.

 

John Cochrane on the gold standard

From Next Steps for FTPL:

No gold standard has ever backed its note issue 100%; and none has even dreamed of backing its nominal government debt 100%. If a government had that much gold, there would be no point to borrowing.

Well, there’s your problem

Way ahead of ya, Steve!

I don't make predictions because I'm always wrong. But it seems the only way to get attention is to make a prediction and turn out to be right. And if ever there was a time for making predictions, this is it. Almost everyone is expecting another recession or crisis and recession. And even Steve Keen says the U.S. cannot have a sustained credit boom comparable to what we saw after World War Two.

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.


Back in December 2012 I made a comparison of private debt around the 1929 peak and around the 2008 peak:

Graph #1

From the 2008 peak I could only go forward three years to 2011.


Steve Keen shows this graph comparing U.S. private debt reduction since the recent crisis (black) to U.S. private debt reduction during the Great Depression (blue):

Steve Keen's Figure 9: Reduction in Private Debt since Peak Level

Sorry, the image lost quality when I re-sized it. The x-axis label says "Years since peak debt ratio" and the numbers go from 0 to 20 by 2s. The y-axis label says "Index 100=Peak Debt Level" and the numbers go from 0 to 100 by 10s. The graph title is repeated in the caption: "Reduction in Private Debt since peak level".

The blue line is U.S. private debt falling after 1932. The black line is U.S. private debt falling after 2008 . The red line is Japan. This time we're not doing any better than Japan, is Steve Keen's point.

Not much reduction in private U.S. debt in the last few years. The decline of debt after 1932 was substantial and, because of that, we were able to have a long period of vigorous economic growth following the second World War. In Steve Keen's words:

By the end of the War, private debt had fallen to 27% of the peak level reached in 1933 (see Figure 9), and the stage was set for a credit-driven revival in Post-War aggregate demand. From 1945 till 1970, credit expanded at an average 5.7% p.a.—substantially faster than the expansion of credit during the Roaring Twenties. From 1970 until the crisis began in 2008, the expansion in credit averaged 9% of GDP per year.

No such sustained credit-driven boom is possible in either Japan or America today, because the deleveraging after their two crises has only slightly reduced private debt levels. Japan’s private debt ratio today is still 75% of the peak level reached in 1996; similarly, America’s private debt level today is 88% of the peak level reached in 2008 (see Figure 9).

Those numbers again: U.S. private debt fell way down to 27% of the Great Depression peak, but only fell to 88% of the 2008 peak. They got rid of 73% of Great Depression debt; we got rid of 12% of Great Recession debt. "Deleveraging" Keen says, is "the crucial difference between Golden Age America and today". I agree, but ...


I want to re-do Steve Keen's graph, get rid of the Japan data, and add a third peak for U.S. data. I'll add the 1990 peak. But I don't want to look at raw debt numbers. I think the important ratio is debt per dollar of spending-money. I'll look at that instead.

For the Depression era I'm using net private debt and M1 money from the Historical Statistics, Bicentennial Edition. For the more recent data I'm using "Total Credit to Private Non-Financial Sector" and "M1 Adjusted for Retail Sweeps" from FRED. Annual data.

Graph #3

Ohhh! I'm hyperventilating! On Keen's graph, deleverage since 2008 has been only slight. On my graph it is comparable to the deleverage after 1932, and far exceeds the deleverage after 1990.

It was the deleveraging of 1990-94 that made possible the "Goldilocks economy" of the latter 1990s. If the mild deleverage of the early 1990s gave us a good economy, then the strong deleverage since 2008 should give us something comparable to the "golden age" that followed World War Two. Comparable in vigor, not in duration.

Let's look at duration.

The deleverage following 1932 lasted 14 years. The golden age following 1947 lasted perhaps to 1973. But let's say with Minsky and Keen that it lasted only to 1966. That's 19 years golden, after 14 years deleverage. Roughly, three years' deleverage gives you four years boom.

Compare that to 1990. Deleverage lasted to 1994, so four years. That means we should have had five or six years of boom: 1995 to 2000 sounds about right to me. High productivity lasted beyond the year 2000, but by 2000 the DPD ratio had returned to its pre-1990 trend. The financial slack in the economy was all used up.

So, we have a number for predicting duration.

I'm not offering investment advice here. I'm just trying to determine what the debt-per-dollar ratio tells me. It tells me things are gonna be good for a few years. Better than the good economy of the latter 1990s.

For how long? We run out of data after 2013, after five years deleverage. From the graph it looks like we might get another year or two before DPD starts rising again. In early March I said first quarter 2016 is the bottom. I'll go with that and say 2015 is the last year of deleverage.

That's seven years deleverage. Seven bad years.

Seven good years to come? We shall see. But if three years deleverage gives you four years boom, seven years deleverage could give us nine good years.

But I hate to see the mess of debt we'll be in by then if Congress doesn't create some incentives to accelerate the repayment of debt, and soon.


// The Excel file...

Here's my "methodology", Noah: Don't always use GDP as the context for everything.

When did the Fed tighten?

"the Federal Reserve caused the crisis by tightening monetary policy in 2008"

- Beckworth & Ponnuru

The blue line is made from two time series -- one old, one new. There is some overlap in the middle, which you can probably see. Combined, the two series show Federal Reserve holdings of Federal debt from 1953 to the most recent data.

This graph shows Fed holdings of Federal debt relative to GDP:

Graph #1: Fed Holdings of Federal Debt as a Percent of GDP

Things are different in recent years, what with the crisis and the recession and the quantitative easing. But from the mid-1950s to 2007 or so -- fifty years or more -- the blue line runs close to the 5% level. A bit low in the 1980s and, if anything, a bit high between 2000 and the crisis.

The blue line shows a general trend of increase since about 1980. Definite increase since 1990. If the line was high, money was loose. Money was loose in the years before the crisis. Looking at this graph, it is hard to see how tight money could have caused the crisis.

(Today's graphs do not show the sudden change in the demand for money that David Beckworth describes as "passive tightening" which occurred "in the second half of 2008" when "the natural interest rate is falling fast and the Fed fails to lower its target interest rate until October". I'm not looking at what happened in the second half of 2008. The crisis was hard upon us by then. I'm looking at the years before 2008, when the groundwork was laid for the crisis.)

In the decade before the crisis, the blue line rose from the old reliable 5% level to something over 5½%. This was money getting looser. Not tighter. That leaves us in an odd position: We can agree with David Beckworth that money must have got tight suddenly, in mid-2008. Or we can look elsewhere for tight money.

I'd love to agree with David Beckworth. But he is saying there was no early warning. He is saying no one could have predicted the crisis. That's funny. The whole point of economics is to understand the economy, to understand trends and tendencies, to know what's likely to happen and what's not. The whole point of economics is to seek the early warning. Beckworth has to throw that all away in order to make his argument.

I'd love to agree with David Beckworth. But he is wrong. His view is that the bottom fell out and the Fed did nothing "until October" and that's what caused the crisis. But the bottom falling out was the crisis.


Why do we look at Fed holdings of Federal debt relative to GDP? Maybe because GDP is the "size" of the economy?? But that's just a metaphor. What does GDP have to do with  the bills we pay? ... with the money we owe? ... with the accumulation of debt? Nothing. Nothing. Nothing.

On the next graph, the blue line is the same as in the graph above: Fed holdings relative to GDP. And I've added the red line, Fed holdings relative to accumulated public and private debt. Fed holdings relative to the money we owe:

Graph #2: Fed Holdings of Federal Debt as a Percent of GDP (blue)
Fed Holdings of Federal Debt as a Percent of TCMDO Debt (red)

The blue line shows Fed holdings relative to "the size of the economy". The red line shows Fed holdings relative to the money we need to pay our bills.

The blue line shows no hint of monetary tightness for two decades before the crisis. That's why Beckworth has to make up a story and pretend that the crisis, when it hit, was just tight money and the Fed would have time to respond to it. Nonsense. When the crisis hit, it was already a crisis.

Where can we look, for signs of tightness? Look at the red line. Look at Fed holdings relative to all the money we owe. Fed holdings have been in decline since about 1972. Hit a low in 1990 and caused a recession, went up a pixel or two, then continued to decline until it caused the crisis.

The red line shows tight money.

But we aren't even looking at money. We're looking at "Fed holdings". The next graph shows base money instead of Fed holdings. The blue line shows base money as a percent of GDP, similar to the blue line above. The red line shows it as a percent of TCMDO debt, like the red line above.

Graph #3: Monetary Base as a Percent of GDP (blue)
Monetary Base as a Percent of Total Debt (red)

The blue line shows increase from about 1980 to a few years before the crisis. The downtrend after 2000 could have had something to do with the crisis, possibly. But the low point of that post-2000 decline is no lower than in the latter 1990s. And things were good in the latter 1990s. So it is hard to see the post-2000 decline in the blue line as a monetary tightening that could have caused the crisis. But look at the red line.

The red line shows tightening from start to finish. Except in the early 1990s. (And the early 1990s is what made the latter 1990s so good, as I have shown repeatedly.)

The red line shows tightening from the mid-1990s to the crisis.It shows more rapid tightening after 2003. Could this have been the groundwork that set the stage for the crisis?

Of course.

It wasn't tightening in 2008 that caused the crisis. It was years of continuous tightening of money, relative to the money we need to pay our bills, that caused the crisis.


// "Methodology" in the title is a reference to Noah Smith's Occult Mysteries of the Heterodox

"sticky down"

Someone who bought a house in the 1970s well understands that inflation erodes debt: My rising income from inflation meant my unchanging monthly mortgage payment took a shrinking cut of my income.

Deflation has the opposite effect: My unchanging debt consumes more of my shrinking income.

That's one good reason wages are "sticky down". (Assuming that the people who say wages are sticky down are correct.)  (Wages and other prices, probably.)

If that's true, then inflation helps debtors and deflation doesn't.

So I'm thinking that the more debt there is in an economy, the stronger is the stickiness of the sticky down. Nobody wants to accept a wage cut. But the more debt we have, the more important it becomes to avoid the wage cut.

I don't have a graph to show that. (This post is just theory.)

Tweaking the Hussmann Interest Rate Calculation

Trying to get back to simulating an interest rate. Wanted to look at the Hussmann calc that I got from Oilfield the other week. I put the interest rate on a graph, and the Hussmann calculation.

I put another line on there, the difference between the interest rate and the Hussmann number. And then Whoa! Look at those bottoms! I eyeballed a line thru the bottoms and sure enough, they seem to drift quite reliably downward at a regular pace, over the full 68 or so years shown on the graph:

Graph #1

In other words, the red line starts out near the bottom of the blue line, and ends up near the top of the blue line. I didn't see it quite that clearly before I did the subtraction.

I got wondering if I could adjust the red line to center it better on the blue, or to position it at will I guess -- to gain control over where the green line ends up on the graph, and the slope of the black line.

I don't know what effect I get by changing the constants, the 4.27 and the 45.5 in the calculation of the red line. I have to get comfortable with what happens when I make changes to those values.

///

Starting from the default values, decreasing c1 or increasing c2 makes the red line straighter without much changing the ends. Increasing c1 or decreasing c2 exaggerates the shape of the red line, again with little change at the ends.

It looks to me like I cannot turn the red line at an angle that would make the bottoms of the green "difference line" more horizontal. Therefore, the "best" I can get is pretty much what Hussmann provides, where the red line starts out low on the blue, and ends up high on it.

// Test it yourself with this Excel file