90 pages in

From Guard! Guard! by Terry Pratchett, HARPERTORCH, 1989.

The Patrician liked to feel that he was looking out over a city that worked. Not a beautiful city, or a renowned city, or a well-drained city, and certainly not an architecturally favored city; even its most enthusiastic citizens would agree that, from a high point of vantage, Ankh-Morpork looked as though someone had tried to achieve in stone and wood an effect normally associated with the pavements outside all-night takeaways.

But it worked. It spun along cheerfully like a gyroscope on the lip of a catastrophe curve. And this, the Patrician firmly believed, was because no one group was ever powerful enough to push it over. Merchants, thieves, assassins, wizards -- all competed energetically in the race without really realizing that it needn't be a race at all, and certainly not trusting one another enough to stop and wonder who had marked out the course and was holding the starting flag.

The Patrician disliked the word "dictator." It affronted him. He never told anyone what to do. He didn't have to, that was the wonderful part. A large part of his life consisted of arranging matters so that this state of affairs continued.

Of course, there were various groups seeking his overthrow, and this was right and proper and the sign of a vigorous and healthy society. No one could call him unreasonable about the matter. Why, hadn't he founded most of them himself? And what was so beautiful was the way in which they spent nearly all their time bickering with one another.

I don't usually read stuff like this. I don't have time. (You wouldn't believe how long it takes me to write what I write.) But only a few pages in to this book, it struck me over and over that, on top of everything else, Terry Pratchett was presenting an economic world.

This is the line that made me interrupt the reading, to write: "...no one group was ever powerful enough to push [the city] over..."

Reminds me of Hayek, from the end of Chapter 5 in The Road to Serfdom:

... it is not the source but the limitation of power which prevents it from being arbitrary.

Japan's top currency-policy bureaucrat complained

Google News turns up this from the Wall Street Journal:

Japanese Official: Yen Doesn't Reflect Economic Fundamentals
By TAKASHI NAKAMICHI And TATSUO ITO

TOKYO—Japan's top currency-policy bureaucrat complained Friday about global investors treating the yen as a "flight-to-safety currency" during times of global economic distress.

So, why don't governments get together and institute a 2% currency-swap tax? Or 1%. Or something. Enough to make currency speculation just a little bit less profitable. It's not rocket science. The governments can split the proceeds.

Not protecting your currency is like dragging your flag through the dirt.

I like 3

At EconomPic recently, Jake showed a long-term graph of the yield on ten year treasuries. My comment on his graph was:

A peak in 1921, at just over 5%, followed by two decades of decline.

A peak in 1981, at three times the level, followed by three decades of decline so far.

If the length of decline is proportional to the peak rate achieved, we can look forward to three more decades of decline.

A peak three times as high, and a decline three times as long.


I often say I don't make predictions, but I don't often say why. It's the obvious reason: My predictions turn out wrong. But I'm going to make a prediction anyway. Even though there is no basis for any prediction in this post, other than what I said in the post title.

My prediction is about the price of gold.

I should say what everybody says to cover their butt: This is not investment advice. Anyway, as I said above, my predictions turn out wrong. But I'm thinking gold is going to peak around $2400 to $2500 per ounce. Because last time it peaked at $800, and $2400 is three times as much, but $2500 is a nice round number.

How's that for solid evidence???

What this means, for me, is that the dollar is not dead. Not yet.


This is a graph from GoldPrice:

I copied a rectangle of it for 1973-1983 (showing the $800 spike of 1980), erased the background, inverted the colors, scaled it up by a factor of 3, and overlaid it on the original graph by eye with the low points lined up, 1977 on 2001:

A pretty good fit. If anything, the recent increase has been slightly more gradual.

I'm not betting on it, but I would be surprised if the spike doesn't end soon.


Let me quote my friend Jazzbumpa here:

Meanwhile, gold has gone to an insane level. The rise from 2000 (Y2K) to almost 2000 ($$$) has been exponential - aka a bubble. This is a horribly mistaken substitute for a flight to safety. Anyone who bought gold in the last three or four years will be wailing and gnashing their teeth, unless they sell some time soon to a greater fool. The timing is unknowable, as is the ultimate high. But bubbles always burst, and this one will not be an exception. It might take years to play out, but the initial drop will probably be a terrifying panic. You can expect gold to eventually end up back at the $250 to $400 level.

Yes to all of that, Jazz, except ending up back at $250-$400. I'd go with three times that, say $800-$1200. Stabilizing there in seven to ten years. Based on nothing but fractal-like magnification of the previous pattern, and the number 3.

ONCE AGAIN, THIS IS NOT INVESTMENT ADVICE.

Natural Rate of Unemployment (NROU)

FRED shows this:

Graph #1

Looking at that graph, I was reminded of something Bill Mitchell wrote: that the NAIRU cannot be measured. (I'm not sure that FRED's NROU is identical to the NAIRU but it's gotta be close.)

Here it is, from Billy's of 12 January 2011:

As the neo-liberal resurgence gained traction in the 1970s and beyond and governments abandoned their commitment to full employment , the concept of the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) entered the debate...

The NAIRU became a central plank in the front-line attack on the use of discretionary fiscal policy by governments. It was argued, erroneously, that full employment did not mean the state where there were enough jobs to satisfy the preferences of the available workforce. Instead full employment occurred when the unemployment rate was at the level where inflation was stable.

The estimated NAIRU (it is not observed) became the standard measure of full capacity utilisation. If the economy is running an unemployment equal to the estimated NAIRU then mainstream economists concluded that the economy is at full capacity...

I like Billy when he's doing history.

Anyway, here is another classic statement on the NAIRU from Billy Mitchell:

A Reuters market analyst (John Kemp) has created a stir by effectively declaring that the global economy is governed by some global NAIRU – a non-accelerating rate inflation rate of unemployment – such that the advanced economies cannot reduce their unemployment rates by expansionary fiscal policy and major structural reforms are needed. In a recent article – Mind the global output gap – he argues that “(e)scalating food and fuel prices are a sign the global economy is approaching full resource utilisation and the limits of sustainable output”.

Kemp is arguing, then, that even amid severe global recession, rising prices are a sign of "full" employment of resources!

Mitchell continues:

He claims that the “high unemployment and idle factories” in the advanced economies are not a sign of a “cyclical lack of demand’ but rather reflect “structural shifts”. From a policy perspective this is natural rate theory on a global scale and effectively denies that sovereign governments can influence domestic demand and real output (within their own policy boundaries) through aggregate demand management. This is the ultimate neo-liberal denial of the effectiveness of fiscal policy.

Billy disagrees, of course. He thinks the structural problem is nonsense.

I disagree with Kemp, too. But I think the structural problem is the excessive reliance on credit. I think the result of that problem is cost, the excessive cost of using money, a cost that has become significant because we use credit for money. And I think the cause of that problem is policy -- the policy that thinks we need credit for growth.

But I digress.

Graph #2

The blue trend-line on Graph #2 is the same shown on Graph #1, the "natural rate of unemployment." The red trend-line is actual unemployment. It varies a lot more.

The blue line looks a bit like a moving average of the red line.

I think it's funny that where the NROU is projected into the future, they show a perfectly flat line.

Graph #3

For Graph #3 I took Graph #2 and added the U6 rate, the broader measure of unemployment. In green there, after 1990 on the right.

Impressions

Yesterday's "Stan Graphs" compared the growth of real output to the growth of prices. This graph shows the same values expressed as percent change from year ago:

Graph #1

Graph #1 shows inflation rates (red) high in the middle of the picture, with real growth (blue) rates higher early and late. But less high, late. Also, the lows of inflation were higher late than early.

There are two areas where growth rates were above inflation rates for a significant time. I have highlighted them here:

Graph #2

The early 1960s, and the late 1990s. The Golden Age of Post-War Capitalism, and the Macroeconomic Miracle.


I thought more highlighting might increase the readability of this graph. Highlighting is yellow where real growth exceeds price growth. Pink where inflation rates exceed real growth rates:

Graph #3

Increasing Minimums

Graph #1: Numbers unemployed

Blue: Number of Persons (16 years of age and older) unemployed.
Red: Civilians unemployed 27 weeks and over.

Skyrockets during recessions. Declines between recessions.

Low points on both (red & blue) are generally  higher in later years.

For unemployment, a "low point" is a good thing. A higher low point is a bad thing.

However, these trend-lines show "number of persons." Population is increasing, so you might expect to see the low points getting higher.

Good point.

Graph #2: Long-Term Unemployed as a Percent of All Unemployed

Graph #2 shows Long-Term unemployed as a percent of Number of Persons unemployed.

Skyrockets during recessions. Declines between recessions. And low points are higher in later years. (This time the observation is valid.)

Graph #3: Comparing Graph #2 to Capacity DisUtilization

Graph #3 shows the same blue trend-line as Graph #2, plus a version of Capacity Utilization.

The red line here is capacity disutilization. I subtracted FRED's capacity utilization number from full (96%) utilization. Why 96%? Because it puts the red trend-line close to the blue one.

The two trend lines both show higher low points in later years. Not a good thing.

The Stan Graphs

For my father

Graph #1: Real GDP relative to the GDP Deflator

With this graph, I'm taking inflation-adjusted GDP and dividing the inflation out of it, a second time. It doesn't seem right. But wait... I am only comparing Real GDP to the price level. That's all. That should be okay. And anyhow, dividing twice by the price level could be as valid as dividing twice by time. That's how they figure acceleration in first year physics, right? "Feet per second per second." So maybe it is valid.

I want the graph to be valid, because it is interesting.

The graph shows a steep increase until the mid-1960s, then a significant decline to the early 1980s, then mild increase. Interestingly, Clonal's graph shows increase until the mid-1960s, then flat until the early 1980s, and then increase again.

Same dates.

Real GDP increased quicker than prices went up, until the mid-1960s. Then, real GDP increased less rapidly than prices went up, until the early 1980s. After that, real GDP increased quicker again, but not as fast as before.

Graph #2: Index comparison

You see the same thing in Graph #2. Real GDP (blue) outpaces the Deflator until the mid-1960s. Then the Deflator (red) accelerates upward until the early 1980s. After that, Real GDP gains on the Deflator, but not at the same pace as in the early years.


The years from the mid-1960s to the early 1980s were years of substantial inflation. That is a big part of what we see on the graphs. But there is more to it than that. The shape of Graph #1 does not fit easily to the shape of inflation. Other factors are involved. Other forces are at work.

You could have guessed. But now you don't have to.

U6:

The red line is "seasonally adjusted".
The blue line is *not* seasonally adjusted.

Debt again

Two graphs from mine of 30 July. One shows Total Debt, GDP, and M1 money for Japan, 1980-2009. The other shows Total Debt, GDP, and M1 money for the US for the same period.

The big number in both cases is debt.

Japan shows convex, a grand hump, a long-term gradual deceleration of debt increase. The US shows concave, opposite-of-hump, a long-term acceleration of debt increase.

Both graphs have a kink in the debt trend at the point where the troubles reached crisis stage.

I want to line up the data for the two countries so that these kinks coincide. And I want to use the US dates on the graph, so that Japan's experience serves as a visible estimate of how long things may continue bad in the US economy.


I pulled out the Japan numbers from my JAPAN STATS spreadsheet

• Google Docs file for browsing.
• Excel file for preview & download.

Same caveats apply as given at the end of my Checking my Numbers post

and the US numbers that I got from FRED

• Google Docs file for browsing.
• Excel file for preview & download.

I rearranged things a bit, eliminated graphs and columns I didn't need, and looked for those kinks in the debt numbers. For Japan, total debt kinks at 1989. For the US, total debt kinks 29 years later, in 2008.

In 29 years, nobody could imagine that it might happen here. And after 29 years, when it *did* happen, nobody saw it coming. What was it Lucas said?

My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.

The classic example of an utter failure to understand the economy.


Anyway, first I took all the US values and divided each one by US Total Debt for 2008. And I took all the Japan values and divided each one by Japan Total Debt for 1989. That made the two debt graphs equal at the kink years, and scaled everything else in proportion. That showed me what I wanted to see, but the vertical axis showed "index" numbers instead of dollars.

So then I did it again. This time I used the original US numbers. And for the Japan numbers, I multiplied each one by US Total Debt for 2008 and divided by Japan Total Debt for 1989. This gave me the same set of trend-lines. But the vertical axis numbers were now meaningful.

I did everything in Google Docs. But when I went to save the graph image, there was an error. Redid the graph and got the same error. Downloaded the spreadsheet and used OpenOffice to recreate the graph. That worked okay.

• Google Docs file for browsing.
• OpenOffice file for download.

Graph #1: If we follow in Japan's footsteps...

If we follow in Japan's footsteps, our economy will still be junk in 2028. We still will have too much debt -- more, even, than we have today. Twenty thousand billion dollars more debt than we have today. The Fed will still be trying quantitative easing, and it will still not have worked. And the economy will still not be growing. Because of all that debt.

Anything else you need to know? Oh... just this: Excessive Federal debt hinders the growth of the Federal government. Excessive private-sector debt hinders the growth of the private sector.