The Schwartz

The name Anna Schwartz should ring a bell. She wrote a very great book (which I never read) with Milton Friedman, who was a very great man. Schwartz has some thoughts on the money supply, here. I have just a few remarks.

The Cost-Push Economy

One of the quirky aspects of MMT is that people like Billy Mitchell always talk of taxes as a way to limit private-sector spending in order to prevent inflation. It could work that way, I admit. But that's not the point. The point is, people react badly to the idea.

People still think inflation is a problem. So Billy makes his argument and people are left thinking: They want to raise taxes MORE??? And people shake their heads, and nobody wants to listen to Billy the Wise.

But that's not why I'm writing today. I'm writing because Billy said something about inflation. Something I think is wrong. Something that tells me Billy still thinks in terms of demand-pull inflation.

Here's what Billy said: "I agree that taking a dollar from a private citizen reduces their capacity of spend that dollar. That is the very important function of taxation – to ensure that the state can manage total spending and keep it in line with what is required for full employment but not push nominal growth beyond the inflation barrier."

He's talking about a way to manage total spending and keep it in line to avoid breaking through the inflation barrier. This is the same sort of thing Milton Friedman used to say, except Friedman wanted the Federal Reserve to control inflation, and Bill Mitchell wants the IRS to control it. Their methods differ, sure. But their objective -- removing money from circulation -- is the same.

Stop thinking about taxes. This post ain't about taxes. I don't want to talk about how we control the quantity of money. The differences between Fed policy and Bill's MMT approach are not relevant to this post. I want to talk about the point of similarity.

I want to talk about the idea that it is the quantity of money that causes inflation. Of course it is, you know. I don't argue the point. However...

Milton Friedman asked a question: Why the excessive monetary growth?

The answer Friedman provides, which I find totally inadequate, includes three points:
1. the rapid growth of government spending,
2. full-employment policy, and
3. mistakes by the Federal Reserve.

My answer is different. I say conditions changed, and left monetary policy between a rock and a hard place. In the 1950s, when Milton Friedman was honing his ideas to perfection, there was too much money in the economy. You know: "Too much money chasing too few goods." It was a consequence of wartime spending and such.

Prices were going up because there was too much money in circulation. Friedman said we should restrict the quantity of money, and he was right. And we did restrict the quantity of money, and it worked. By 1960, inflation was pretty much at an end. Then we had a few good years. "Camelot," it has been called. Whatever.

Anyway, pretty soon inflation started coming back, what with the war in Viet Nam and all. And if you ask economists today, they still say that in the 1960s and '70s the excessive money growth was the cause of that inflation. Maybe. But "too much money in circulation" was not the driving force.

When inflation came back in the 1960s, it was cost-push inflation. By the 1970s it was obvious. We were getting stagflation. Prices were going up even when demand was going down. There was no more "demand-pull" to cause inflation.

It's easy to tell the difference. In demand-pull inflation, prices go up because we have more money than we know what to do with. In cost-push inflation, prices go up because we either increase income, or we go under. In times of demand-pull inflation, people have money to burn. In times of cost-push inflation, people have to stretch every dollar.

Demand-pull inflation is associated with good times; cost-push inflation, with hard times. By the mid-1970s, the "golden age of post-war capitalism" had reached an end. Times have been hard ever since.

The inflation since that time has been driven by rising costs. People have to have more income, just to stay even. So the choices open to policymakers at the Federal Reserve are to accept inflation, or to have recession. There is no middle ground any more. Just the rock and the hard place: Inflation, or decline.

Yes, we have inflation because of the quantity of money. But there are reasons we have an inflationary quantity of money. Reasons that developed after Milton Friedman had formulated his ideas and written his 1963 book with Anna Schwartz. Reasons Friedman and Schwartz never understood.

Anna Schwartz continues to explain inflation in demand-pull terms.


The question that must be asked is: What is the source of the rising costs that drive cost-push inflation? The answer is clear: The factor cost of money is the source.

In the 1980s, at the Federal Reserve they continued to restrict the quantity of money to fight inflation. In Congress, they came up with all sorts of ways to boost economic growth.

The thing is, if you boost growth you boost spending, and it's spending that causes inflation. But that's not the half of it. What we spend, matters. If we spend money, there's no associated interest cost and we don't have to pay the money back. If we spend credit, we have the cost of interest to deal with. And the repayment of principal.

Our economic policies took money out of circulation and encouraged the reliance on credit. "What we spend" became more costly. The factor cost of money increased.

A factor cost is something like wages or profit, or something that competes with wages and profit. The cost of interest is a factor cost that competes with wages and profit.

The cost of interest is an "extra" cost, a largely unnecessary cost in our economy. Yes of course we need to use credit. But we don't need to use credit for everything. But we do. So, we have this extra cost to deal with, the factor cost of money. And it creates cost-push conditions. And cost-push conditions cause inflation. Inflation, or decline.

In the '90s and the Naughts we have the Federal Reserve letting money grow enough to prevent decline, and still thinking it has to fight inflation by restricting the quantity of money. But it isn't even money that's causing inflation. It's credit-use and the cost of this substitute-for-money that are causing inflation. But nobody sees it. Nobody at the Fed says Hey, wait a minute!

At the Fed, they think they have to restrict the quantity of money even more. And of course Congress is happy to do more to encourage spending and the use of credit, to stimulate growth.

And, yeah, they did. But the economy wasn't working very well, so of course Congress had to do even more to boost credit-use. And then one day we had so little money and so much debt that we couldn't afford our debt anymore. Then we had a financial crisis.

And, somehow, the crisis seemed to catch everyone by surprise.


Meanwhile, Billy Mitchell, like Milton Friedman and Anna Schwartz, writes of taking dollars from people, to manage total spending, so that we may prevent inflation.

It's all wrong. It's just all wrong. It isn't even money that causes inflation anymore. It is credit-use that causes inflation. And it is the cost of credit-use that causes cost-push inflation.

Velocity: NBER 14144 and Satisfaction

This is one of those posts where I don't so much have something to say as I have something to see for myself. I didn't think it through before I wrote it. I just had an idea and started investigating, making notes along the way. These are those notes. So if the thing is unreadable, don't say I didn't warn you.

If you can't read it, skip to the end to check out the graphs. I'm happy how they worked out. My suspicions were not unfounded.


This is new to me: using NBER data to chase down an answer.

The most interesting of the FRED Velocity series is the one that goes back into the 1800s. From the Notes on that series:

Data Were Computed From Wartime Current Prices Divided By Money Which Had Been Centered To June 30 For Each Year. Source: Simon Kuznets, NBER

This NBER data series a14187 appears on the NBER website in Chapter 14 at http://www.nber.org/databases/macrohistory/contents/chapter14.html.

NBER Indicator: a14187

I clicked the "Chapter 14" link, and came to a whole page of NBER links on Money and Banking. Searched for "a14187". Found one:

db

dat

doc

a14187

U.S. Velocity of Money Stock 1869-1966

The three "d..." links look to me to be database, data, and documentation. I clicked doc and found this:

"c           VAR 0075      14187 VELO TY 1R 869-966               MD= 1E-37   "
"c           REF 0075         LOC  636 WIDTH  9             DK  10 COL 71-79  "
"c                                                 EXP DEC=  3                "
"c                                                                            "
"c              VELOCITY OF MONEY STOCK                                       "
"c              -----------------------                                       "
"c                                                                            "
"c              NBER SERIES:  14187                                           "
"c              AREA COVERED:  U.S.                                           "
"c              UNITS:  RATIO                                                 "
"c              ANNUAL COVERAGE:  1869-1966                                   "
"c              QUARTERLY COVERAGE:  NONE                                     "
"c              MONTHLY COVERAGE:  NONE                                       "
"c              SEASONAL ADJUSTMENT:  NONE                                    "
"c              SOURCE:  SIMON KUZNETS, NBER                                  "
"c                                                                            "
"c              NOTES:  DATA WERE COMPUTED FROM WARTIME CURRENT PRICES        "
"c              DIVIDED BY MONEY WHICH HAD BEEN CENTERED TO JUNE 30 FOR EACH  "
"c              YEAR.                                                         "
"c                                                                            "
"c              CHECKED MANUALLY; NO CORRECTIONS NECESSARY.                   "
"c                                                                            "
"c           ...............................................................  "

Oh.

Okay...

I backed out of that and did another search, this time for MONEY STOCK. I found "U.S. Velocity of Money Stock 1869-1966" again, and then "U.S. Money Stock" series m14144a. This time, the doc file captured my attention. Here's the body of it:

MONEY STOCK, COMMERICAL BANKS PLUS CURRENCY HELD BY PUBLIC,
SEASONALLY ADJUSTED
-----------------------------------------------------------

NBER SERIES: 14144
AREA COVERED: U.S.
UNITS: BILLIONS OF DOLLARS
ANNUAL COVERAGE: NONE
QUARTERLY COVERAGE: NONE
MONTHLY COVERAGE: 05/1907-12/1946
SEASONAL ADJUSTMENT: SEASONALLY ADJUSTED BY NBER
SOURCE: DATA ARE COMPUTED BY NBER FROM THE SUM OF SERIES
14125 (CURRENCY HELD BY THE PUBLIC) AND SERIES 14145 (DEMAND
DEPOSITS ADJUSTED AND TIME DEPOSITS ALL COMMERICIAL BANKS);
SEE FRIEDMAN AND SCHWARTZ, MONETARY STATISTICS OF THE UNITED
STATES (NBER, 1970).

NOTES: SERIES 14144 IS PRESENTED HERE AS FOUR
VARIABLES--(1)--SEASONALLY ADJUSTED DATA, 1867-1906
(2)--SEASONALLY ADJUSTED DATA, 1907-1946 (3)--ORIGINAL
DATA, 1955-1969 (4)--SEASONALLY ADJUSTED DATA, 1947-1969.
DATA ARE FOR THE WEDNESDAY NEAREST THE END OF THE
MONTH.

Currency plus Demand Deposits plus Time Deposits... Friedman and Schwartz... four variables... data back to 1867 and forward to 1969... I can use this. I backed out of the doc and clicked the dat. Three columns of data: year, month, and value. In a textfile. Should be importable into a spreadsheet.

Firefox let me save each dat page easily and//... Oh, there are only three 14144 pages, and nothing going back into the 1800s. Hm.

I searched around a bit. No luck. Well that's disappointing. Okay. I'll go with what I found.

OpenOffice opened the DAT file in Writer. Crap. Maybe I can copy and paste it to the spreadsheet?

Nope, not in a useful way. I need import...

Maybe Insert sheet from file??? Fixed width... Detect special numbers... OK...

YES!

Rename the worksheet before importing the others...

Okay, got 'em all. That went quick. Now document the data. (There is no header info in the NBER DAT files.) Copy a few lines from the NBER page... Paste to the Blogger "Compose" editor...

db	dat	doc	m14144a	U.S. Money Stock, Commerical Banks Plus Currency Held By Public, Seasonally Adjusted 05/1907-12/1946
db	dat	doc	m14144b	U.S. Demand Deposits, Adjusted Time Deposits, All Commericial Banks, Plus Currency Held By the Public 01/1955-09/1969
db	dat	doc	m14144c	U.S. Demand Deposits, Adjusted Time Deposits, All Commercial Banks, Plus Currency Held By the Public, Seasonally Adjusted 01/1947-09/1969

... the thing comes out as a fully formatted table. Sweet. Sometimes stuff just works. I gave it the border and white background to dress it up.

I don't think I need the "m14144b" file; the other two are both seasonally adjusted, and "b" doesn't say it is. Anyway file "a" takes me from 1907 to the end of 1946, and file "c" picks up at the beginning of 1947 and goes to 1969. Hm, I started my senior year in college, 1969.

Damn. I wish I had the numbers back to 1867.


File m14144a. How to get annual data from these monthly numbers? Move the file to Excel and use VBA? No.

Why do I care? Can I use monthlies? No. The GDP data will be quarterly or annual.

Just do some calculation that pulls out annual numbers.

... Okay, that works. I figured the average of 12 monthly values to get an annual number. Then I just added 12 to the starting row-number to to figure the next year's annual value. I used the same method to calculate my year values. If I didn't get nice round year-numbers, I'd know I had something wrong. Everything came out okay.

Now do the same for file C...

... I did it for file B also. Hey, you never know. I might need it. Okay, now I want to copy the three sets of annual data all onto the same worksheet, and then go round up some GDP data so I can calculate Velocity and compare it to FRED's Velocity of Money Stock for United States.

Graph #1: The NBER MONEY STOCK Data

NBER's "A" file (blue) and "C" file (red) fit together and cover the whole 1908-1968 period. There's a gap between the two lines because the blue ends in 1946 and the red starts in 1947. That gap'll disappear when I treat the two datasets as one data series.

NBER's file "B" (dashed green) starts in 1955 and follows the same path as the red data. I don't need the "B" data.

I divided MeasuringWorth's US GDP numbers by NBER's money stock numbers to figure velocity in red on Graph #2. For comparison I took FRED's velocity that goes back to the 1800s, in blue:

Graph #2:FRED's A14187USA163NNBR (blue) and NBER's m14144 series (red) in Velocity Calculations

The red one looks like my gold one yesterday, the Historical Statistics M2 Velocity, the one where I said

To my eye the gold and blue are very similar, as if the blue line was produced in part by revising the gold line.

I think I was right about that.

On the research.stlouisfed.org page, down near the bottom there's a bunch of links for My Account and About and Services and more. Among the links for Research is Monetary Aggregates. If you follow that link you find these notes:

We often receive requests for monetary aggregates data that cover time periods prior to January 1959, the beginning date for the Board of Governors currently published monetary aggregates. Various data are available for these years, but not all data are consistent with the current definitions of the Board's monetary aggregates. This section discusses available data. The problem is not one of finding data; the problem is one of constructing monetary aggregates that are consistent with currently published definitions.

FRED probably revised the NBER data to make it "consistent".

The NBER numbers are older; FRED's were revised in 2012. So I wanted to see FRED's numbers relative to NBER's, to see how the numbers were changed.

Graph #3: FRED's number as a share of NBER's number

High and dry until the Depression; then the FRED velocity starts falling away.

We're looking at velocity numbers, GDP divided by money stock. To make velocity fall (taking GDP as a given) we'd have to increase the money number. So Graph #3 shows FRED's money numbers are higher than NBER's.

Ignorance is Bliss

re: "stoking demand" versus "boost[ing] costs"

SIDEBAR:
"Printing money causes inflation." This is a notion associated with Milton Friedman, in my mind at least. But as Friedman pointed out, printing money influences prices via its affect on spending. Spending is the process by which demand is exercised. Demand is the driving force. It is a shortcut to say printing money causes inflation. Sometimes, it is a confusing shortcut. Demand is the driving force. But there is a problem with "demand" theory as well.
Demand has been supposed to cause prices to rise, as Anna Schwartz supposes, and Milton Friedman and, well, everybody. [See sidebar.] But prices are not supposed to start rising as soon as we start growing out of recession, nor while we are still in one.

That's why "stagflation" was such a big deal, way back when. The price increases are only supposed to happen, as Anna Schwartz explains, as capacity limits are approached.

Then again, as Bill Conerly's Capacity Usage graph shows, we've been reaching capacity limits at lower and lower levels since the 1960s.

So I have to say these things:

1. The argument that inflation is "demand-pull" -- that prices are pulled upward by growing demand -- does not explain the circumstances of the greater postwar period. This is important, for it was inflation that undermined the Keynesian consensus.

2. The alternative explanation -- cost-push inflation -- is often immediately rejected. "There's no such thing," I've been told by a very confident fellow. But rejection of ideas is not the same as evaluation or understanding. Anyway, the economy changes. What was true once may be true no more. Not only madmen in authority, but also men mad at authority may be slave to some defunct economist.

3. Inflation arises much sooner than it should, sooner than the standard explanation can explain. But this does not seem to bother anyone. We've settled for "low" inflation as an adequate substitute for "no" inflation. And we ignore inflation: Politicians and the media ignore inflation, until we can no longer ignore it. These are the only reasons the standard demand-pull story seems to hold true.

4. Why do we get inflation before we reach capacity limits? Why does capacity utilization peak at progressively lower levels? These are key questions, questions that if answered might help us solve the inflation problem, and help us understand the economy a little better. But it seems we prefer to ignore such questions, for they endanger our standard explanations of the world we live in.

Jim Tankersley: "Is slow growth America’s new normal?"

At the Washington Post, Jim Tankersley:

Still, many economists, even the ones holding to the “bad luck” story, agree that something has changed in the economy post-recovery; our fireballer, they say, appears to have lost some speed on his fastball permanently. The easiest way to see that is in prices... Prices aren’t rising very fast, even with aggressive monetary easing, but the fact that they aren’t falling probably suggests the demand void — the untapped potential in the economy — isn’t as big as forecasters once thought.

No.

First of all, the argument is based on prices. As if economists understood the forces that drive prices. Tankersley tells the same old "demand-pull" story, the same story you get everywhere from Friedman and Schwartz to Bill Mitchell. But demand-pull stopped being the correct story just about the time Friedman and Schwartz published their book in 1963.

To understand what drives prices now, you have to think cost-push. You have to figure in the cost of finance. You have to allow for the drag, allow for the sluggishness created by the cost of finance. And then you have to allow for all the policy fixes put in place since stagflation arose in the 1970s, fixes that mostly reinforced the problem.

To say that prices aren’t falling "suggests the demand void ... isn’t as big as forecasters once thought" oversimplifies the problem immensely. To say the least.

// Coincidentally related: Analyzing the present

Wesley changed my life

I worked with a guy named Wesley years ago. He worked behind the counter in a steel warehouse. He dealt with customers. He dealt with demand.

Back then, I still thought of inflation in the demand-pull terms expressed by Milton Friedman and Anna Schwartz. Too much demand, I said, is the cause of inflation. Too much money chasing too few goods. You know.

Wesley said, "But prices go up because costs go up."


Related posts:

The Cost-Push Economy	...20 Feb 2011
Indonesia Now	...11 Jan 2011
Ignorance is Bliss	...6 July 2010
The Long Decline	...17 June 2010
The Schwartz	...31 Oct 2009

The Long Decline

A graph from Bill Conerly's Businomics Blog:

(From his April 25, 2009 post.) Look at the downhill trend created by the peak points. Capacity utilization at its best has been getting worse. Evidently the Keynes/Reagan shift (see my previous post) did nothing to slow the Long Decline.

With this picture I start a collection of graphs showing the long decline. But this one has a special relevance. A while back I quoted Anna Schwartz on the cause of inflation:

An increase in the supply of money ... stimulat[es] spending. Business firms respond to increased sales... The spread of business activity increases... In a buoyant economy, stock market prices rise... If the money supply continues to expand, prices begin to rise, especially if output growth reaches capacity limits.

"Prices begin to rise, especially if output growth reaches capacity limits."

Looks like those limits are getting lower. My comments from that post:

If it is true (as has been stated repeatedly) that our money supply has increased, then where is "the spread of business activity"? Where is "the demand for labor"? Where is "the demand for capital goods"? Where is the approach to "capacity limits"? Where is the "buoyant economy"? And why do we have all this debt?

What Schwartz describes is the "demand-pull" version of inflation -- a version we've not seen since the rise of stagflation in the very early 1970s. Her famous book with Milton Friedman was published in 1963. At that time, the economy was buoyant. It is buoyant no more. Her explanation is defunct.

Live long and prosper.

Too Much Money Chasing Too Few Goods?

Milton Friedman said, and Anna Schwartz perhaps as late as 2008 said that inflation is always and everywhere demand-pull inflation. As Schwartz put it:

An increase in the supply of money works [by] stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise...

But inflation which results from increased spending must arise from an excess of the medium of exchange. Not from an excess of the medium of account.

An excess of the medium of account may cause a bidding-up of financial asset values, real asset values, and cost-push inflation. It cannot cause demand-pull inflation.

The change in our economy toward greater finance is associated with the decline of real-sector income, with the concentration of wealth, and with a kind of inflation that will never be ended by demand-side constraints.

Eggertsson (2): Fiat optimism

Excerpts from the Eggertsson PDF

Page 1477:

Roosevelt immediately implemented several radical policies which had a strong impact on expectations. As if mobilizing the nation for war, the government went on an aggressive spending campaign, nearly doubling government consumption and investment in one year. This spending spree was not financed by tax increases, but instead by some of the largest budget deficits in US history outside of wartime. On the monetary side Roosevelt announced that the value of the dollar was no longer tied to the price of gold, effectively giving the administration unlimited power to print money. The overarching goal of these policies was to inflate the price level...

I think Eggertsson's summary is crude. The "overarching goal" may have looked at the time to be to inflate the price level. Perhaps it looks like that still, today. But the overarching goal, really, was to obtain economic recovery, right? And whether anyone knew it or not, they did it by correcting the monetary imbalances that had created the Depression.

It was not inflation for its own sake that Roosevelt desired. It was inflation to restore balance between the components of money. I doubt Roosevelt ever knew it. But I am saying we should be able to look back now, evaluate what happened, and come up with something a little better than a blind call for more inflation. Because if we can do it better, we can do it better.

Page 1477:

The turning point cannot be explained by contemporaneous changes in the money supply, as stressed by Temin and Wigmore (1990). As shown in panel D of Figure 1, the money supply did not change around the turning point.

There was a temporary increase in currency in circulation due to the banking crisis, but this was offset by a drop in nonborrowed reserves, leaving the monetary base virtually unchanged.

Temin and Wigmore (1990) document that the real value of some broader monetary aggregates such as M2 declined considerably in 1933.

The turning point, perhaps. Nonetheless, for more than a decade after 1933 the level of debt fell with respect to the quantity of money. I would remind you that, as Eggertsson writes, "Roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level". So the quantity of money *should* have gone up. Though maybe not at the very moment of the Inauguration.

Early in the Obama administration there was talk of "green shoots" and other yap intended to bolster confidence and get the economy moving again. Policymakers focus on confidence simply because they don't know what else to try.

Confidence is nice, but confidence emerges from conditions. If we had coupled confidence-boosting with debt forgiveness of some kind, we would have been changing conditions in a way that improved not only confidence but the economy as well.

We didn't do that.

Page 1479:

The Hoover Administration is constrained by the policy dogmas (i.e., the gold standard, balanced budget, and small government dogmas), while the Roosevelt Administration is not.

Maybe so. But the actual effect of that absence of constraint was to reduce the level of total debt per dollar of M1 money.

Page 1480:

Milton Friedman and Anna Schwartz (1963), and a large literature that followed, suggest that the recovery from 1933–1937 was driven primarily by money supply increases. Nominal interest rates, however, were close to zero during this period. According to the model in this paper, a higher money supply increases demand only through lower interest rates, so at the zero lower bound it is only through the expectation of future money supply, and thus future interest rates, that the money supply affects spending...

This is where I disagree with Gauti Eggertsson. He says the assumption (that the Depression was ended by increasing the quantity of money) is flawed because with interest rates at zero, the normal effects of increased money were unavailable. And Eggertsson concludes that it was expectations that brought recovery.

"Recovery" implies growth. Growth implies the expansion of credit-use. The expansion of credit-use implies accumulation of debt. So we should see an increase of debt as the economy recovers (as we see in my DPD graph, beginning in 1947).

The problem is not to increase demand. The problem is to reduce debt now so that it can expand again ASAP. After we reduce debt, the rest will follow. Increased demand will follow. Growth will follow.

The page 1480 excerpt continues:

...Through the expectation channel the main point of Friedman and Schwartz is confirmed in this paper: appropriate monetary policy was essential to end the Great Depression, and could have prevented it altogether. The twist is that this could be achieved only through the correct management of expectations, not contemporaneous increases in the money supply per se.

The twist is that this could be achieved only through the correct management of expectations. First of all, that's a creepy, manipulative, and totalitarian approach. Too much "behavioral" and not enough "economics". Second, I think it is really sad that economics has given up on economic policy, fiscal and monetary policy, in favor of behavior modification and fiat optimism.

Page 1480:

Several papers study the Great Depression in DSGE models, and the current paper shares many elements with them. The main difference is the focus on the regime shift associated with Roosevelt’s rise to the presidency, which is used to explain the recovery. While many of these papers recognize the importance of expectations, they do not model explicitly why and how they changed in 1933 with Roosevelt’s inauguration.

I'm writing these remarks as I read Eggertsson's paper, so I may head off in the wrong direction. But again here he emphasizes expectations and "how they changed in 1933 with Roosevelt’s inauguration." Yet just a moment ago he was talking about events of the 1933-1937 period. And again a moment or two before that, he showed an unidentified money supply that was not growing for six months either side of the FDR inauguration.

Overly optimistic expectations would not have endured for four years. Spending money (the economists' M1 money) increased from 19.91 billion in 1933, to 30.91 billion in 1937, according to the Historical Statistics (Bicentennial Edition, Series X414). It was an increase of eleven billion dollars, or more than 55% in four years. Match that against Eggertsson's empty expectations.

Match it against what Eggertsson says about money.

Graph #1: 1916-1950

My graph #1 shows M1 money and Total Debt with each series indexed on its 1923 value. This makes the two trend lines overlap and makes them equal in 1923. What that means is the numbers themselves are not comparable. I cannot say "money is higher than debt in 1916" or "debt is higher than money in 1931" or "money is higher than debt in 1945". (If I had chosen some year other than 1923, the lines would not be as they appear on this graph.)

However, what this graph *does* show is that total debt was growing faster than M1 money in the years leading up to the Depression. And that after reaching a low point in 1933, the quantity of money grew much faster than total debt, until 1947.

These dates, 1933 and 1947, correspond exactly to the turning-point dates identified on my DPD graph in the previous post.

Graph #2: 1916-1970

When we take Graph #1, caveats and all, and extend it out to 1970, it becomes obvious that in the 1950-1970 period debt was growing significantly faster than M1 money. That trend continued almost without letup until 2007.

What's wrong with FRED

(Apart from revising the way they organize their data, I mean.)

FRED is fastidious about data integrity. Too fastidious. I think it's a problem.

At FRED, in the blue box at the bottom, under Monetary Aggregates we find

We often receive requests for monetary aggregates data that cover time periods prior to January 1959, the beginning date for the Board of Governors currently published monetary aggregates. Various data are available for these years, but not all data are consistent with the current definitions of the Board's monetary aggregates. This section discusses available data. The problem is not one of finding data; the problem is one of constructing monetary aggregates that are consistent with currently published definitions.

The problem is not to find the data. The problem is that the stuff they find doesn't match current definitions.

I wonder... If the economy changes, then perhaps it is appropriate that the definitions should change as well. If so, then the older definitions are not incorrect. They are correct for an earlier time. If this is true, then the older numbers are not "wrong" because they differ from newer numbers; they are merely "different". And hopefully, they are more relevant to the older period than current definitions would be.

Krugman ran into mismatched data definitions recently:

Source: Paul Krugman

I run into mismatched data definitions all the time.

Look at PK's graph. Suppose the graph showed only the "new series" numbers. It would be easy to think that the trend was always upward, and that it had never been higher than in the past few years.

Those would be very flawed assumptions.

It is far more important to know about the ups and downs than it is to have lines that match up perfectly. This is why FRED's fastidiousness is a problem. The fastidiousness is a cover-up of history. And I say that with love, because I do love FRED.


At FRED I click FRED Economic Data, then Monetary Aggregates, then M1 and Components to get a list of data series. Sorted by start date, the list offers two series beginning in 1947. Everything else begins in 1959 or after.

At ALFRED (Archival FRED) we read:

In general, economic data for past observation periods are revised as more accurate estimates become available. As a result, previous vintages of data can be superseded and may no longer be available...

So ALFRED offers older stuff.

But not the stuff I'm looking for. I click Monetary Aggregates: M1 and Components and sort the list of data series by start date. The oldest numbers that come up are for 1947. So it seems ALFRED offers not older data, but just older versions of current datasets.


One of the most pivotal books in all of economics was Friedman and Schwartz's A Monetary History of the United States, 1867-1960, a "monumental" work. Would you throw it away because its data definitions are not current?

No.

But FRED won't use it. At the blue-box monetary-aggregates link, FRED includes that monumental history as one of five "common sources of historical monetary data". They even offer downloads for M1 back to 1929. But they have not integrated the data into their normal data series.

At FRED, they not only know about these sources; they recommend them. But they won't use those sources themselves. I think it's a mistake. They should set it up in separate data series, just like they do with everything else. And add a footnote about the mismatch.

I use FRED graphs a lot. I think one of the benefits of using FRED graphs is that it's not my graph. It's from a known, trustworthy source. I use FRED graphs because I think it increases the confidence people have in the information I present.

But I'm left on my own with the mismatched data. At the start, I thought maybe I was doing something wrong, to get the mismatches. Nope: Even Krugman gets mismatches. And FRED'll tell you why that is. But they won't touch the old data, themselves.

I think they should.

Milton Friedman's Mischief

On the left is a scan of one of the graphs from Milton Friedman's book Money Mischief; on the right is a tweak of that scan.  [Regarding the tweak...]

For the figure on the left, I moved the "Figure 3" label to the bottom and reduced the size of the text below the "Figure 3". Otherwise this figure is not retouched.

In the figure on the right, I moved the label, reduced the text, and shifted the "money" line up so that the two lines start at the same level. That makes it easier to compare the trends. And I erased the Y-Axis labels because shifting the trend line makes those labels incorrect. (These tweaks were all done in Paint.)
The tweak shows that money increased more quickly than prices. Funny -- that's not what you might expect. If printing money causes inflation, the two lines should travel together. They don't.

Indonesia Now...

From the Inflation Watch blog, under the heading Inflation scare growing in Indonesia, Dr. Duru writes:

...observers are citing growing inflation fears for the drop in the Indonesian stock market. The Indonesian Central Bank decided to hold interest rates steady for now, but economists and analysts seem to expect a rate hike program to finally begin after rates stayed at record lows for 17 months. As always, the trick is whether monetary authorities can act swiftly enough to stem the looming tide of inflation in the country. The monetary mentality has to rapidly switch from recovery to constraint.

That's the context in which this statement is delivered:

As always, the trick is whether monetary authorities can act swiftly enough to stem the looming tide of inflation in the country. The monetary mentality has to rapidly switch from recovery to constraint.

First, we have the As always. Yeah. Always we do the same thing, to fight inflation. That's where the problem lies. That's what I'm sayin, here and here and here and here. We cannot solve the same old problem with a solution that no longer works. We need a different solution.

Second, we have to rapidly switch from recovery to constraint. So lemmee ask: Where's the boom? Where is Anna Schwartz's buoyant economy? Where is the excess demand that is so often said to be the cause of inflation? Where is the approach to capacity limits? It's like the weather: One day it still feels like winter, and the next day it's hot as summer already. And everybody asks: What happened to Spring?

Why would anybody think we need to switch to constraint? Don't we need the economy to grow?? The only reason I can see, why anyone would call for constraint, is they don't know any other way to fight inflation. So the solution is to kill off growth.

As always.

Act Naturally

From Scott Sumner's response to David Andolfatto:

The recent (2008-09) NGDP crash was the largest since the 1930s, and Lucas has argued that the Friedman and Schwartz story applies to the steepest part of that crash, in late 2008 and early 2009. However he also believes that the slow recovery is better seen as an example of the sort of stagnation that hit Europe after the 1970s, when natural rates of unemployment rose to a much higher plateau.

1. One would expect Sumner to speak of an "NGDP crash" as opposed to a GDP crash, because NGDP is part of Sumner's central theme. However, we really didn't have much deflation to speak of, so what is correctly described as an NGDP crash is also correctly described as a GDP crash or an RGDP crash.

No biggie. But Sumner's use of the term "NGDP crash" shifts focus to his theme and away from analysis of the problem. And it is never right to take eyes off the analysis.

I guess that's the problem with lots of solutions people offer: They want you to look at their solution, rather than at what the problem really is.

2. The biggie:

"...the slow recovery is better seen as an example of the sort of stagnation that hit Europe after the 1970s, when natural rates of unemployment rose to a much higher plateau."

You can't just make up something like "the natural rate of unemployment" and assume that it varies, and then throw numbers together based on these and other assumptions and call that evidence, and expect me to buy it.

The thing that you call the natural rate is something I see as a result of the interaction of your conflicting economic policies. But you never blame your policies. You act like your policies had nothing to do with the problems. You act like there's no way your policies could have done things to make the so-called "natural" rate go up.

Funny thing about that: If you guys made the natural rate go up, it isn't really a natural rate at all.

Insanity

BBC News -- Federal Reserve 'close to meeting targets' for US economy:

The Federal Reserve is close to hitting its targets for US employment and 2% inflation, according to the central bank's vice chairman, Stanley Fischer.

In a speech in Colorado, the Fed's number two policymaker was upbeat about the economy's recovery and prospects.

"We are close to our targets," he said on Sunday, adding that jobs growth had been "remarkably resilient".

He did not mention interest rates, but the remarks are likely to fuel debate about when they may rise.

He did not mention interest rates, but I will: They needed interest rates low to get economic growth so they can raise interest rates and undermine the growth. This is their plan for the economy.

We have to stop thinking always in terms of interest rates. We have to find a better way to prevent inflation.

On second thought, no. We don't have to find a better way. We already have a better way to prevent inflation: Paying down debt destroys money. Paying down debt takes money out of circulation. Paying down debt is a way to prevent inflation.

Paying down debt takes money that is in the economy, and takes it out of the economy. It's money that's in the economy that causes prices to go up.

New borrowing is generally for growth: for a new car or a bigger home or for business expansion, stuff that gets counted in GDP. Growth.

But new borrowing also puts money into the economy. And after that first use, the money's in the economy and it circulates. It is "extra" money in the economy. It may be used to purchase more output, or it may be used to bid up prices. The latter is demand-pull inflation.

Most of the "extra" money eventually works its way out of circulation and into savings. Then it has no demand-pull effect. But the debt that was created when the money was created -- the debt remains in the economy. And the cost of servicing it continues to be imposed on the economy; this creates cost-push inflation. Financial cost push.


Anna Schwartz describes demand-pull inflation:

An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise, especially if output growth reaches capacity limits.

Do consumers feel wealthier since the start of quantitative easing? Has our spending been stimulated? Are businesses increasing production? Is the economy "buoyant"?

No.

Is our inflation, what little inflation we have, is it demand-pull inflation?

No.

Does printing money make prices go up, if nobody's spending the money?

No.

If new borrowing leads to a buoyant economy and demand-pull inflation, is raising interest rates an appropriate policy response?

Yes. Perhaps not the best of policy responses, but it does address the problem of new borrowing. But if the economy is not buoyant and inflation is financial cost push, then raising interest rates is bad policy.

Graph #1

Paying down debt is a way to fight inflation.

So much for the study of cost-push inflation

Roger Farmer, September 21, 2017:

In the 1960s, the U.S. government borrowed to pay for the Vietnam war, and rather than raise politically unpopular taxes, it paid for new military expenditures by printing money. Milton Friedman pointed out correctly, that printing money would eventually lead to inflation.

Roger Farmer brings back memories. Evans and Novak's memories, not mine. In Atlantic Monthly, July 1971, Rowland Evans and Robert Novak remembered early 1968: Lyndon Johnson was President; Richard Nixon was on the campaign trail; and former President Eisenhower was considering the options open to his protege Nixon. Evans and Novak wrote:

For the old General there was no higher imperative for a new Republican President than to curb the torrent of inflation that had been loosed on the economy since full US intervention in the Vietnam war in 1965.

That is what happened: War-related spending increased, and inflation went up. And Milton Friedman is remembered as having predicted the inflation. "Cause and effect" was thus inviolably established. And every day since, one monetarist twit or another, his mind closed tight as his sphincter, has been predicting inflation. Generally, like the famous stopped clock, such predictions are only occasionally accurate.

Sure, I know: The value of the dollar continues to fall. I'm not saying there's no inflation. I'm saying the predictions are junk. Remember Janet Yellen saying we don't know the cause of inflation? If you don't know the cause, you can only make an accurate prediction by dumb luck. Dumb luck.

I even accept the bumper-sticker logic that says printing money causes inflation. What I cannot accept is that no additional logic applies. Even Friedman distinguished between "money supplied" and "money demanded", as Peter N. Ireland points out. It ain't just printing money that matters. The logic of demand matters, too.

Yes, it seems Friedman also said the demand for money is constant and it's only the supply that varies. And okay, I can see that in a normal economy the demand for money may be quite constant, probably more constant than the supply. So maybe in the normal economy the predictions of inflation are pretty good after all. Okay, fine. But why were people still making the same predictions after the economy went all abnormal? Echolalia?


Time magazine, December 31 1965:

The economic policies of 1966 will be determined most of all by one factor: the war in Viet Nam. Barring an unexpected truce, defense spending will soar so high—by at least an additional $7 billion—that it will impose a severe demand upon the nation's productive capacity and give body to the specter of inflation.

And there it is again. Inflation -- specifically, the Great Inflation -- was created by Lyndon Johnson's spending on the Vietnam war. They said it in 1965. They thought it in 1968 and wrote it in 1971. And apparently we still think it in 2017. But as Roger Farmer would say: Where's the beef?

Where's the analysis that shows the mid-1960s wartime spending was the cause, the sole cause, or even the primary cause, of the inflation that arose in that moment? Coincidence? You relying on coincidence as an argument? What about lags, then, the long and variable lags.

Your coincidence is not evidence if there are lags.


We thought and still think the Great Inflation was created in 1965 by the "guns and butter" spending of Lyndon Baines Johnson. This we have taken for true since the very first day of the Great Inflation.

It's odd, though. In 1960, Samuelson and Solow did a study in which they considered the source of the 1955-58 inflation in the US economy. They wrote:

... just by the time that cost-push was becoming discredited as a theory of inflation, we ran into the rather puzzling phenomenon of the 1955-58 upward creep of prices, which seemed to take place in the last part of the period despite growing overcapacity, slack labor markets, slow real growth, and no apparent great buoyancy in over-all demand.

It is no wonder then that economists have been debating the possible causations involved in inflation: demand-pull versus cost-push; wage-push versus more general Lerner "seller's inflation"; and the new Charles Schultze theory of "demand-shift" inflation.

Samuelson and Solow thought there was a good chance the inflation of the latter 1950s was cost-push in origin. That's interesting because, if it was, then there is also a good chance that when inflation returned in the mid-1960s, it was the return of cost-push inflation. Mixed, perhaps, with demand-pull brought on by Vietnam war spending.

Samuelson and Solow in 1960 were leaning toward "mixed":

We have concluded that it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis ...

What was needed, obviously, was additional work on the cost-push question. But things didn't go that way. Instead, their paper was read as a call for tradeoff: more inflation and less unemployment.

The inflation/unemployment tradeoff was a story Milton Friedman could shoot down, and Edmund Phelps, and they did.

Then Milton Friedman rejected cost-push, saying inflation is always and everywhere a monetary phenomenon. Right behind him, Paul Volcker rejected cost-push when he said the inflation process is ultimately related to excessive growth in money and credit.

By then, the concept of cost-push was in the throes of death. Today, I can't even find a link to the Samuelson and Solow paper. But I can find a sharp guy like Nick Rowe observing that Arthur Burns -- Chairman of the Fed through most of the 1970s and thus through most of the Great Inflation -- observing that Burns thought inflation was largely a cost-push phenomenon; then Rowe adds:

People forget (and maybe younger people never knew) just how common that view was in the 1970’s. It was common among economists as well as the general population. It was almost the orthodoxy of the time, IIRC. Tighter monetary policy would just raise interest rates, which would increase costs, and make inflation even worse.

Nick is much too nice a guy to put it into words, but to my ear what he's saying is that "cost-push" is a ridiculous idea, not worthy of economic analysis. That was in 2012.

And now, in 2017, you've got Roger Farmer (in the opening salvo of a post titled "Where's the Inflation? Where's the Beef?") dismissing the possibility of cost-push when he says "the U.S. government borrowed to pay for the Vietnam war, and ... paid for new military expenditures by printing money".

So much for the study of cost-push inflation.


To my mind, the growing cost of finance was the cost that initiated the cost-push inflation that became the Great Inflation of 1965-1984 -- and is chiefly responsible for the inflation since that time as well. Finance takes from non-financial business, directly increasing the costs of production. Finance takes from consumers, directly depressing demand. Finance returns its monies to the circular flow at interest, further increasing production costs and further depressing demand. And that is the story since Volcker. Since before Volcker.

Convince me I'm wrong, or stop assuming there is no cost-push inflation.


Related links:

Anna Schwartz on the buoyant economy (here)

The inflation/unemployment tradeoff (Kevin D. Hoover)

Williamson's history of the time (here)

An overview of confusion (Mainly Macro)

The Forder connection (Robert Waldmann at Economist's View)