Monetary policy is a really big deal

Tyler Cowen is surprised by the size of the various emerging market reactions to the non-taper:

Pay special heed to quantitative magnitudes.  For how long are we delaying the taper?  One or two months?  How much is the taper anyway, relative to the stock of relevant financial assets?  Taking $10 to $15 billion off of $85 billion a month in purchases, when the asset stocks are in the trillions?  Woo hoo.

.  .  .

I’ll say it again: none of you understand what is going on here, and neither do I.  I am not seeing enough admission of this basic fact.

I certainly admit to not understanding the specific market reactions that he points to, but don’t really agree with the larger point he is making.

Monetary policy drives NGDP; nothing else really matters.  But people care about real variables, not nominal variables.  So how important is NGDP anyway?  It turns out that in the short and medium term it’s really, really important, even in real terms.  In the long run not so much.

Tyler might respond that even though monetary policy is important, the specific action taken by the Fed was so trivial that it’s hard to see why markets would have responded so strongly. But he misses the larger point.  The Fed’s action was a SURPRISE.  In the world of central banking surprises are actually pretty rate. Normally the Fed telegraphs what it is likely to do.  But even that doesn’t fully explain why surprises matter so much.

The real reason why surprises are so important is that they cause market participants to revise their expectations of the future path of policy. Yes, the 10 or 15 billion a month is no big deal. But the future path of policy is a very big deal. It’s like someone who finds out that their spouse is lying over something trivial. Not important right? Or does it lead one to wonder if they are lying about other things too?

The markets went into Wednesday thinking the Fed was determined to taper for Larry Summers-type reasons.  Fear of a big balance sheet.  At the end of the day the markets realized that the Fed was serious about letting the data drive policy. That’s not just a different policy; it’s a completely different policy regime. And it will have important implications for when and under what conditions the Fed will start raising rates.

So yes, most of us can’t explain why the rupee did this or that on a given day. But who ever claimed they could?  On the other hand the US stock market reaction makes perfect sense.

PS.  Not much time for blogging over the next few days.

PPS. Tyler’s post has the following title:

Model this taper and show your work, if only verbally 

Thank God he allows verbal answers, I used to hate it when the professor would ask for math.

Update:  I had a brain freeze yesterday when I endorsed the FDP.  I completely forgot about the AfD, which is anti-euro but pro-EU.  In other words, it’s one of the few rational political parties in all of Europe. Given how close the AfD came to the 5% threshold, my error was very unfortunate.  I offer my abject apology.


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170 Responses to “Monetary policy is a really big deal”

  1. Gravatar of Morgan Warstler Morgan Warstler
    22. September 2013 at 18:30

    I wonder how long it will take take everyone to catchup to the question:

    Why is NGDPLT the best answer to how to taper?

  2. Gravatar of Catherine Catherine
    22. September 2013 at 18:40

    Reward prediction error!

    Economists will have to start reading cognitive science.

  3. Gravatar of TallDave TallDave
    22. September 2013 at 19:41

    “The real reason why surprises are so important is that they cause market participants to revise their expectations of the future path of policy”

    Nails it. Expectations uber alles.

    This is another of those situations where market monetarism so, so clearly explains things best. How can anyone seriously argue the Fed is powerless when things like this happen?

  4. Gravatar of TESC TESC
    22. September 2013 at 20:12

    ‘Fear of a big balance sheet’

    Does anyone care about the balance sheet of the institution that produces the world currency?

    Why?

  5. Gravatar of TESC TESC
    22. September 2013 at 20:49

    Sorry if this comment is not totally related to the post. But I wanted to put this out there. I know you guys will have insightful comments on it.

    1. Inflation targeting overheats the economy during high growth years. Example, 5% RGDP implies 7% NGDP. Unemployment will be very low and wages will heat up with an AS contraction in the near future.

    2. During bad times, inflation targeting limits the economy. Example, 1% inc RGDP implies 3% inc NGDP. Unemployment would probably be rising.

    Can I comfortable say that NGDPLT would never allowed an AD shock like the Great Depression and Recession, or it would at least correct it immediately? In an AS shock, NGDPLT would stop inflation at the percent pre-determined for NGDP.

    The reason for my comment is because as far as I can see, under NGDPLT, bad times would just be productivity problems. Never spending problems. Do you guys see where am I going?

  6. Gravatar of Mike Mike
    22. September 2013 at 21:00

    How can expectations be anchored if the monetary transmision mechanism is innefective? People have no idea what to expect.

    If the fed only targets narrow money which is largely irrelevant to the broader economy MP effectiveness is diminished.

  7. Gravatar of TESC TESC
    22. September 2013 at 21:48

    @TallDave

    ‘How can anyone seriously argue the Fed is powerless when things like this happen?’

    Because short term interest rates are near zero. All your evidence is irrelevant; for them.

    Do not confuse them with facts when they have the perfect excuse to waste other people’s money with fiscal spending.

    Great comment

  8. Gravatar of Ralph Musgrave Ralph Musgrave
    22. September 2013 at 21:52

    “Monetary policy drives NGDP?” The consensus is that the effects of QE are pretty feeble, isn’t it?

    If the Fed gives me $X in exchange for my $X of Treasuries, I’m not going to run out and spend the money because I regarded the $X of Treasuries as part of my savings. Thus I’ll also regard the $X of cash as part of my savings.

  9. Gravatar of Benjamin Cole Benjamin Cole
    22. September 2013 at 22:06

    TESC:

    Jackpot comment.

    Yes, the Fed has a big balance sheet. And?

    Well, those pillars in front of the Fed building might snap from all the pressure.

    “The Fed has a big balance sheet” joins other anti-QEisms, such as QE causes “unquantifiable financial risks,” or “hyperinflation,” or is “inert” or creates specific asset bubbles despite EMT.

    Some economists, such as John Cochrane, say QE is inert but very dangerous. That’s a nice trick–Cochrane would have made an interesting chemist.

    I wish I was making this stuff up.

  10. Gravatar of Benjamin Cole Benjamin Cole
    22. September 2013 at 22:10

    Ralph Musgrave:

    Okay, if you own Treasuries, you are already reasonably liquid (active market in Treasuries) and have no credit risk.

    So why would you sell at all? It makes no sense to sell and just move into cash, with even lower yields.

    Ergo, the reason to sell is to spend the money (good for aggregate demand), or invest in another asset class (good for property and equities). I assume many will temporarily “park” the money from selling Treasuries in banks.

    I can see no reason to sell Treasuries just to move into cash, period. And no one is forced to sell Treasuries.

    Ergo, QE is stimulative. Just need to ramp that baby up, and really print some big money.

  11. Gravatar of Nick Rowe Nick Rowe
    23. September 2013 at 02:25

    Scott: Yep. The taper is just a communications device, anyway. It communicates (badly) the Fed’s monetary target. Postponing the taper is a way of saying something, and the Fed said something unexpected. Actually, the Fed didn’t even postpone the taper; it just said it would postpone the taper. It communicated a change in communication. The actual marginal dollar number was $0.

  12. Gravatar of ssumner ssumner
    23. September 2013 at 03:07

    TESC, You said;

    “The reason for my comment is because as far as I can see, under NGDPLT, bad times would just be productivity problems. Never spending problems. Do you guys see where am I going?”

    Yup.

    Mike, You said;

    “If the fed only targets narrow money which is largely irrelevant to the broader economy MP effectiveness is diminished.”

    The Fed doesn’t target the MB, they target inflation and employment.

    Ralph, You said;

    “Monetary policy drives NGDP?” The consensus is that the effects of QE are pretty feeble, isn’t it?”

    Context is everything. QE can be “pretty feeble” or all powerful. It depends how it is done. But there is much more to monetary policy than QE, so there is no doubt that monetary policy, broadly defined is quite powerful.

    You said;

    “If the Fed gives me $X in exchange for my $X of Treasuries, I’m not going to run out and spend the money because I regarded the $X of Treasuries as part of my savings. Thus I’ll also regard the $X of cash as part of my savings.”

    If this were really true, then how does monetary policy work when rates are positive?

    Nick, That’s right.

  13. Gravatar of Model this taper and show your work, if only verbally Model this taper and show your work, if only verbally
    23. September 2013 at 03:31

    [...] Addendum: Scott Sumner offers a response. [...]

  14. Gravatar of Benjamin Cole Benjamin Cole
    23. September 2013 at 04:42

    If QE is inert, just swapping of assets, do not we owe it to taxpayers to swap out cash for bonds in large trillion-dollar chunks?

    Once bondholders have cash, they have been paid off, and we taxpayers are free and clear. Yahoo!

  15. Gravatar of SG SG
    23. September 2013 at 04:51

    @ Benjamin Cole

    Notice that the liquidity trappers–Krugman, Cochrane, et al–have never given a response to that basic criticism that QE ineffectiveness implies cost-free monetization of the national debt. Nor will they, because it’s a bulletproof refutation of the liquidity trap.

    One day, the liquidity trap–specifically the notion that central bankers are limited by anything other than their own timidity–is going to be such an abject embarrassment that it won’t be mentioned in polite company. The sooner it joins the long-run Phillips curve, union-driven inflation, and Austrian economics on the Island of Misfit Economic Theories, the better.

  16. Gravatar of MFFA MFFA
    23. September 2013 at 05:07

    Prof Sumner, sorry for this side step but I have a question regarding the argument that central bank intervention favours the wealthy/big businesses. This seems easy to dismiss when talking about QE, if your governements bonds are exchanged for currency at market price you’re not better off (but maybe you have a little information advantage as to what is the current stance of monetary policy?). But what about discount lending, like when the ECB allows banks to borrow for much below the market rate? How do you counter the argument that the ECB is subsidizing big banks with those programs? Or maybe they’re actually right after all?

    Sorry if this has been explained in the past (if then a fellow reader could provide me with some links, the search function didn’t save me in this case!)

  17. Gravatar of Anon Anon
    23. September 2013 at 06:47

    Stock market rose 1% on the surprise

    Stock market gave up its 1% rise over next two days

    Monetary policy is very important

  18. Gravatar of Ralph Musgrave Ralph Musgrave
    23. September 2013 at 08:07

    Benjamin,

    My above comment was silly in that I implicitly assumed that Treasury prices don’t rise when the Fed buys them. Obviously those prices do rise, and that plus the extra monetary base in private sector hands is stimulatory.

    However I suggest the effect is not large because the rich don’t go on a HUGE spending spree when their net assets rise in value. Plus there is no logic in channelling stimulus into the economy just via the rich (never mind the inequality increasing effect).

    So I think that IN THEORY, fiscal policy is superior to monetary policy when it comes to stimulus or NGDP adjustments: fiscal policy can feed money into the pockets of a wider cross section of the population which gets rid of the above “false logic”.

    However, I realise Congress just won’t wear fiscal stimulus at the moment, so monetary stimulus is the only game in town at the moment. Plus if Congress (and equivalent elected bodies in other countries) did accept the desirability of fiscal stimulus, there’d need to be some big institutional changes if fiscal policy was to be used for fine tuning on a regular basis.

  19. Gravatar of Don Geddis Don Geddis
    23. September 2013 at 09:03

    Ralph Musgrave: you have the wrong transmission mechanism in mind. Your theory suggests Cantillon effects, where the Fed’s money “first” goes to “the rich”, and then only affects NGDP later, because the rich increase their spending.

    But that’s only a trivial part of the real transmission mechanism for monetary policy. The actual levers are: expectations, hot potato, Chuck Norris, etc. Far, far more powerful than the mechanisms you have in mind. And they effect the entire economy simultaneously and instantaneously.

    So your evaluation of fiscal vs. monetary policy is wrong, because you don’t understand how monetary policy works.

  20. Gravatar of Saturos Saturos
    23. September 2013 at 09:46

    “I had a brain freeze yesterday when I endorsed the FDP. I completely forgot about the AfD…”

    Somewhere, Bryan Caplan is smiling…

  21. Gravatar of Saturos Saturos
    23. September 2013 at 09:47

    Ryan Avent with another good post: http://www.economist.com/blogs/freeexchange/2013/09/monetary-policy-1

    And monetary policy is a really big deal: http://www.economist.com/blogs/freeexchange/2013/09/economic-history-1

  22. Gravatar of Michael Michael
    23. September 2013 at 10:06

    Off-topic – Bryan Caplan with a great post on sticky wages:

    http://econlog.econlib.org/archives/2013/09/why_dont_wages.html

  23. Gravatar of TravisV TravisV
    23. September 2013 at 11:19

    (Groan)

    Richard Fisher continues to baffle me:

    “Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question.” I believe that is exactly what has occurred, though I take no pleasure in saying so.”

    http://www.businessinsider.com/what-dallas-feds-dudley-thought-of-fomc-2013-9

  24. Gravatar of Doug M Doug M
    23. September 2013 at 11:31

    I can’t say that the decision to not-taper really surprised me. I thought that the 60% conviction of Fed watching economists that the Fed was going to taper was a little bit surprising.

    What is important to keep in mind, is that the Fed itself is not exactly sure what it is going to do, and is making up its policy as it goes along.

    I think the Fed should lay-off the forward guidance thing… If they think it is time to taper, then they should start tapering. But, to introduce the spectre of the taper introduces a degree of uncertainty that is not necessary.

  25. Gravatar of The Economy Is Pretty Hard to Understand These Days The Economy Is Pretty Hard to Understand These Days
    23. September 2013 at 11:36

    [...] strongly to the Fed’s announcement because it was unexpected and signaled not just a change, but a change to a completely different policy regime. I have to say that I find that strained. It’s become almost faddish to believe that all a [...]

  26. Gravatar of Matt McOsker Matt McOsker
    23. September 2013 at 11:56

    Confused by this statement:

    “Monetary policy drives NGDP;”

    So if the government increased spending by 50% tomorrow NGDP would not move because it is not monetary policy?

    And actually if the latter happened via deficit spending then the additional debt issuance would be a reserve drain?

  27. Gravatar of Matt McOsker Matt McOsker
    23. September 2013 at 12:26

    Correcting my prior comment – not a reserves drain but reserves neutral.

  28. Gravatar of TravisV TravisV
    23. September 2013 at 12:33

    Matt McOsker,

    You asked:

    “So if the government increased spending by 50% tomorrow NGDP would not move because it is not monetary policy?”

    Google the “Sumner Critique” of fiscal expansion. It says that if the Fed is doing its job, it will totally offset the expansionary impact of any deficit spending / tax cuts.

    Personally, here’s my way of thinking about it:

    Imagine that the Fed commits to keep the economy running at a certain rate of core inflation (say, 2%). Then the government follows the Keynesian advice and spends $5 trillion to hire more teachers, educate doctors, build schools, infrastructure, etc. That spending increase will cause a major increase in inflation as teachers buy more stuff. Observing that core inflation is now running at 4% or 5%, the Fed will aggressively implement contractionary monetary policy. That decreases spending–particularly in the private economy–and inflation falls back to the Fed’s 2% target. As a result, unemployment remains at nearly the same rate it was at before the government spent $5 trillion. The Keynesian stimulus was obviated. This is called the “Sumner critique” of Keynesian fiscal stimulus.

  29. Gravatar of TravisV TravisV
    23. September 2013 at 12:36

    Per Marcus Nunes, Neil Irwin identifies the problem with the approach of the FOMC:

    “They’re making it up as they go along, like the rest of us.”

    http://thefaintofheart.wordpress.com/2013/09/23/monetary-policy-used-to-be-a-serious-matter

  30. Gravatar of TallDave TallDave
    23. September 2013 at 12:36

    Once bondholders have cash, they have been paid off, and we taxpayers are free and clear. Yahoo!

    Taxpayers would still owe the Fed.

    QE qua QE is (mostly) inert , it’s what QE says about the future expectations for Fed policy that really matters.

    That’s why a relatively small surprise moves the markets so violently.

    So if it starts to look like Treasury can’t pay the Fed… well, then the expectations of a sovereign debt crisis come into play. It’s not too hard to imagine a Democrat Congress in, say, 2038 demanding the Fed take a giant loss on Treasuries rather than accept spending cuts.

  31. Gravatar of J J
    23. September 2013 at 12:57

    SG,

    You said: ‘Notice that the liquidity trappers–Krugman, Cochrane, et al–have never given a response to that basic criticism that QE ineffectiveness implies cost-free monetization of the national debt. Nor will they, because it’s a bulletproof refutation of the liquidity trap.’

    Eventually, velocity will rise and, if the Fed put enough dollars into the market in exchange for ALL of the national debt, the Fed will want to contract the money supply to prevent too high NGDP/too high inflation. The Fed will have to do this by selling treasuries back to the public.

  32. Gravatar of Saturos Saturos
    23. September 2013 at 13:02

    Bullard thinks QE is a really big deal: http://www.stlouisfed.org/newsroom/displayNews.cfm?article=1929

  33. Gravatar of Saturos Saturos
    23. September 2013 at 13:06

    Stanley Fischer, firefighter (sorry Evan): http://blogs.wsj.com/economics/2013/09/23/the-key-to-forward-guidance-dont-give-it-fischer-says/?mod=WSJBlog

  34. Gravatar of Saturos Saturos
    23. September 2013 at 13:23

    I quite liked this Neil Irwin piece as well: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/23/does-the-fed-have-a-communication-problem-or-do-markets-have-a-listening-problem/

  35. Gravatar of Saturos Saturos
    23. September 2013 at 13:28

    And that’s it for now. My link-posting role here may soon be obsolete: http://www.macrodigest.com/

  36. Gravatar of Benjamin Cole Benjamin Cole
    23. September 2013 at 14:08

    Tall Dave–
    You are correct—that is one reason I advocate placing the Fed inside the Treasury Dept. Then we would have true debt monetization through QE and it would be very effective stimulus.

  37. Gravatar of Matt McOsker Matt McOsker
    23. September 2013 at 14:40

    Travis increased gov spending does not guarantee inflation. We just had a big stimulus and little inflation. Mathematically NGDP goes up if gov spending goes up, assuming C + I don’t decline too much. C would benefit from gov spending.

  38. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. September 2013 at 15:32

    Matt McOsker,
    Here’s a relatively simple way to frame this.

    The following link is to a dynamic AD-AS diagram, and which can be found in “Modern Principles: Macroeconomics” by Tyler Cowen and Alex Tabarrok:

    http://1.bp.blogspot.com/_JqNx8yXnFE8/SxlWoq_PI8I/AAAAAAAABCg/7y9VXIleCrs/s1600-h/Tabarrok-Cowen+ADAS.JPG

    You’ll note that the rate of change in the aggregate demand curve (AD) is equal to the sum of the inflation rate and the rate of change in real GDP (RGDP), and so is precisely equal to the rate of change in nominal GDP (NGDP). The rate of change in NGDP is determined by both fiscal and monetary policy in the short run.

    Note also the short run aggregate supply (SRAS/AS) curve and the Solow growth curve. The Solow growth curve is essentially the long run AS curve (LRAS). In the short run wages and prices are sticky causing the SRAS curve to be upwardly sloped. In the long run money is neutral and wages and prices are flexible so the Solow growth curve is vertical. Thus shifts in AD influence the rate of growth of RGDP in the short run, but not in the long run. Similarly, shifts in AS influence the inflation rate in the short run, but in the long run the inflation rate is determined solely by AD.

    The Sumner Critique is essentially the recognition that, no matter where fiscal policy may shift the AD curve, monetary policy may always offset that shift.

    In other words expansionary fiscal policy can never make up for contractionary monetary policy, just as contractionary fiscal policy can never make up for expansionary monetary policy.

    The problem, and conssequently the solution, always lies in fixing monetary policy.

  39. Gravatar of TESC TESC
    23. September 2013 at 15:59

    @Matt McOsker

    “increased gov spending does not guarantee inflation.”

    Yes it does. I will get you the numbers. It is a good research topic, thanks. In short, to say that right now there would be no inflation by a stimulus it would be to say we are far away from full capacity or that the the AS is super flat. I do not think you would say that. We just got 3% inflation on 2011 for example.

    2007 2.8
    2008 3.8
    2009 -0.4
    2010 1.6
    2011 3.2
    2012 2.1

    This is an economy where extra stimulus would increase inflation beyond 2%. The FED would just naturally slow down expansion. Fiscal expansion means monetary slowdown. Why slowdown monetary policy? The FED can do all needed stimulus to achieve X inflation or Y NGDP, purchasing federal debt rather than making taxpayers go into debt. Why go into debt?

  40. Gravatar of TESC TESC
    23. September 2013 at 16:00

    Thanks Mark, I am too slow.

  41. Gravatar of "The markets went in thinking the Fed was determined to taper for Larry Summers-type reasons. Fear of a big balance sheet. At the end of the day the markets realized the Fed was serious about letting data drive policy. That’s not just a differ "The markets went in thinking the Fed was determined to taper for Larry Summers-type reasons. Fear of a big balance sheet. At the end of the day the markets realized the Fed was serious about letting data drive policy. That’s not just a differ
    23. September 2013 at 16:00

    [...] Source [...]

  42. Gravatar of benjamin cole benjamin cole
    23. September 2013 at 16:59

    TESC–
    Take look at Japan”s deficits over the years and…they had deflation.

  43. Gravatar of TravisV TravisV
    23. September 2013 at 16:59

    Matt McOsker,

    Also consider the perspective of Paul Krugman, the chief advocate of government stimulus.

    According to his view, employment can only significantly increase if aggregate demand (and thus inflation) increase.

    That’s why he’s advocating a long-run rate of inflation of 4%. See below, for example:

    http://krugman.blogs.nytimes.com/2013/05/24/the-four-percent-solution

  44. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. September 2013 at 17:01

    TallDave: It’s not too hard to imagine a Democrat Congress in, say, 2038 demanding the Fed take a giant loss on Treasuries rather than accept spending cuts. Really? Have you looked at where Democrats get their campaign funding from? I include in this unions whose members have pension funds.

    One reason the Australian Labor Government (2007-2013) just got tossed out so comprehensively by the electorate was that it thought a mining tax would be a great idea–soak the rich! Good, solid labor/social democrat/centre-left politics. Except that the previous Labor government (1983-1996) had partially privatised pensions (I am sorry, imposed compulsory superannuation contributions) and guess where a lot of super funds had invested? Lots of Labor voters did not see the tax as an attack on filthy capitalists but a tax on their super.

    Meanwhile, monetary policy matters in a very public way in Oz because so many folk have (expensive) mortgages (land rationing, it does drive up house prices–imagine a country where every major city has California’s/the UK’s land-rationing policies) and they care what happens to interest rates. (A major reason why the politics of the RBA is very different from the politics of the Fed: I remain flabbergasted that Obama left positions on the Fed Board vacant: that so would not happen down here.)

    Actually, come to think of it, lots of folk in all developed economies care about interest rates, which probably helps the plausibility of the “it’s all about interest rates” approach to monetary policy.

  45. Gravatar of benjamin cole benjamin cole
    23. September 2013 at 17:02

    Tall Dave—
    But the Fed, if it simply maintains the size of its balance sheet in perpetuity, obtains the same result.

  46. Gravatar of TravisV TravisV
    23. September 2013 at 17:03

    Excuse me, employment can only significantly increase if aggregate demand (and thus prices) increase more rapidly.

  47. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. September 2013 at 17:06

    TESC: Does anyone care about the balance sheet of the institution that produces the world currency?

    Why?
    Great comment. So, when was the last time a fiat-money producing central bank went bankrupt? I.e. could not get enough money to pay its putative creditors?

  48. Gravatar of TravisV TravisV
    23. September 2013 at 17:09

    Prof. Sumner,

    You might find Scott Grannis’s latest post to be both insightful and misguided at the same time:

    http://scottgrannis.blogspot.com/2013/09/fed-tightening-is-real-issue-not.html

  49. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. September 2013 at 17:13

    TravisV: Aggregate demand can go up without prices going up significantly. It is all about expectations of future income, which are what matter given sufficiently stable future-value-of-money expectations.

    I so get why Scott would prefer folk not to talk about inflation. Leaving aside measurement issues, it conflates thinking about income and thinking about the future-value-of-money.

  50. Gravatar of Matt McOsker Matt McOsker
    23. September 2013 at 18:17

    TESC here is a place to start, and as Ben cole states Japan is worth a look:

    1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.

    1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.

    1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.

    1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.

    1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.

    1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

    1998-2001: U. S. Federal Debt reduced 9%. Recession began 2001

    2004-2007: U. S. Deficit Reduced 61% (from $413B to $160B) Great Recession began 2008

    I am not saying monetary policy never matters, but fiscal policy can matter as much and is not mutually exclusive.

    TravisV – I agree with Krugman on this, and 4% inflation will only bother rich bond holders. 2% inflation after a huge asset deflation in housing makes no sense we can tolerate higher levels. Housing was what people used to spend more income than they earned through credit the past decade or so.

  51. Gravatar of TESC TESC
    23. September 2013 at 18:55

    Matt, I do you have background in Econ and Stats?

  52. Gravatar of Steve Steve
    23. September 2013 at 18:56

    I think the Fed should have tapered and then announced NGDPLT as forward guidance. (I know that’s slightly tongue in cheek but you should read my other posts tonight)

    The problem with the non-taper is that it further erodes Fed credibility, and that undermines the recovery. It also creates the impression of a power struggle within the Fed, which means the non-taper has limited stimulus power. In June, Bernanke was fired and Jeremy Stein was in charge. Now, Bernanke is back and Yellen is in charge. Of course this is probably the correct view given Obama’s bungling. So I suppose you could blame Obama for the soft patch over the last few months.

  53. Gravatar of TESC TESC
    23. September 2013 at 18:56

    I meant ‘do you’

  54. Gravatar of TravisV TravisV
    23. September 2013 at 19:59

    Lorenzo from Oz,

    Fair enough. It is possible that, if there’s a positive supply shock, aggregate demand can increase with the rate of inflation actually decreasing. I left out the scenarios of shifts in the aggregate supply curve in order to simplify my point.

  55. Gravatar of ssumner ssumner
    23. September 2013 at 20:10

    Anon gets it exactly right. However something tells me that Anon doesn’t understand why all three of his assertions are exactly right. Perhaps someone can help him. Hint, it has something to do with the EMH.

  56. Gravatar of TravisV TravisV
    23. September 2013 at 21:06

    Excuse me, aggregate demand can ACCELERATE….

  57. Gravatar of libertaer libertaer
    23. September 2013 at 23:07

    “I had a brain freeze yesterday when I endorsed the FDP. I completely forgot about the AfD, which is anti-euro but pro-EU.”

    Sorry, but here you are endorsing your worst enemies. In Germany everybody is an inflation paranoid, but AfD voters are the créme de la créme. It’s like endorsing Major Freedom or Geoff. Really! (The FDP is a close second when it comes to sado-monetarism. But almost every party, if they talk about monetary policy at all, are repeating the same common soundbite: “the expropriation of savers by the ECB’s lose money policy”. The only party who tries to learn something about monetary policy is the “Pirate party”, a left-libertarian party, but they had one of the worst records at this election.)

    In the conservative camp there is nobody arguing for NGDP targeting, no Larry Kudlow here. The only German I know who talks about NGDP is Wolfgang Münchau but he belongs to the Keynesian camp (favoring Eurobonds and other fiscal stuff).

    The only non-keynesian spokesman you had (in Germany) was Kantoos and look what happened to him!

  58. Gravatar of The Economy Is Pretty Hard to Understand These Days – GreenEnergy4.us The Economy Is Pretty Hard to Understand These Days - GreenEnergy4.us
    24. September 2013 at 00:45

    [...] strongly to the Fed’s announcement because it was unexpected and signaled not just a change, but a change to a completely different policy regime. I have to say that I find that strained. It’s become almost faddish to believe that all a [...]

  59. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 04:40

    TESC – I do not. At this point, I am learning as a hobby. I am very interested in MMT (MMR) and monetary policy as it relates to fiscal in a fiat currency system. The research you mention above would be interesting, and if you need help we could assemble some numbers.

    Another interest of mine is behavioral – do people “feel” real GDP or nominal. When I say feel, if NGDP is high do people feel that the economy is moving along. Best analogy is NGDP a dry heat? Does a person care is inflation is 4% if they have a job and a house versus unemployed with 2% inflation? If you own a home that is underwater then high wage inflation is advantageous.

  60. Gravatar of Jason Odegaard Jason Odegaard
    24. September 2013 at 08:02

    Scott, entirely unrelated question. Maybe you’ve answered it before, but a quick search of your past posts didn’t reveal an answer.

    What macroeconomics textbook(s) do you recommend? What do you teach with? Do any properly explain the role of monetary policy in the macro economy? Are there any that would be useful for someone interested in performing their own self-study of a undergraduate-level textbook?

  61. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 08:16

    Matt McOsker,
    “1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.

    1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.

    1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.

    1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.

    1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.

    1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.”

    These facts were all originally cited by Frederick C. Thayer in an article titled “Do Balanced Budgets Cause Depressions?” for The Washington Spectator on January 1, 1996. Four of the six periods of surpluses that Thayer mentions followed wars during which the debt rose far more than it was paid down during those periods. Another of the periods (1879-93) was just a further paying down of the tremendous debt run up during the Civil War. Hence, only one of the periods (1823-37) represents a seemingly voluntary paydown of debt not recently acquired through war.

    So if the argument is that the paydown of Federal debt somehow deprived the private sector of a source of financial assets I find that to be rather dubious.

    Furthermore the last four of those depressions were all global in nature and the historical root cause in each case seems closely related to the gold standard system that was in place at the time.

    I particularly find it difficult to believe that the paying down of the US Federal debt from 2.2% of GDP in 1852 to 0.7% of GDP in 1857, or by 1.5% of GDP, was responsible for a global depression.

  62. Gravatar of W. Peden W. Peden
    24. September 2013 at 08:36

    In the 19th century, banks laboured under reserve requirements (designed effectively as a tax) which meant that surpluses forced them to contract their liabilities. Under the National Banking System of the day, fiscal policy does have a strong connection with recessions and depressions. Extrapolating from such circumstances today is casual empiricism at its worst.

  63. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    24. September 2013 at 08:57

    Speaking of big deals, how does much does a Grecian earn;

    http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_24/09/2013_519997

    ‘ADEDY, the public sector umbrella union which organised the walkout, said government efforts to reduce the 600,000-strong civil service at the behest of the EU and IMF bailing out Greece was «the most merciless plan» to eliminate worker rights.

    ‘….The latest review by the lenders, who have propped up Greece with over 240 billion euros ($323.82 billion), will decide the size of a third bailout to see it through the crisis….’

  64. Gravatar of TallDave TallDave
    24. September 2013 at 09:00

    Really? Have you looked at where Democrats get their campaign funding from?

    Yes, that’s precisely the point — they would much rather force everyone else to take the hit, rather than recipients of government redistribution. The first rumors of this could begin to drive the federal debt into a death spiral where only the Fed will loan money to them. We’d start to look like Zimbabwe pretty quickly if that happened — the Plank curve is steep!

    Ben — The value of the Treasuries matters even if they sit on the balance sheet forever. For example, say the Fed buys $14T of commodities and then destroys them. Does anyone think that wouldn’t affect the currency?

    And remember, huge real deficits are looming because of the SSTF accounting fiction. Monetizing those is… problematic.

  65. Gravatar of TallDave TallDave
    24. September 2013 at 09:14

    Thanks Patrick.

    Greece’s creditors have said they will not dole out any more money unless Athens reforms a state apparatus accused of being spendthrift and corrupt.

    They said the same thing three bailouts ago. Greece is spendthrift and corrupt, the EU is feckless and corrupt, so the ECB wants a recession for everyone because they know they’re throwing money away. It’s mind-boggling, like a whole factory being given pay cuts because one of them keeps stealing from the till.

  66. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 09:22

    Mark, if the federal government ran a decent surplus for the next ten years what would happen to the economy? Lets assume the balance of trade is zero. Can you really pull indefinite amounts of net private savings out of the economy? Why leave out the two recent periods of deficit reduction which both preceded recessions. In 2007, we were also running a huge trade deficit of about 6% of GDP.

    We will find out in the next two years as the deficit continues to shrink, all while maintaining trade deficit of around 3% of GDP, and anemic credit growth.

    Now look at Greece, Italy and others.

  67. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 09:40

    Mark here is an interesting chart. Might be cool to also overlay monetary policy as well as maybe fixed investment. Not sure about the latter, but looking for a data series that represents investment resulting from credit – which I assume is a byproduct of monetary policy.

    http://research.stlouisfed.org/fredgraph.png?g=mHC

  68. Gravatar of TallDave TallDave
    24. September 2013 at 09:45

    Can you really pull indefinite amounts of net private savings out of the economy?

    Of course you can. “Net private savings” is just a strange euphemism for “taking money out of the productive economy.”

  69. Gravatar of Vivian Darkbloom Vivian Darkbloom
    24. September 2013 at 10:04

    “…how does much does a Grecian earn”.

    Has Patrick been reading John Keats?

  70. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 10:07

    TellDave – what happens if you do for long enough? What happens to the economy if the government cut spending by 50% tomorrow?

  71. Gravatar of TESC TESC
    24. September 2013 at 10:53

    Matt,

    (Sorry about the spelling, my tablet does not correct it)

    Thanks for answering, I just wanted to know your level of expertise to sort of know where to start. I am glad you are interested in economics. Those numbers in your chart veil too much.

    But to keep it simple, the last 2 resesions WOULD tell us that we need surpluses to have mild ressesions, not deficit reduction. When there was a surplus in the 90s we had a small contraction, when defecit was simply reduced in the 2000s we had a BANG. The more negative the deficit (higher surplus) the milder the next resesion.

    I am sure you would find my idea incorrect, even if you could not show what is incorrect with it. But is perfectly consistent with the data. Plus the fact that those data points are closer to our socio-economic reality. You can comfortable say I am confusing correlation with causation. And I can tell you same.

    Sound economic theory is necessary to interpret data. Numbers do not interpret themselves.

    The conversation will continue.

  72. Gravatar of TESC TESC
    24. September 2013 at 11:05

    Benjamn,

    why did you point out Japan? I am guessing because it shows that high deficits do not promote growth. So deficits do matter, even you print your own currency. Is that what you had in mind?

  73. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 11:28

    Thanks TESC. The deficit reduction in the latter part of the 2000′s had two an additional problems – it was accompanied by a large trade deficit and credit contraction resulting from the collapse in home prices. It was the perfect storm, and I do believe the Obama stimulus was a huge component that helped lift us out of it. At that time the trade deficit was around 6% of GDP, and credit contraction was the third leg. Basically, I am looking at this through the sectoral balances approach, and I acknowledge that deficits are not the only component.

  74. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 11:55

    Matt McOsker,
    “Mark, if the federal government ran a decent surplus for the next ten years what would happen to the economy?”

    In economics the fiscal spending multiplier is the ratio of a change in GDP to any autonomous *change* in the government budget balance. In fact this is something both Post Keynesians and New Keynesians are in general agreement about. Even Monetarists seemingly agree with this in principle except that they believe that monetary policy can in practice always offset fiscal policy rendering the fiscal multiplier effectively zero.

    But neither Post Keynesians nor New Keynesians believe that an unchanging fiscal balance provides any kind of expansionary or contractionary effect. All it does is change the public versus private composition of financial assets. This idea that an unchanging fiscal balance has a permanent expansionary or contractionary effect is purely an MMT idea (and evidently one that is shared by MR).

    “Lets assume the balance of trade is zero. Can you really pull indefinite amounts of net private savings out of the economy?”

    I don’t see why not. General government net financial liabilities are negative in Norway, Finland, Luxembourg, Korea, Estonia, Sweden and Switzerland.

    “Why leave out the two recent periods of deficit reduction which both preceded recessions. In 2007, we were also running a huge trade deficit of about 6% of GDP.”

    In my opinion the most objective way of measuring fiscal policy stance is the change in the general government cyclically adjusted balance. The cyclically adjusted balance takes into account any changes in the general government budget balance due to the business cycle. Thus changes in the cyclically adjusted balance are almost all due to discretionary fiscal policy, and consequently may be taken as a proxy for the degree of fiscal stimulus.

    You can find estimates of the general government cyclically adjusted balance in the IMF World Economic Outlook which is updated twice a year. The following are the general government fiscal balance as a percent of GDP and the general government cyclically adjusted balance (“structural balance”):

    http://www.imf.org/external/pubs/ft/weo/2013/01/weodata/weorept.aspx?sy=1991&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=111&s=GGXCNL_NGDP%2CGGSB_NPGDP&grp=0&a=&pr.x=29&pr.y=9

    The US general government cyclically adjusted balance increased every calendar year from 1993 through 2000 with the sole exception of 1999. Thus fiscal policy was contractionary nearly 8 years in a row and a recession only occured the year Bush’s EGTRRA tax cut was implemented helping to reduce the general government cyclically adjusted balance. Obviously I’m not suggesting the recession was caused by a tax cut, I’m merely pointing out the irony that a recession occured the moment fiscal policy became expansionary.

    The US general government cyclically adjusted balance fell in 2000 through 2003. And then the balance increased in 2004-06. It started to decrease again in 2007, the year before the recession. Once again the timing is off, with fiscal policy turning expansionary before the recession started.

  75. Gravatar of benjamin cole benjamin cole
    24. September 2013 at 12:16

    Tall Dave—
    You no savvy me. When the Fed does QE it is monetizing debt. In context, good. If when bonds in its portfolio mature it buys more bonds, and does so for decades (maintains the $3 trillion hoard) then the debt monetization is permanent.
    The Fed may wish to make clear this is an option.

  76. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 12:22

    Matt McOsker,
    “We will find out in the next two years as the deficit continues to shrink, all while maintaining trade deficit of around 3% of GDP, and anemic credit growth.”

    An even better measure of fiscal policy stance is the cyclically adjusted primary balance (CAPB). The CAPB goes a step further than the cylically adjusted balance, factoring out changes in net interest on government debt and thus ensuring that all of the changes in fiscal balance are discretionary in nature.

    You can find estimates of the CAPB in the IMF Fiscal Monitor which comes out twice a year. The CAPB for the Advanced Economies are on the bottom half of Table 2:

    http://www.imf.org/external/pubs/ft/fm/2013/01/pdf/fm1301.pdf

    The US CAPB was (-6.7%), (-5.7%) and (-4.4%) of potential GDP in calendar years 2010, 2011 and 2012 respectively. It is forecast to rise to (-2.7%) of potential GDP in 2013.

    Thus the change in CAPB was 1.0% and 1.3% of potential GDP in 2011 and 2012 respectively and is forecast to be 1.7% of potential GDP in 2013. In short we don’t have to wait two years, fiscal policy has been a major drag on the economy for nearly three years now.

    “Now look at Greece, Italy and others.”

    If you look again at Table 2 you’ll notice that Italy has increased its CPBB by 4.1% of potential GDP between 2010 and 2013, only slightly more than the US increase of 4.0% of potential GDP. So in my opinion the difference in NGDP performance between the US and Italy is attributable almost entirely to monetary policy.

    Greece on the other hand has increased its CAPB by 17.9% of potential GDP between 2009 and 2013. Given both Italy and Greece are subject to the same monetary policy, the difference in NGDP performance between Italy and Greece may be mostly attributed to this.

    However, according to the ECB statistical warehouse Greece’s general government has borrowed 57.5 billion euro from 2010Q3 through 2013Q1 alone, which is equal to roughly 30% of Greece’s current nominal GDP. So Greece continues to be a large supplier of financial assets in the form of Greek general government debt. Thus measuring fiscal policy stance in terms of the level of deficits, rather than changes in cyclically adjusted deficits, doesn’t seem to work very well, does it?

  77. Gravatar of John John
    24. September 2013 at 12:51

    The real reason it matters is that the Fed goes through cycles of tightening and loosening. Once they tighten once, it is very likely that they will tighten after the next policy meeting and the next one after that. Since every policy movement since 2007 has been in the direction of lower interest rates and more QE, this means that there is a possibility that there will be even more of this in the future before they reverse direction and start pulling away the punch bowl.

  78. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 12:59

    Mark why do you limit it to NGDP only? What about employment? Then are you saying Krugman is wrong about Austerity?

  79. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 13:04

    Matt McOsker,
    “Lets assume the balance of trade is zero. Can you really pull indefinite amounts of net private savings out of the economy?”

    Here’s an interesting historical example from a sectoral balances point of view.

    From 1816 through 1899 the UK had a central government primary budget surplus every single year according to the BOE. Gross government debt fell from 226.3% of GDP in 1815 to 35.1% of GDP in 1899 according to the IMF historical public debt dataset.

    It also had a current account deficit every year except for five years during this time period (1825, 1831, 1839-40 and 1847) according to the BOE. Since the handful of current account surpluses were relatively small, the domestic private sector ran a net financial deficit for for 84 consecutive years.

    Of course the UK had recessions during this time period, some of them very serious. But the the UK went from having the second highest GDP per capita on earth after the Netherlands in 1815 to having the highest on GDP per capita on earth in 1898. So all of those government primary surpluses didn’t seem to harm its economy much did they?

    I think both the fact that the UK had a government debt over 200% of GDP at the beginning of this time period, and the fact that it consistently ran government primary surpluses for 84 years without disaster, underscores the fact that there is nothing necessarily dangerous about either extreme of fiscal behavior.

  80. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 13:10

    Matt McOsker,
    “Mark why do you limit it to NGDP only? What about employment?”

    Because we’re talking about monetary aand fiscal policy. They don’t impact employment directly, they affect it by changing AD (NGDP). Furthermore economies can also be subject to AS shocks which are largely outside of the control of monetary and fiscal policy.

    “Then are you saying Krugman is wrong about Austerity?”

    In my opinion Krugman is wrong about the “liquidity trap”.

  81. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 13:27

    Mark, thank you for the replies. But fiscal policy does immediately impact employment. The government could go out and hire 2 million people tomorrow if they wanted. I remember the census hiring directly impact employment.

  82. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 13:52

    Matt McOsker,
    “But fiscal policy does immediately impact employment. The government could go out and hire 2 million people tomorrow if they wanted. I remember the census hiring directly impact employment.”

    The operative word is “could” (and the Census is not a fiscal stimulus program). Obviously anytime the government increases spending there is some direct hiring. But the great majority of the employment effect of fiscal policy is indirect. There are of course historical examples of direct hiring programs such as the Federal Emergency Relief Workers (FERW) during the Great Depression, but that is not relevant to our discussion of the current effect of fiscal policy with respect to US, Italy and Greece.

  83. Gravatar of Tom Brown Tom Brown
    24. September 2013 at 14:11

    Mark, is a quick Summary of your views like this:

    Since in order for fiscal stimulus to be effective, monetary targets by the CB would have to change anyway, then why not just change the monetary targets by themselves and skip the fiscal stimulus?

  84. Gravatar of Tom Brown Tom Brown
    24. September 2013 at 14:22

    Scott, are my comments banned? Why? I’m always polite, don’t ramble on (except when I’m addressing Fed Up… but not in posts to you), and genuinely want to understand MM from its most influential proponent (you). I do comment at pragcap, but after you pointed out one unflattering comment I made regarding you, I’ve since then always kept out of any attacks on you or MM. All I’ve ever done over there (and at other blogs) is to try to get people NOT to underestimate you and to explain your views and the views of other MMists as best as I am able.
    Thanks.

  85. Gravatar of TravisV TravisV
    24. September 2013 at 14:38

    I thought the neoliberal commenters here might have fun with this new post by Brad DeLong:

    “The Seven Cardinal Virtues of Equitable Growth” by Brad DeLong:

    http://delong.typepad.com/sdj/2013/09/the-seven-cardinal-virtues-of-equitable-growth.html

  86. Gravatar of Matt McOsker Matt McOsker
    24. September 2013 at 15:23

    Mark sure it does. Greece Spain and Italy have budgets that contracted(ing) and high unemployment and lousy economies. Italy is in the “best” shape of the 3 because of a positive trade balance. Unemployment is through the roof in Greece. The ECB has their bond rates back down, but absent a change in fiscal policy I do not see where their economies recover much – especially on the employment front.

    Australia is the next to watch. Balance of trade shifted negative, their budget has been flat, their growth is slowing, and unemployment up. This despite their rates being halved.

    Now I do agree that fiscal policy can be more or less direct depending on how the political winds decide to do it.

  87. Gravatar of wm tanksley wm tanksley
    24. September 2013 at 15:41

    Did you guys see the controversy about the allegedly too-fast response of the market to the Fed announcement? It seems that a bunch of trades happened at precisely 2PM by the Naval Observatory, observably ahead of the speed-of-light lag for the distance between the Fed announcement and the trading center.

    http://www.ft.com/cms/s/0/eb5953b8-2545-11e3-b349-00144feab7de.html#axzz2fr8dC0Ua

    There are other articles, but this one seems to have been written by someone who actually studied the issue.

    Anyhow, the claim is that someone leaked the information to a trading company, who set up a planned trade, and then triggered it to fire when the announcement was scheduled to be made. It then stood out like a sore thumb against all the other automated trades hitting the market at the sluggish speed of light.

    So… hm. I guess this doesn’t prove the EMH, but it certainly is an illustration of it. It’s also an illustration of how dangerous it is to keep the Fed’s decisionmaking private and arbitrary.

  88. Gravatar of AldreyM AldreyM
    24. September 2013 at 15:47

    Matt McOsker: “The ECB has their bond rates back down, but absent a change in fiscal policy I do not see where their economies recover much – especially on the employment front.”

    :) Worst comment ever.

  89. Gravatar of Jim Glass Jim Glass
    24. September 2013 at 15:51

    “Can you really pull indefinite amounts of net private savings out of the economy?”

    “I don’t see why not. General government net financial liabilities are negative in Norway, Finland, Luxembourg, Korea, Estonia, Sweden and Switzerland.”
    ~~~

    This odd phrase “net private savings” seems to have a mesmerizing effect on MMTers, much like that of headlights on deer.

    Of course what matters for the health of an economy is gross savings that go into capital formation.

    Case 1): Parties in the private sector save funds that are invested in a new factory that will produce goods profitably for society for years to come, thus making society wealthier.

    However, the savings of the investors are offset by the liability of the factory owner to them. Thus there are zero “net” savings — and no having no savings is bad! Thus the MMTer tells us, and who could argue that having no savings is good?

    Case 2): The government runs up debt, attracting the savings of the aforementioned private sector parties to its bonds, away from the factory. Thus, no factory is built and the future becomes poorer by that amount (as the govt consumes its borrowings on bombs, medicare, crop supports, etc., rather than investing them) — while at the same time the tax liability of future taxpayers becomes greater by that amount.

    But now there is no offsetting private sector liability created against the private parties’ saving. So “net” private savings increase. Thus, the loss of the factory is good, as more “net” savings must be better than less “net” saving. It is self-evident!

    Case 3): The government starts paying down its accumulated debt at a steady pace, year after year. Thus the private parties who formerly lent their savings to it now are forced to redirect their savings to private-sector capital investment — creating new productive factories year after year that otherwise would not have existed.

    “The horror!”, cries our MMTer, for with each new productive factory created to produce for the future of society, using funds that were formerly loaned to the govt, the liabilities of the private sector go up — and “net” private sector saving is destroyed!

    How long can a society survive with its net savings being continually destroyed like that — “pulled out of the economy”, by being invested *in* the economy.

    Driven down to nothing. Less than nothing!

    (Somebody call Norway, Finland, Korea, Sweden and Switzerland and ask them how they do it.)

  90. Gravatar of TESC TESC
    24. September 2013 at 16:17

    Jim,

    I wanted to write your post but I do not have time. Thanks, the Universe is better because of your comment.

    Aldrey,

    Please explain him why his comment is so wrong. Give him the opportunity to learn.

  91. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 16:26

    Matt McOsker,
    “Mark sure it does. Greece Spain and Italy have budgets that contracted(ing) and high unemployment and lousy economies.”

    According to the October 2012 IMF Fiscal Monitor the US cut government spending more than Italy between 2009 and 2012.
    (Page 21 – Figure 15 – Expenditure Items):

    http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdf

  92. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 16:33

    Matt McOsker,
    “Italy is in the “best” shape of the 3 because of a positive trade balance.”

    Spain has had a trade surplus since 2012Q2:

    http://research.stlouisfed.org/fred2/graph/?graph_id=138832&category_id=0

    And yet it still has a 26.3% unemployment rate. There’s much more to economics than accounting identities.

  93. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 16:37

    Matt McOsker,
    “The ECB has their bond rates back down, but absent a change in fiscal policy I do not see where their economies recover much – especially on the employment front.”

    Even Krugman thinks expansionary monetary policy would help the eurozone periphery a great deal.

    http://krugman.blogs.nytimes.com/2012/07/29/internal-devaluation-inflation-and-the-euro-wonkish/?_r=0

  94. Gravatar of TESC TESC
    24. September 2013 at 16:38

    @Mark

    ‘There’s much more to economics than accounting identities.’

    You just destroyed all of MMT, thanks.

  95. Gravatar of Negation of Ideology Negation of Ideology
    24. September 2013 at 17:16

    Matt McOsker – You’ve asked some very good questions on this thread, but for now I’d like to address your history of debt reduction followed by depressions comment (I won’t quote from it again here)

    You list several periods of varying length (3-13 years) of debt reduction of different percentages (9-99%, and I thought it was 100%, didn’t the debt briefly hit zero?). It seems to me the only thing you proved is that it’s easier to reduce the debt when the economy is strong. If there’s any pattern there, I can’t detect it, other than that prosperity ends with lack of prosperity.

    Perhaps this example will make my point:

    1789-1811: Peace. War of 1812 began in 1812
    1814-1845: Peace. Mexican War began in 1846
    1848-1860: Peace. Civil War began in 1861

    (I won’t go through all our wars, but you get the point.)
    That doesn’t prove that peace causes war.

    If debt repayment is the cause of depressions, then why did the Panic of 1837 happen after 13 years of debt repayment and not 3? Jackson’s destruction of the Bank of the US and his Specie Circular, both monetary actions, are much more plausible explanations. And the fact that every depression we’ve had has been under the gold standard is another clue that bad monetary policy is the cause.

  96. Gravatar of Philippe Philippe
    24. September 2013 at 17:50

    Mark Sadowski,

    That UK 19th century example is interesting. Where can I find those statistics? Do you have any links?

    I’m wondering whether it might have something to do with the expansion of the Empire. Apparently Between 1815 and 1914, “around 10,000,000 square miles (26,000,000 km2) of territory and roughly 400 million people were added to the British Empire”.

    http://en.wikipedia.org/wiki/British_Empire#Britain.27s_imperial_century_.281815.E2.80.931914.29

  97. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 18:04

    Philippe,
    The BOE data comes from the data annex of “The UK recession in context — what do three centuries of data tell us”:

    http://www.bankofengland.co.uk/publications/Pages/other/monetary/mpreadinglistf.aspx

  98. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 18:07

    Philippe,
    The IMF’s Historical Public Debt Database can be found here (click on link to data for this title):

    http://www.imf.org/external/pubs/cat/longres.cfm?sk=24332.0

  99. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. September 2013 at 18:22

    Philippe,
    The historical GDP per capita data comes from the Angus Maddison database (look under Historical Statistics – Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD):

    http://www.ggdc.net/maddison/oriindex.htm

    “I’m wondering whether it might have something to do with the expansion of the Empire.”

    That thought had crossed my mind. But exactly how would that have enabled the UK’s domestic private sector to run a net financial deficit for for 84 consecutive years without negatively impacting the economy?

  100. Gravatar of Philippe Philippe
    24. September 2013 at 18:29

    Thanks.

  101. Gravatar of Brian Donohue Brian Donohue
    24. September 2013 at 19:29

    Vivian,

    If you are still reading, you are owed (ode?) a round of applause. Hilarious!

  102. Gravatar of TallDave TallDave
    24. September 2013 at 20:51

    Ben — Right, I’m not arguing the Fed can’t monetize debt by rolling it over forever. What I’m saying is that doing so isn’t consequence-free to taxpayers — if they don’t make the payments, the currency would collapse. As they say, TANSTAAFL.

  103. Gravatar of TallDave TallDave
    24. September 2013 at 20:55

    Jim Glass — Very good unpacking of “net private savings.”

    But now there is no offsetting private sector liability created against the private parties’ saving. So “net” private savings increase. Thus, the loss of the factory is good, as more “net” savings must be better than less “net” saving. It is self-evident!

    Yes, I think most people lose interest in MMT as soon as they figure this out. But I suppose the popularity of spending other people’s money never wears off.

  104. Gravatar of Tom Brown Tom Brown
    24. September 2013 at 21:06

    TallDave, you write:

    “What I’m saying is that doing so isn’t consequence-free to taxpayers — if they don’t make the payments, the currency would collapse.”

    Just curious, do you subscribe to Mike Sproul’s backing theory?

  105. Gravatar of Benjamin Cole Benjamin Cole
    24. September 2013 at 22:13

    Tall Dave–

    I think you have it backwards.

    The Fed owns the bonds.

    The collect the interest payments and ultimately the principle on the bonds. In no way is the fed burdened by the bonds. They are beneficiaries of having printed money and bought bonds.

    The Treasury has to make payments on the bonds.

    Right now, the Treasury makes payments on the bonds, but the Fed rebates excess earnings to the Treasury. It is a neat little plus for taxpayers.

    The Fed, when the bonds mature, can just buy more bonds, thus effectively monetizing debt in perpetuity (or for so long the when the bonds finally mature, it won’t matter much).

    No free lunch? Well, maybe.

    Right now we are seeing no inflationary consequences from QE.

    In fact, PCE core is headed downhill towards 1 percent. If anything, inflation is uncomfortable low, and a risk—we might slip into ZLB-recession land.

    It is a great time to monetize a few trillion in debt. And pay for that lunch with fresh currency.

    The economy is starved.

  106. Gravatar of Benjamin Cole Benjamin Cole
    24. September 2013 at 22:43

    Okay, the Fed has been doing a modest amount of QE. I say not enough. We are not monetizing enough debt.

    Here are the PCE chain-type index numbers:

    Aug 2008 101.2
    Feb 2013 107.1
    Aug 2013 107.3

    We are talking about dead inflation. Siz percent inflation over five years…is nearly a record low.

    And we are dead in the water now.

    So, who says there are consequences to QE? in this lifetime?

  107. Gravatar of Jim Glass Jim Glass
    24. September 2013 at 22:47

    TESC, TallDave — Thanks, I’m always happy to do my bit for the universe.

  108. Gravatar of Morgan Warstler Morgan Warstler
    25. September 2013 at 03:38

    Jim,

    It’s a fun one, but you don’t have to model the end of govt, debt to solve the problems MMT cries about…

    I made Mosler argue that clearing markets is bad.

    http://www.morganwarstler.com/post/49828770506/sultans-and-their-fanners

  109. Gravatar of Matt McOsker Matt McOsker
    25. September 2013 at 04:30

    Jim, first please don’t pigeonhole me to MMT or any other school of econ. I feel the truth sis somewhere in between several schools – but also thank you for engaging in the chat.

    I think you have mischaracterized the savings concept as I would describe it. Net private Savings can also be stated as savings net of investment (see Wynne Godley). You can pull net financial assets out of the economy, the negative effects of which can be offset by a positive trade balance and/or credit creation by banks. Obviously, the latter can hit a wall circa 2008 (and the trade deficit was huge).

    How do those other countries do it? Switzerland, Norway, Sweden and Korea all have trade surpluses. Finland, Estonia and Luxemborg have trade deficits but have been running some budget deficits. I have not looked at credit growth in any of these places.

    Government spending and private capital can both be misdirected. Spending on wars is not the best use of government money, and private capital was misused on toxic paper, and inflated real estate just before the 2008 debacle.

    In the end when the government deficit spends, someone uses reserves to buy the bond, but the government spending replaces the reserves. the original reserves remain in the system plus you have added the government bond.

  110. Gravatar of Matt McOsker Matt McOsker
    25. September 2013 at 04:31

    Post chopped off my last sentence. Running a surplus drains reserves.

  111. Gravatar of Dan W Dan W
    25. September 2013 at 05:33

    Noticed today that the price of the cheapest burger at my local Five Guys had increased in price another 20 cents. That is on top of several previous increases over the past couple of years.

    The price of a fast food burger reflects costs of labor, real estate, energy, and food staples. In other words, changes in the price of a fast food burger are fairly representative of the changes in prices consumers experience as a whole. And note, the fast food hamburger market is very competitive and well developed so it is not as if one can blame these price hikes on a supply or demand shock.

    By my reckoning the annual rate of inflation in the fast food business is running well over 5% and has been for the past several years. Yet because the price of big screen TVs is collapsing we are supposed to believe that the overall rate of inflation is low.

    Of course the TV is made in southeast Asia. The fried hamburger is a purely domestic product. Even more, the hamburger is a meal and the TV is a disposable luxury. Speaking of domestic costs, the headlines are saying Americans are paying more than ever for state and local taxes as well as for health care and education. The headlines also say that it costs more than ever to raise a child. But the Keynesians continue to shout that “inflation is dead”. If only believing was all that mattered.

  112. Gravatar of Matt McOsker Matt McOsker
    25. September 2013 at 05:35

    Mark, Spain has run a trade deficit for a number of years, it peaked in 2008 and it has been narrowing. The latter usually happens when people can no longer afford imports. The narrowing will help them eventually if it turns to a sustained trade surplus.

    http://www.tradingeconomics.com/spain/balance-of-trade

  113. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 06:53

    The numbers you have posted from Trading Economics are for *goods trade only*. Services represent about 30% of Spain’s international trade, and according to AMECO, Spain has had an annual surplus in services trade since at least 1964.

    The data I posted previously was for exports and imports of *goods and services*. It came from FRED which in turn gets it from the OECD. The numbers are identical to what you will find at Eurostat, AMECO, the ECB statistical warehouse and Agencia Tributaria.

    Spain has had a surplus in the trade of goods and services since 2012Q2 (that’s five consecutive quarters).

  114. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 07:14

    Tom Brown,
    “Since in order for fiscal stimulus to be effective, monetary targets by the CB would have to change anyway, then why not just change the monetary targets by themselves and skip the fiscal stimulus?”

    That’s not exactly how I would phrase it but that’s essentially the gist of it.

  115. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. September 2013 at 07:21

    ‘If only Glass-Steagall hadn’t been repealed…’;

    http://www.dailyfinance.com/2013/09/24/fed-leak-chicago-traders-got-no-taper-decision-news-early/

    ———-quote———–
    The doors were locked at 1:45 p.m., and Fed staffers handed out copies of the statement at 1:50 p.m., allowing reporters a few minutes to digest the complicated document before reporting on its contents. At 1:58 p.m. television reporters were escorted out of the room to a balcony where cameras had been positioned. The Fed’s security rules dictated that television reporters were not allowed to speak before precisely 2 p.m. Print reporters were told they were allowed to open a phone line to their editors at headquarters offices a few moments in advance of the hour, but not allowed to interact with people on the other end of the line until exactly 2 p.m.

    On top of those precautions, every media person entering the lockup — including two employees of CNBC — was required to sign an agreement that read: “I understand that I may make no public use of the documents distributed by Federal Reserve Board (FRB) staff or the information contained therein, including broadcasting, posting on the Internet or other dissemination, until the time the FRB has set for their public release.”

    All of the security precautions were taken to prevent the details of the Fed’s decision from leaving the building before the precise deadline to make sure that editors, technicians, producers and even computer techs in media offices all over the country could not learn of the decision ahead of time.

    On Wednesday, that tiny sliver of time saw a burst of trading. Nanex said as much as $600 million of assets changed hands in Chicago in the milliseconds before the rest of the market there was aware of the decision by the Fed.
    ————–endquote————–

  116. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 07:56

    Matt McOsker
    “Finland, Estonia and Luxemborg have trade deficits but have been running some budget deficits.”

    Again this only refers to the trade in *goods*. The trade in *goods and services* is far more relevant to this conversation.

    Finland had a surplus in the trade of goods and services for the last two quarters:

    http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=teina050&plugin=1

    Estonia had a deficit last quarter but it’s only the second quarterly deficit since the beginning of 2009. Luxembourg’s primary export is financial services. According to AMECO it hasn’t had a significant deficit in the trade of goods and services since 1982.

    All of this actually supports your argument, so consider this to be vigorous nitpicking on my part.

  117. Gravatar of Matt McOsker Matt McOsker
    25. September 2013 at 08:24

    Mark, good discussion. My sectoral balances argument is simply balance of trade, credit, and fiscal. Credit of course, is heavily related to monetary policy and banks.

    Another thing that I have been pondering is QE and the recent tax increases. The tax increases possibly amount to a $26 billion per month reserve drain. Is this in theory a drag on QE operations.

  118. Gravatar of Vivian Darkbloom Vivian Darkbloom
    25. September 2013 at 08:42

    Brian Donohue,

    I can’t be 100 percent sure, but I think you ode that accolade to Patrick who I suspect is fond of playing around with homophones (also from the Greek, but having nothing to do with gay telephones).

    I thought that was a rare use of the term Grecian, which is normally used as an adjective (remember Grecian Formula?) and when used as a noun for an expert on matters Greek and, if used to describe the Greeks, it is rather antiquated.

    But, only Patrick (and perhaps his hairdresser) would know for sure.

  119. Gravatar of Philippe Philippe
    25. September 2013 at 09:33

    Jim Glass,

    I think it’s safe to say that you have completely misunderstood the MMT argument regarding ‘net saving’. Maybe you picked it up from blog comment threads instead of reading the actual texts, I don’t know.

  120. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    25. September 2013 at 09:49

    For the Grecians, it’s pretty clear their formula isn’t adding up.

  121. Gravatar of TallDave TallDave
    25. September 2013 at 09:56

    Ben — I think your characterization is accurate as far as it goes, but “monetizing” is irrelevant if Treasury continues to make payments at market rates, since they could just as easily do the same thing in the open market. Treasury is indifferent to whether the Fed owns their bonds unless Treasury is in trouble (i.e. can’t make payments or can’t sell bonds on the open market — which of course amounts to the same thing really).

    Rapid monetization happens when sovereigns are at high risk of default — they turn to the CB for loans (or outright transfers) in their own currency, because they can’t get cash any other way.

    The Fed can also intervene only to the extent of making it slightly cheaper for Treasury to borrow of course, but that’s a very weak form of monetization. And that’s what QE is.

    Why isn’t there inflation now due to QE? Because QE isn’t very inflationary, as Scott has pointed out before — everyone still believes the Fed’s long-term position is an inflation target of 1-2% and everyone believes Treasury is going to make their payments. Expectations uber alles.

  122. Gravatar of TallDave TallDave
    25. September 2013 at 10:06

    “Since in order for fiscal stimulus to be effective, monetary targets by the CB would have to change anyway, then why not just change the monetary targets by themselves and skip the fiscal stimulus?” That’s not exactly how I would phrase it but that’s essentially the gist of it.

    I would say something like “There exists some optimal monetary policy where fiscal stimulus is zero. There also exist combinations of suboptimal monetary policy and fiscal stimulus which are better than the same suboptimal monetary policy alone, but these combinations will always be less optimal than the optimal monetary policy alone.”

  123. Gravatar of TallDave TallDave
    25. September 2013 at 10:29

    Tom Brown — I think Sproul’s arguments are pretty sound, the question is when and where they’re applicable (e.g. real bills doctrine was applied very poorly in TGD, because they didn’t understand monetarism yet). I don’t think anyone really believes (for instance) the U.S. could announce it will henceforth stop collecting taxes borrow from the Fed instead without triggering hyperinflation, even if the effect of the quantity of money was neutral.

  124. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 11:38

    Matt McOsker,
    “Another thing that I have been pondering is QE and the recent tax increases. The tax increases possibly amount to a $26 billion per month reserve drain. Is this in theory a drag on QE operations.”

    1) I don’t know where you’re getting the $26 billion figure from. According to the CBO this fiscal year’s federal budget changes increase payroll tax receipts by $86 and income tax revenue by $42. That comes to an average of $14 billion a month through the end of September. Even when you add in the reductions in spending of about $50 billion over seven months that only brings it to $21 billion a month.

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

    2) Yes, I realize it appears to be conventional MMT wisdom that a reduction in a budget deficit reduces reserve balances by an equal amount, but that’s obviously not true.

    Reserve balances equal the monetary base less currency in circulation. Currently the monetary base is equal to whatever it was last month plus whatever the Fed chooses to add to it through QE this month.

    Thus the change in the Federal budget deficit has zero impact on the monetary base. It may impact how much of the monetary base is held in the form of currency, and by implication the amount of reserve balances, but it’s not clear to me why that would be the case.

  125. Gravatar of Tom Brown Tom Brown
    25. September 2013 at 12:23

    TallDave, thanks for your reply. What’s “TGD?” Your position appears somewhat different than Sumner’s here:

    http://www.themoneyillusion.com/?p=23516#comment-275450

    Do you agree there is a difference?

  126. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 12:29

    Scott,
    David Andolfatto has a new post on the Koizumi Boom where he takes some of the points I made in comments on his previous post on Japan and runs in a slightly different direction:

    http://andolfatto.blogspot.com/2013/09/another-look-at-koizumi-boom.html

    If nothing else it makes for an extremely effective Paul Krugman Smackdown:

    “…According to Krugman, the Koizumi boom was nothing special–it was driven by an export boom. And, of course, in a world recession, one cannot export one’s way out of trouble…unless. And in any case, I think Krugman is wrong in his assertion. Take a look at the first figure here. Yes, it is true that exports boomed–but so did imports. And the last time I checked, only net exports constitute contributions to GDP.

    In response to Kobayashi’s column, Krugman writes:

    “But it’s true that I’m a bit puzzled by the attribution of Japan’s recovery to bank reform. If the bank-reform story were central, you’d expect to see some “signature” in the data — in particular, I’d expect to see an investment-led boom as firms found themselves able to borrow again. That’s not at all what one actually sees.”

    The reason Krugman does not “see” the signature investment boom in the data is the same reason I did not see it in my earlier post, where I obsured the boom by lumping private and government investment together. The following figure shows a rather robust boom in private investment during the Koizumi era…”

    Ouch!!!

  127. Gravatar of W. Peden W. Peden
    25. September 2013 at 12:40

    Tom Brown,

    My guess would be “The Great Depression”.

  128. Gravatar of Philippe Philippe
    25. September 2013 at 12:57

    Mark Sadowski,

    in your previous comment you said:

    “[the UK] had a current account deficit every year except for five years during this [1816 through 1899] time period (1825, 1831, 1839-40 and 1847) according to the BOE.”

    According to Chart 13 in the BOE document, the UK had a current account *surplus* through most of the 19th century, and especially large current account surpluses after 1850. The specific years you mention (1825, 1831, 1839-40 and 1847) appear to be years in which it had current account deficits!

    see chart 13, page 284:

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100403.pdf

  129. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 14:01

    Philippe,
    You’re right.

    I took my information from the Excel file which is labeled “Current account deficit”. I glanced at 1890s trade figures and noticed imports exceeded exports and assumed that positive really meant deficit. (Oops!)

    So I guess the question is, can anything be salvaged from that example?

    Well, the central government primary surplus exceeded the current account surplus every year from 1816 through 1853. So the domestic private sector was only in financial deficit for a period of 38 consecutive years.

    Granted, that’s not as impressive as 84 years but on the other hand the fact that the central government had a primary surplus every year from 1816 through 1899 is still true. And in fact since the central government also had a primary surplus in 1815 (current account data only starts in 1816), that means the central had a primary surplus for 85 consecutive years without disaster.

  130. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 14:44

    Phillipe,
    It’s also worth mentioning that the UK surpassed the Netherlands in terms of GDP per capita by 1851, becoming the country with the highest GDP per capita on earth.

    Your correction forced me to look more methodically for the periods of sustained domestic private sector financial deficits in UK history. It turns out there is another one.

    From 1946 through 1973 the central government primary surplus less the current account surplus was also positive every year. Thus the UK’s private domestic sector was in financial deficit for 28 consecutive years in this latter period.

    The central government ran a primary surplus every year from 1947 through 1971, a period of 25 consecutive years. Public debt fell from 269.8% of GDP in 1946 to 65.6% of GDP in 1971.

    Between 1945 and 1973 the UK fell from being behind only the US, Canada and Switzerland in terms of GDP per capita, to also being behind France, Belgium, the Netherlands, Denmark, Sweden, Australia and New Zealand. Of course this period was the inverse of the 19th century with the UK’s colonies gaining independence.

    P.S. Another good candidate is the Netherlands, which also had over 200% of GDP in public debt in the early 19th centruy and at the end of WW II, and paid down its public debt over periods that were decades in length.

  131. Gravatar of Jim Glass Jim Glass
    25. September 2013 at 14:56

    @ Philippe

    Jim Glass, I think it’s safe to say that you have completely misunderstood the MMT argument regarding ‘net saving’. Maybe you picked it up from blog comment threads instead of reading the actual texts, I don’t know.

    I picked it up from Warren Mosler and his first generation disciples directly, in extended exchanges on sci.econ back, oh, 15 years ago. Pretty much at the creation.

    I also have Warren & Co explaining how capital investment isn’t reduced by savings going to the govt because “the supply curve for money is horizontal” so there is always an unreduced amount of funds available for firms to invest, whatever. I keep that exchange in my files to look back on now and then for a chuckle.

    Patrick knows, he was there.

    Of course this was back when they were calling themselves “chartalists”, before they hit on the “MMT” moniker — which is a wonderful example of the marketing power of good trade names (as if there is anything either ‘modern’ or ‘monetary’ about chartalism and the “T” doesn’t stand for tautology.)

    I mean, how many people would have been attracted to “The New Chartalism”? A good brand name matters!

    Since then I’ve seen and exchanged with and perused the web sites and writings of generations of MMTers who’ve arrived on the scene, some of whom have tried to hash out less chuckle-worthy explanations of how the textbooks and central bankers and Nobelists have it all wrong about, well, all the basics.

    But of course they exist in a huge variety, from the much more sophisticated than Warren who are trying to re-invent Abba Lerner’s functional finance 60 years later (for some strange reason), to silly people who truly believe that printing trillion-dollar bills had no causal effect at all on inflation in Zimbabwe, and who wouldn’t know what “functional finance” means if Abba came back and smacked them in the head with it.

    (Though three traits a great many have often seemed to share in common over the years are: being mesmerized by accounting identities and very quick to make the mistake of thinking of identities as models; believing they have superior knowledge of how things “really work” because they are employed in a bank or somewhere or read the blog of someone who says he does, while the central bankers who run the banking systems and textbook writers all live in some fantasy world of theory; and on the strength of the first two feeling no need to actually learn what the central bankers, textbooks and Nobelists say, since they are all wrong on their face — as one MMTer replied to me not so long ago “that’s all blah, blah, blah, why bother with it?” Thus obtaining the great psychic reward of knowing oneself to be more expert than the experts with none of the effort.)

    All of which makes it very difficult for us as yet unenlightened to pin down any “true” description of the tenets of MMT, as so many MMTers find it so convenient to contradict each other — with the hugely frequent and very frustrating result being the experience of citing one MMTer’s plain if dubious statement to another and getting the response: “But MMT doesn’t say that, how little you know about MMT, you shallow and naive person… Did you get that from a blog comment?…” :-)

    The consequence being I’ve been around the mulberry bush so many times that the eyes now glaze at the term “MMT”, and when it arises in discussion I typically ignore and move on. Usually. So I haven’t really been following here.

    What flavor of MMTer are you? I don’t know.

    Hey, maybe you could be the person to do us all the real favor of putting together a “True MMT FAQ”, settling all the points that no MMTer can deny in discussion. And that the rest of us can cite with confidence.

    I *do* have from CBO a proof by accounting identity of how rising govt debt (increased “net private financial savings”) reduces capital accumulation. That’s been fun to show on occasion. Perhaps the FAQ could start by refuting that. Horizontal supply curve for money?

  132. Gravatar of Philippe Philippe
    25. September 2013 at 15:33

    Mark,

    Chart 13 shows the ‘primary fiscal surplus’ and the ‘actual fiscal surplus’. During the 19th century the current account surplus appears to have exceeded the actual fiscal surplus in almost every year that there was an actual fiscal surplus, and by a very large amount after 1850.

    Prior to 1850 there appears to have been an ‘actual fiscal deficit’ whenever the current account went into deficit, apart from approximately 1825, though it’s difficult to tell exactly from the chart.

    As you mentioned, after 1853 the current account surplus also exceeded the primary budget surplus in almost every year.

  133. Gravatar of Matt McOsker Matt McOsker
    25. September 2013 at 17:39

    Mark, if I withdraw money from my checking account to pay my taxes what does that count against? I am basically withdrawing the money and burning it. Once deposited with the treasury it would subtract from reserves, no? It becomes money in circulation that is then retired?

    The $26 billion was simply from the initial estimate of the tax increase for 2013 divided by 12.

  134. Gravatar of Geoff Geoff
    25. September 2013 at 17:45

    “Monetary policy drives NGDP; nothing else really matters.”

    Not to you, but to others, economic calculation is more important.

    Dollars are used to calculate gains and losses.

    Think of money like a scientific means to calculate one’s real activity.

    Economic calculation is far more important than NGDP, because no individual utilizes NGDP in their individual activity.

  135. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 17:48

    Philippe,
    For the sectoral balances approach the appropriate measure of the government fiscal surplus is the primary surplus since it measures the financial surplus. This is similar to the reasons why the current account is preferable to the balance of trade.

    Interest payments on a public debt equal to 226.3% of GDP at peak were substantial. The Excel file shows that the difference between the “actual fiscal surplus” and the primary fiscal surplus equaled 6.6% of GDP in 1833.

  136. Gravatar of Jim Glass Jim Glass
    25. September 2013 at 17:54

    Re the Update about the German election…

    After the last USA election there was here much talk amid many comments about the inferiority of the US’s first-past-the-post election system, with gerrymandering and all, compared to the superior rational result produced by the European parliamentary proportional voting systems.

    That result in Germany was described by Econlog today…

    Mrs Merkel won the German elections by a landslide, gaining an impressive 41.5% of votes. However, the most notable unintended consequence of Mrs Merkel’s triumph is that both the other right-of-the-center parties, the liberals of the FDP and the newly formed Alternative for Germany (AfD) party, which campaigned challenging the wisdom of current European policies concerning indebted states, did not pass the threshold to enter the Parliament. Mrs Merkel is thus most likely now to form a coalition with the socialists of the SPD, that she spectacularly defeated in the ballot box.

    The grass is not always really greener on the other side, and all election systems have their problems.

  137. Gravatar of Philippe Philippe
    25. September 2013 at 18:20

    Mark,

    looking at the BOE’s chart (chart 13), apart from 1825 there doesn’t seem to be a single year during the 19th century in which the ‘actual fiscal surplus’ exceeded the current account surplus. There are three brief points at which the current account surplus and actual fiscal surplus are roughly equal, and three points at which there is both a current account deficit and an ‘actual fiscal deficit’. The rest of the time the current account surplus exceeds the actual fiscal surplus (whenever there is an actual fiscal surplus), and there are a number of years in which there is both an ‘actual fiscal deficit’ and a current account surplus. However it’s difficult to say with any precision as the chart is rather small. It would be useful to get some accurate statistics to see exactly what was going on.

  138. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 18:36

    Matt McOsker,
    “Mark, if I withdraw money from my checking account to pay my taxes what does that count against? I am basically withdrawing the money and burning it. Once deposited with the treasury it would subtract from reserves, no? It becomes money in circulation that is then retired?”

    To continue with your analogy, if the Treasury collects more in taxes then it issues less bonds. The households and firms that would have withdrawn bank deposits to buy the bonds no longer do so. The amount of bank deposits and reserve balances remains unchanged.

    The banking system does not create deposits when the government runs deficits. Government deficits are a redistribution of existing bank deposits, not the creation of new bank deposits.

    From a central bank perspective it is even simpler. The Fed controls the amount of base money in existence. Base money equals reserve balances plus currency in circulation.
    End of story.

    “The $26 billion was simply from the initial estimate of the tax increase for 2013 divided by 12.”

    It sounds to me like you are counting tax increases that never occured. Income taxes were only increased on the top 2% of households. Thus approximately $288 billion (see the CBO link above) of the anticipated tax increases never happened.

    Furthermore Fiscal Year 2013 ends in 6 days. You should have been dividing by 9.

  139. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 18:42

    Philippe,
    “However it’s difficult to say with any precision as the chart is rather small. It would be useful to get some accurate statistics to see exactly what was going on.”

    Why don’t you open the Excel file in the data annex?

    Furthermore, as I said before, it’s the primary deficit that matters from a sectoral balances perspective not the “actual fiscal surplus”.

  140. Gravatar of TravisV TravisV
    25. September 2013 at 19:04

    Awesome post from Tim Duy:

    “The Fed appears to want to shift away from asset purchases in favor of forward guidance and is looking for the right time to begin that process……I am a little concerned that forward guidance is being used only in reaction to disappointing outcomes and not proactively to accelerate the pace of improvement.”

    http://economistsview.typepad.com/timduy/2013/09/resetting-expectations.html

  141. Gravatar of Philippe Philippe
    25. September 2013 at 19:09

    ok, I found the Excel file, thanks.

    “it’s the primary deficit that matters from a sectoral balances perspective”

    I don’t think Wynne Godley approached it in that way normally, though I could be wrong.

    After all the “actual fiscal surplus” is… the actual fiscal surplus. You said in your comment above that “the domestic private sector was only in financial deficit for a period of 38 consecutive years”… but it wasn’t ‘actually’ in deficit.

  142. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. September 2013 at 20:55

    Philippe,
    “I don’t think Wynne Godley approached it in that way normally, though I could be wrong.”

    In my opinion most of Godley’s own explanations of sectoral balances are unclear. Here’s the clearest explanation I can find (Pages 3-4):

    “…The imbalances approach has been the basic framework of analysis that has been applied to the U.S. economy since the middle of the 1990‘s by W. Godley and others economists associated with the Levy Institute at U.S. (Godley, 1999; Godley et al., 2007). After Professor Godley moved back to England, this approach was also used in works realized at the Cambridge Endowment for Research in Finance (Godley and Izurieta, 2004). This approach has been quite successful within heterodox economists, in particular “post-Keynesians”1.

    The approach departs from the basic identity of national accounting:

    C + I + G + X ≡ Y + M ≡ Yd + T + M

    C is consumption; I is private investment; G is public expenditure; X, exports; Y national income; S, private savings; Yd, disposable income; T, taxes; and M, imports. The principle of effective demand ensues that we can go beyond the identity and establishes also causality from expenditure to income:

    C + I + G + X-M => Y

    Subtracting the imports of the national income we have the gross internal income (GIY) or, as equivalent, the gross internal product (GIP):

    GIP ≡ GIY ≡ C + I + G + X – M

    As to establish financial balances we should include external net income (R) and subtract net taxes (T), which includes taxes payments, income transfers and interest payments made by the public sector. And we should separate three “institutional sectors” (or macro-sectors), private, government and the external sector:

    GIY – C – I – T +R ≡ (G – T) + (X – M + R)

    Or equivalently:

    PFB (private financial balance) = – GFB (government financial balance) + CAB (current account financial balance)…”

    http://www.centrosraffa.org/public/4ce234ef-405d-4a0e-aabb-f1ed94ba7c60.pdf

    So net taxes (T) includes tax payments, income transfers, and interest payments. Since public expenditures (G) plus income transfers equals total government spending, G – T equals total government spending minus tax payments minus interest payments, which is by definition the primary surplus.

    “After all the “actual fiscal surplus” is… the actual fiscal surplus.”

    Yes but it’s not the same as the *government financial balance*. And supposedly the whole idea behind the sectoral balances approach is to measure *financial flows*.

    “You said in your comment above that “the domestic private sector was only in financial deficit for a period of 38 consecutive years”… but it wasn’t ‘actually’ in deficit.”

    If the government financial balance minus the rest of the world financial balance is positive then by definition the domestic private sector is in financial deficit, no?

  143. Gravatar of Michael Michael
    26. September 2013 at 02:19

    An interesting Krugman blog that begs for a Sumner response:

    http://krugman.blogs.nytimes.com/2013/09/25/bubbles-regulation-and-secular-stagnation/

  144. Gravatar of Matt McOsker Matt McOsker
    26. September 2013 at 03:34

    Mark, I was looking at calendar year not fiscal and including the payroll tax increase. Again thanks for the discussion. I will go back and do some reading.

    Correct deficits do not create reserves, only creates a new bond.

    Either way, in my example above, if taxes do drain reserves it can only be a net drain if there is a surplus. In a deficit the spending replaces the reserves.

  145. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. September 2013 at 05:29

    Matt McOsker,
    “Mark, I was looking at calendar year not fiscal and including the payroll tax increase.”

    According to the CBO this fiscal year’s federal budget changes increase payroll tax receipts by $86 and income tax revenue by $42. That comes to an average of $14 billion a month through the end of September.

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

    “Correct deficits do not create reserves, only creates a new bond.

    Either way, in my example above, if taxes do drain reserves it can only be a net drain if there is a surplus. In a deficit the spending replaces the reserves.”

    Taxes can never be a net drain on bank reserves.

    In your example bank deposits are withdrawn to pay the taxes what cover the fiscal surplus. The Treasury retires an amount of bonds equal to the surplus. The households and firms that own the bonds are paid for those bonds and they deposit those funds in their bank accounts. The amount of bank deposits and reserve balances still remains unchanged.

    The banking system does not change the amount of deposits when the government changes the fiscal balance. Government fiscal balances redistribute existing bank deposits, they do not create or destroy bank deposits.

    The easiest way to remember this is the following. The Fed controls the quantity of base money. Base money equals reserve balances plus currency in circulation. No fiscal action, be it deficit or surplus has any impact at all on the quantity of base money.

  146. Gravatar of Philippe Philippe
    26. September 2013 at 08:42

    Mark,

    “So net taxes (T) includes tax payments, income transfers, and interest payments. Since public expenditures (G) plus income transfers equals total government spending, G – T equals total government spending minus tax payments minus interest payments, which is by definition the primary surplus.”

    Are you including government interest payments as part of government expenditures (G)?

  147. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. September 2013 at 10:10

    Philippe,
    In BEA terminology:

    1) G = “consumption expenditures” + “net income payments on assets”

    2) T = “current tax receipts” + “contributions for government social insurance” + “net income payments on assets” – “net current transfer payments” – “subsidies”

    3) “Current expenditures” = G + “net current transfer payments” + “subsidies”

    Thus:

    (G – T)

    =

    (“consumption expenditures” + “net income payments on assets”) – (“current tax receipts” + “contributions for government social insurance” + “net income payments on assets” – “net current transfer payments” – “subsidies”)

    =

    “consumption expenditures” + “net income payments on assets” – “current tax receipts” – “contributions for government social insurance” – “net income payments on assets” + “net current transfer payments” + “subsidies”

    =

    (“consumption expenditures” + “net income payments on assets” + “net current transfer payments” + “subsidies”) – “current tax receipts” – “contributions for government social insurance” – “net income payments on assets”

    =

    (G + “net current transfer payments” + “subsidies”) – “current tax receipts” – “contributions for government social insurance” – “net income payments on assets”

    =

    “current expenditures” – “current tax receipts” – “contributions for government social insurance” – “net income payments on assets”

    =

    the primary balance

    Which represents the “government financial balance”.

  148. Gravatar of ssumner ssumner
    26. September 2013 at 10:27

    Ralph, You said;

    “If the Fed gives me $X in exchange for my $X of Treasuries, I’m not going to run out and spend the money because I regarded the $X of Treasuries as part of my savings.”

    You are no wealthier, but T-bonds earn interest while cash does not. So you will run out and spend the cash on an asset that does earn interest, or on a good.

    libertaer, Yes, but if Germany exits the euro, it doesn’t matter.

    Jason, I don’t know of any good textbooks. Does anyone else? I did a short online course for MRU, which should be put up shortly.

    Steve, You said;

    “I think the Fed should have tapered and then announced NGDPLT as forward guidance. (I know that’s slightly tongue in cheek but you should read my other posts tonight)”

    Yes, and end IOR while you are at it.

    Tom Brown, No I never ban commenters, but some comments get mysteriously eliminated, even from friendly market monetarists. I don’t know why. All I can suggest is to keep trying.

    Dan W. If inflation is 5% then I’m the Queen of England. That’s just a preposterous claim. NGDP is growing at under 4% per year. Non-governmental estimates of inflation are also very low.

    Patrick. Could one of the reporters have given a visual Q to a camera. Say a smile or a frown?

    Jim Glass, If they had a truly proportional system then the FDP and AfD would have gotten seats, and the “right” would have had a clear majority.

  149. Gravatar of Jim Glass Jim Glass
    26. September 2013 at 11:07

    Jim Glass, If they had a truly proportional system then the FDP and AfD would have gotten seats, and the “right” would have had a clear majority.

    Sure, but they have the 5% requirement that prevents “true” proportional representation for a reason. Without it, a fringe party with a fringe percentage of the vote (say 0.2%) could have the swing vote that makes or breaks a government — and thus have power extraordinarily out of proportion with the proportion of votes it collected.

    Of course, this is an inherent problem with proportional voting systems anyhow — party power is not proportionate to the vote collected. Small parties in the swing position can have power hugely disproportionate to their votes collected, and collectively they can produce chronic instability in govt, see, e.g, say the record of Italy.

    The 5% rule is meant to prevent only extreme, bizarre cases of such.

    There is no voting system anywhere that doesn’t have its own faults and internal contradictions.

    When choosing which among them you like best you decide on your druthers, rank your priorities, then pick your poison.

  150. Gravatar of Philippe Philippe
    26. September 2013 at 11:40

    “T = “current tax receipts” + “contributions for government social insurance” + “net income payments on assets” – “net current transfer payments” – “subsidies”.

    BEA:

    “Government current receipts is the sum of cur­rent tax receipts, contributions for government social insurance, income receipts on assets, current transfer receipts, and current surplus of government enter­prises.”

    http://www.bea.gov/national/pdf/nipaguid.pdf

    You have “net income payments on assets”, whereas the BEA has “income receipts on assets”.

    You appear to have counted “net income payments on assets” twice, in both government expenditures and government receipts….?

  151. Gravatar of TallDave TallDave
    26. September 2013 at 11:42

    Tom Brown — I would guess not in the range of my example, in which the Fed buys $14T in assets that then become worthless. We could ask Scott whether he thinks there would be no effect on the currency.

    That seems like a very “strong” version of QTM. I think the way to square that circle might be to say “in that case, what happens to market expectations of the future size of the monetary base?”

  152. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. September 2013 at 12:05

    Philippe,
    I’m trying to simplify this as much as possible:

    “net income payments on assets” = “Interest payments” – “income receipts on assets”

    “You appear to have counted “net income payments on assets” twice, in both government expenditures and government receipts…?”

    “Net income payments on assets” is both part of government budget and a net transfer to the non-government sector.

  153. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. September 2013 at 13:00

    I was looking for historical data on the Netherlands and came across this:

    http://www.imf.org/external/pubs/ft/wp/2013/charts/wp1305_chartbk.pdf

    It has graphs of the primary surplus of 54 countries across three centuries with an extensive list of sources.

    It shows that Norway has had a primary surplus since 1948 and has the record for largest primary surplus (20.6% of GDP in 2008).

    Canada, Denmark, Finland, France, Germany, Ireland, Italy, Korea, the Netherlands (from 1880-1913), New Zealand, Spain, Sweden, Switzerland and the UK also have had double digit primary surpluses and/or long periods of primary surpluses.

  154. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. September 2013 at 13:10

    There’s an associated paper and even an Excel file (sweet!):

    http://www.imf.org/external/pubs/cat/longres.aspx?sk=40222.0

  155. Gravatar of Tom Brown Tom Brown
    26. September 2013 at 13:33

    Scott, you write:

    “No I never ban commenters, but some comments get mysteriously eliminated, even from friendly market monetarists.”

    Good to know, thanks. BTW, are there any unfriendly MMists? Lol. (I’m not asking for names)

  156. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. September 2013 at 14:11

    For the record, the longest primary surpluses on record (according to the IMF database) are:

    Nation–Length–Period
    1.UK 85 1815-1899
    2.Norway 64 1948-2011
    3.Italy 47 1867-1913
    4.Spain 39 1876-1914
    5.Japan 38 1906-1943
    6.Canada 37 1946-1982
    7.Belgium 34 1880-1913
    France 34
    Germany 34
    Netherlands 34
    Portugal 34

    Now to find the corresponding current account information.

    P.S. The data also appears to undermine the Keynesian interpretation of the Japanese recovery from the Great Depression.

  157. Gravatar of Philippe Philippe
    26. September 2013 at 16:02

    Mark,

    you’re simply cancelling out “interest payments” and “income receipts on assets” by replacing them with “net income payments on assets” in both government expenditures and receipts. So of course you end up with the primary balance, because both “net income payments on assets” simply cancel each other out.

    Of course you can leave out data if you want to, but all you’re doing is ignoring a large chunk of government expenditure and private sector income. Interest payments on the UK government debt in the 19th century were huge, but for some reason you want to ignore them and focus only on the primary balance, and then claim that the private sector was in deficit for decades, when it’s clear from the BOE chart that it wasn’t actually in deficit at all.

  158. Gravatar of Scott Sumner Scott Sumner
    27. September 2013 at 09:12

    Jim Glass, No, small fringe parties would have no influence. In Germany, for instance, the former communist party is toxic–no one will form a coalition with them. Small centrist parties will be influential, as they should be.

    Tom, I should add the it’s liberal bloggers like Krugman and DeLong than ban commenters, I believe an open discourse is best.

  159. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. September 2013 at 10:32

    “No, small fringe parties would have no influence. In Germany, for instance, the former communist party is toxic–no one will form a coalition with them. Small centrist parties will be influential, as they should be.”

    The US electoral system is complicated, but the German system, like it’s grammar, is much more intricate. (I’ve always liked that Mark Twain quip about German grammar: “I’d rather decline two drinks than a German adjective”).

    So, is the 5% threshold meant to diminish the power of minority parties? That’s debatable. It appears the provision was the consequence of German history. The rule seems to have been the result of the negative experiences in the Weimar Republic with forming a government when votes were widely dispersed among various parties.

    In the election of May 1928, no party got more than 29.8 percent of the vote (that was the Social Democrats);

    In the election of Sept 1930, no party got more than 24.5 percent of the votes (again, Social Democrats);

    In the election of July 1932, not party got more than 37.3 percent of the vote (that was Adolph and Co);

    In the election of November 1932, no party got more than 33.1 percent of the vote (again, Adolph and Co.). It was after that election that Hitler become Chancellor and consolidated power.

    It should be noted that in the November 1932 election, five German parties got more than 5 percent of the popular vote.

    One could debate whether this situation was the result of “minority parties having too much power” or “there were simply too many parties”. In any event, it was disfunctional and it provided the opportunity for Hitler to seize control with less than one-third of the popular vote.

    The existing 5 percent rule (which has its exceptions) appears to have been a response to the Weimar experience. I don’t think the intent was to reduce the power of minority parties as much as it was to reduce the number of parties, period. But, that distinction may be largely semantics.

    Perhaps the US should be happy with the, albeit imperfect, system it has.

  160. Gravatar of Mark A. Sadowski Mark A. Sadowski
    27. September 2013 at 10:35

    Philippe,
    Even if we measure government fiscal balances in terms of simple fiscal deficits it doesn’t really change the conclusions. This is because the incidents of primary surpluses would obviously include all of the incidents of simple fiscal surpluses as a subset.

    In the case of the UK, if you define the domestic private sector surplus as being equal to the “actual fiscal surplus” minus the current account surplus, what you’ll find is that the longest periods of time that the domestic private sector was in deficit was from 1954 through 1962 (9 years) and 1964 through 1971 (8 years).

    It just so happens on real GDP per capita data going back to 1830 (Angus Maddison), the fastest average real GDP growth in UK peacetime history over any 20 year period occurred from 1953 to 1973 and was 2.50%. For comparison the average rate of growth in real GDP per capita from 1830 to 2008, excluding those 20 years, is 1.35%. The average rate of growth in real GDP per capita from 1945 to 2008, excluding those 20 years, is 1.68%.

    Looking at things in a much more methodical manner, regressing the annual rate of increase in real GDP per capita on the domestic private surplus as a percent of GDP, the R-squared value is 0.0007 meaning only 0.07% of the variation in real GDP per capita growth can be explained by the domestic private surplus. So it’s about as statistically insignificant as a variable can possibly be.

    The IMF historical primary surplus data that I discovered yesterday also has the necessary data to calculate simple fiscal deficits. I can’t find historical current account data, although I know it exists (Alan Taylor).

    Michael Bordo’s historical financial crisis data has trade balance statistics which are a reasonable proxy for the current account surplus. It would be a simple matter to repeat the regression on other countries.

    But my preliminary investigations reveals that the historical examples of long primary surpluses coincides in many cases with persistent large trade deficits (Norway in 1948-89, Italy, Spain, Germany, France and Portugal). And none of these historical examples coincides with a period of significantly below average growth (on the contrary).

  161. Gravatar of libertaer libertaer
    28. September 2013 at 02:08

    “libertaer, Yes, but if Germany exits the euro, it doesn’t matter.”

    “…small fringe parties would have no influence. In Germany, for instance, the former communist party is toxic–no one will form a coalition with them. Small centrist parties will be influential, as they should be.”

    AfD is considered toxic. Why? Because they want to exit the Euro. Their effect won’t be a Euro exit, but they will make the right monetary policy even less possible.

    BTW, they got a lot of their votes from former communist party-voters.

  162. Gravatar of Philippe Philippe
    28. September 2013 at 04:04

    Mark,

    “In the case of the UK, if you define the domestic private sector surplus as being equal to the “actual fiscal surplus” minus the current account surplus, what you’ll find is that the longest periods of time that the domestic private sector was in deficit was from 1954 through 1962 (9 years) and 1964 through 1971 (8 years).”

    You only have to look at the BOE’s chart 13 (fiscal and current account balances) to see that the private sector was not in deficit for most of those years.

    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb100403.pdf (p.284)

    I went through the data to calculate the “actual fiscal surplus” minus the current account surplus, i.e. the domestic private sector balance, for each of those years (according to the BOE), and found that in the two periods you mention the private sector was in surplus in every year except for the years 1955, 1969, and 1970, when it was in deficit.

  163. Gravatar of ssumner ssumner
    28. September 2013 at 08:39

    Vivian, It’s hard for me to understand how the 5% rule would have made it harder for Hitler to gain power. In any case, I don’t think Americans need worry about a dictator taking power. The real concern is that our elected parties will take away our liberties. Small parties act as watchdogs, and make that less likely. Right now neither US party is supporting Snowden, which is a disgrace.

    libertaer, If they are not in the government, how do they make monetary stimulus harder?

  164. Gravatar of Philippe Philippe
    28. September 2013 at 09:12

    “neither US party is supporting Snowden, which is a disgrace”

    Agreed.

  165. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. September 2013 at 09:15

    Philippe,
    That’s because you’re using the “public net lending/net borrowing” instead of “central government surplus”. UK public sector net lending/net borrowing data only goes back to 1900.

    If you define the domestic private sector surplus as being equal to the “public net lending/net borrowing” minus the current account surplus, what you’ll find is that the longest periods of time that the domestic private sector was in deficit was from 1931 through 1934 (4 years), 1947 through 1951 (5 years), 1987 through 1990 (4 years) and 1998 through 2002 (5 years). (Note that the UK recovery from the Great Depression started in 1931.)

    The growth in real GDP per capita averaged 0.85%, 1.12%, 2.76% and 2.49% in 1931-34, 1947-51, 1987-90 and 1998-2002 respectively. The weighted average RGDP per capita growth rates for the 18 years is 1.81%. For comparison the average rate of growth in real GDP per capita from 1899 to 2008, is 1.57%.

    Defined this way, regressing the annual rate of increase in real GDP per capita on the domestic private surplus as a percent of GDP, the R-squared value is 0.0003 meaning only 0.03% of the variation in real GDP per capita growth can be explained by the domestic private financial surplus. So it’s even more statistically insignificant than was the previous measure. And, for what it is worth, the slope is negative (i.e. higher private sector surplus = lower RGDP per capita growth).

    Instead of looking at domestic private financial surplus as a residual of the government and rest of world sectors, why not look at the domestic private financial surplus directly?

    FRED has all the data necessary to calculate the domestic private financial surplus for the US back to 1947. Here it is as a percent of GDP in blue with the annual rates of change in RGDP per capita in red back to 1953 (population data starts in 1952):

    http://research.stlouisfed.org/fred2/graph/?graph_id=139324&category_id=0

    The US domestic private sector was in deficit from 1998-2001 and 2005-07. The average rate of change in RGDP per capita was 2.44% and 1.63% during 1998-2001 and 2005-07 respectively. The weighted average RGDP per capita growth rates for those 7 years is 2.09%. For comparison the average rate of growth in real GDP per capita from 1952 to 2012, is 1.96%.

    Regressing the US annual rate of increase in real GDP per capita on the domestic private surplus as a percent of GDP, the R-squared value is 0.0922 meaning 9.22% of the variation in real GDP per capita growth can be explained by the domestic private financial surplus. Moreover, this result is statistically significant at the 5% level. Most importantly, the correlation is *negative* with each one point *increase* in the domestic private financial surplus as a percent of GDP corresponding to a 0.269 point *decrease* in the rate of change of RGDP per capita.

  166. Gravatar of Philippe Philippe
    28. September 2013 at 09:54

    “That’s because you’re using the “public net lending/net borrowing”

    The only reason I used that is because that’s what the BOE analysts used.

  167. Gravatar of Philippe Philippe
    28. September 2013 at 11:37

    I dunno Mark, you’ve made so many basic factual errors and tried to pass off algebraic sleights of hand as a way of “proving” your points that I really don’t know what to make of your arguments anymore.

  168. Gravatar of Philippe Philippe
    28. September 2013 at 11:47

    nonetheless I’ve enjoyed this argument, and you’ve made me look up things I otherwise wouldn’t have, so thanks.

  169. Gravatar of Mark A. Sadowski Mark A. Sadowski
    28. September 2013 at 13:10

    Philippe,
    I’m just being flexible.

    The point is it doesn’t matter how you define the domestic private financial sector surplus, there’s either no significant correlation between domestic private financial sector surplus and real GDP per capita growth, or the correlation is the opposite of what Matt McOsker (and by extension you) claim is the case.

    We looked at:

    1) Domestic private sector financial surplus as residual counting the central government primary surplus as the government sector financial balance (UK, 1831-2007, no significant correlation).
    2) Domestic private sector financial surplus as residual counting the central government “actual” surplus as the government sector financial balance (UK, 1831-2007, no significant correlation).
    3) Domestic private sector financial surplus as residual counting the general government “actual” surplus as the government sector financial balance (UK, 1900-2008, no significant correlation).
    4) Domestic private sector financial surplus measured directly (US, 1953-2012, significant negative correlation).

    Domestic private sector financial deficits are not correlated with depressions.

  170. Gravatar of libertaer libertaer
    29. September 2013 at 02:51

    “libertaer, If they are not in the government, how do they make monetary stimulus harder?”

    Their existence and the danger that they will get stronger forces Merkel to appear even tougher when it comes to monetary stimulus.

    BTW, I don’t know if you agree, but even if Germany exits the Euro, which sure would be good for everybody else, Germany itself is in great danger of becoming just like Japan. When it comes to demographics, export orientation etc. Germany is like a mirror image of Japan. Just like them we will hit the zero bound and stagnate without the right monetary policy. One key to the success Germany enjoys right now, is Draghis ECB, which is doing a monetary policy Germany wouldn’t allow if it were an island. So the Euro is actually good for Germany and if Draghi would do NGDP targeting, it would get even better.

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