Karl Smith on the importance of NGDP

As I indicated earlier, I won’t have much time for blogging this semester, although you can check over at Econlog where I do some posting.  Meanwhile, this is an excerpt from an excellent Karl Smith post at FT Alphaville:

The period of mildly slower-than-average Nominal GDP growth from 2001 to 2004 is matched by a similar sized period of faster-than-average “catch up” growth from 2004 to 2006. That suggests Nominal GDP was roughly back on track late 2006. On the other hand, the extreme slowdown in Nominal GDP growth that began in 2008 has never been made up for, and indeed Nominal GDP continues to lag to this day.

This pattern is far more consistent with the experience of the US economy than the one found in stock market data. Thus, while Mr. Smith writes…

It seems obvious to most people that the Great Recession was caused by stuff that happened in the financial sector; the only alternative hypothesis that anyone has put forth is the idea that fear of Obama’s future socialist policies caused the recession, and that’s just plain silly.

…we can think of at least one economist who hypothesised a central role for Nominal GDP long before the Great Recession began.

BTW, what does “Alphaville” mean?  Is it a reference to the Godard film?

HT:  Vaidas


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132 Responses to “Karl Smith on the importance of NGDP”

  1. Gravatar of gofx gofx
    19. February 2014 at 19:26

    Scott,
    Alpha is above-market return in finance. Maybe that’s the source of the name?

  2. Gravatar of Benjamin Cole Benjamin Cole
    19. February 2014 at 19:36

    I always thought “alpha” was a tip of the hat to “alpha male,” or “alpha dog.”

    The third link, “one economist,” feeds right back to same page. A bit of humor?

  3. Gravatar of Tom Brown Tom Brown
    19. February 2014 at 19:49

    gofx, I think I’ve heard that kind of definition for alpha: isn’t it a statistical measure that’s in every mutual fund prospectus?

    I think this guy might be using it that way, but he never really defines it from what I can tell (after a brief search through his article):

    http://pragcap.com/forever-elusive-alpha

  4. Gravatar of Edward Edward
    19. February 2014 at 20:30

    Scott,
    when people talk about how pathetic the Bush years were compared to Clinton, do they mean the slower NGDP growth years before 2006?

  5. Gravatar of Jason Jason
    19. February 2014 at 20:38

    I always thought it was a pun on alpha (finance) and Alphaville (film), but apparently it’s just the finance:

    http://www.24-7pressrelease.com/press-release/financial-times-launches-ft-alphaville-19836.php

    @Benjamin Cole: I can attest the original article linked themoneyillusion.com when it came out yesterday (or I guess now two days ago GMT?)

  6. Gravatar of Ironman Ironman
    19. February 2014 at 20:48

    “Alphaville” is a tongue-in-cheek nickname for London’s financial district, which is better known as “The City”. In The City, they care a lot about “alpha“, which is a risk-adjusted measure of return on an investment that appears as the alpha coefficient in the Capital Asset Pricing Model.

  7. Gravatar of Saturos Saturos
    19. February 2014 at 22:04

    Can Scott explain why Abenomics is having this effect? (from David Andolfatto’s blog): http://2.bp.blogspot.com/-nd04Nn-WzOY/Uu_PIuC0wYI/AAAAAAAABaU/RKUSuK-dzYo/s1600/japan+cpi+def.png

  8. Gravatar of Saturos Saturos
    19. February 2014 at 22:06

    Oh never mind I just saw the scale on that. Still, an interesting phenomenon…

  9. Gravatar of Saturos Saturos
    19. February 2014 at 22:09

    Anyway, here’s a good Andolfatto paper on Japan: http://research.stlouisfed.org/publications/es/article/10024

  10. Gravatar of Saturos Saturos
    19. February 2014 at 23:21

    OK, better link: Are the frequency of nominal wage cuts in Britain a problem for Scott’s theory?

    http://www.frbatlanta.org/documents/news/conferences/13employment_elsby.pdf

  11. Gravatar of Benjamin Cole Benjamin Cole
    20. February 2014 at 03:56

    Jason–

    Okay, now I get it. The link is in Karl Smith’s blog and was not added by Sumner….I think.

  12. Gravatar of John Becker John Becker
    20. February 2014 at 06:41

    I second what Ironman says.

  13. Gravatar of Robert Robert
    20. February 2014 at 07:06

    Scott look at this is in spanish but the title caught my attention, “Venezuela: a problem to the MMT”. http://vlcnews.es/opinion/venezuela-un-problema-para-la-mmt/

  14. Gravatar of TravisV TravisV
    20. February 2014 at 10:59

    http://blogs.wsj.com/economics/2014/02/20/u-s-inflation-is-a-window-into-a-global-growth-risk/?mod=WSJBlog

    “Thursday’s U.S. consumer price index report showed a meaningful divergence between goods and services inflation.

    The U.S. seems to be in a new part of the inflation cycle. U.S. services inflation is stabilizing at a lower level than it was in the 1990s and 2000s. It is long past falling. Goods inflation, on the other hand, is in a new down cycle.

    This seems to point to weakness abroad. It all points to a normalizing U.S. domestic economy but more vulnerability abroad.”

  15. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. February 2014 at 11:02

    Saturos,
    “Oh never mind I just saw the scale on that. Still, an interesting phenomenon…”

    In that post David Andolfatto states the following:

    “So, since about the time of the Asian financial crisis, the relative prices of non-consumer goods and services has declined steadily.”

    And I respond in comments:

    http://andolfatto.blogspot.com/2014/02/monitoring-japan.html?showComment=1391460133669#c1171510005580040952

    “Actually this pattern in Japanese inflation goes back a lot further than that. Interestingly, from at least 1956Q1 until 1962Q2 yoy GDP implicit price deflator inflation always exceeded yoy headline CPI inflation. There was a period of transition with CPI inflation being roughly equal to GDP implicit price inflation around 1970. The gap seemed to stabilize around the mid-1970s. Since then yoy headline CPI inflation has averaged about 0.9% more than yoy GDP implicit price deflator inflation.

    Furthermore, this pattern is hardly unique to Japan. The US CPI also has a long history of rising faster than the US GDP implicit price deflator.”

    And to expand on that last observation, the US pattern is very similar to the Japanese pattern, with CPI rising at a slower rate than the GDP implicit price deflator in the 1950s, and with a transition to faster rates of CPI inflation than GDP implicit price deflator inflation largely finished by the mid-1970s. I haven’t yet checked to see if other countries have the same pattern, but my intuition tells me that this will probably be true for most of the advanced nations.

    Incidentally, EPI’s Lawrence Mishel points out that the divergence between consumer and output prices alone accounts for the 34% of the wedge between productivity and median wage growth between 1973 and 2011:

    http://www.epi.org/blog/understanding-wedge-productivity-median-compensation/

    And in fact Marcus Nunes has a recent post (“Spinning Tales”) where he takes another EPI productivity-wage-wedge-graph (average wages) and makes the wedge vanish simply by using the PPI (the index used for putting the “real” in real productivity) instead of CPI for adjusting wages.

    So the point is that this “interesting phenomenon” has been around for 40 years, in more than one country, and has absolutely nothing to do with Abenomics or the Asian financial crisis.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. February 2014 at 13:00

    Scott,
    Off Topic.

    He’s at it again!

    http://krugman.blogs.nytimes.com/2014/02/20/key-stimulus-graphs/

    February 20, 2014

    Key Stimulus Graphs
    By Paul Krugman

    “I thought it might be useful to put up a few graphs that are key to how I think about the sad tale of fiscal policy in the Great Recession and afterwards…”

    Krugman presents three graphs. I have no real quarrel with graphs number one or three. It’s graph number two that drives me up the wall:

    “…Second, while there have been a number of studies using various approaches to estimate the impact of fiscal policy in a depressed economy, I think the really decisive evidence comes from differential austerity in Europe. Here’s a crude picture, simply comparing the change in IMF estimates of the cyclically adjusted budget balance with growth from 2009 to 2013:

    [Graph]…”

    (Arrgh! Just shoot me already.)

    Krugman keeps rolling out some variant of the same scatterplot dominated with countries mostly from, or all from, the Euro Area every few months as if *this* is proof positive of the liquidity trap and a nonzero fiscal multiplier. Nobody doubts that if the government spends more money in Fargo, North Dakota, that GDP goes up…in Fargo, North Dakota. (Apologies to Scott for stealing his metaphor.)

    In this particular case Krugman uses the change in the cyclically adjusted balance (CAB) from the IMF World Economic Outlook as his measure of fiscal policy stance, and the change in RGDP between calendar years 2009 and 2013. There are 11 countries in his graph, and every single one of them is from the Euro Area. (All of the pre-2014 Euro Area members except Cyprus, Estonia, Luxembourg, Malta, Slovakia and Slovenia.) Thus all 11 observations have exactly the same monetary policy.

    I happen to have ordinary least squares (OLS) results for this very dataset and time period for the IMF Advanced Nations from my response to a blog post that Menzie Chinn wrote specifically for my benefit only a month ago. (What is it about economists trying to estimate the fiscal multiplier from observations mostly from, or all from, the same currency area?!?):

    http://econbrowser.com/archives/2014/01/euro_and_noneur

    There are 35 countries in the IMF Advanced Country group of which there are CAB estimates for 33. Sixteen of those are Euro Area members. Of the remaining 17, all have monetary policies independent from each other except Hong Kong which is pegged to the US dollar. Removing Hong Kong leaves 16 nations in the non-Euro Area group.

    Yes, regressing RGDP growth on CAB change for the Euro Area we find that the R-squared value is 74.1% and the slope coefficient (essentially the fiscal multiplier) is 1.49 and it is statistically significant at the 1% level. So spending less in Fargo, North Dakota lowers GDP in Fargo, North Dakota.

    But, regressing RGDP growth on CAB change for the non-Euro Area countries, we find the R-squared value is 0.0% (you can’t make this stuff up) with a slope coefficient of 0.05 and a p-value of 94.0%. The p-value means that if the null hypothesis of a zero slope coefficient is true, there is a 94.0% probability of the test statistic being further away from zero than it is.

    Or, in plain English, when countries each have a unique monetary policy, THE FISCAL MULTIPLIER IS ZERO! (Sorry for pulling a Morgan, but sometimes you have to scream in order to make people remember your point.)

    Now, if someone wants to claim that monetary policy is ineffective in some of these countries, because they are at the zero lower bound in short term interest rates, and thus they are in a liquidity trap, then perhaps we should look at those particular countries. (Unfortunately only six of the 16 non-Euro Area countries qualify, so this is probably not a suitable topic for OLS analysis.)

    But please don’t prove the existence of the liquidity trap and a nonzero fiscal multiplier by simply assuming it, that is by choosing a set of countries which cannot have different monetary policies.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. February 2014 at 15:50

    Scott,
    Off Topic.

    Cullen Roche took a break from criticizing Sumner’s posts, but he’s back, and he gets some things spectacularily wrong:

    http://pragcap.com/did-the-fiscal-stimulus-from-2009-work

    February 20, 2014

    Did the Fiscal Stimulus from 2009 Work?
    By Cullen Roche

    “The White House recently released a rather lengthy report on the effects of the American Recovery and Reinvestment Act. They’ve stated that the ARRA was a big success and the White House is taking a good deal of credit for having implemented policy that helped steer the economy in the right direction in the last 5 years. Naturally, this has some conservatives upset. For instance, Scott Sumner harshly criticizes the program in this piece and refers to its analysis as “voodoo economics”…”

    I read Sumner’s Econlog post (“Bastiat just rolled over in his grave”) and already responded to Mike Sax’s criticism of his use of the phrase “Voodoo Economics”. It was clear that Sumner was referring to the White House’s claim on page 42 that ARRA might actually reduce the national debt, and this claim was based on some highly questionable supply-side effects very reminiscent of the Voodoo Economics of the 1980s.

    But mostly, it’s telling that the use of this phrase has already caused a couple of knee-jerk responses, without either party really taking a closer look at what Sumner was criticizing when he used that phrase. If they had, they would have noticed that the criticism actually rings true.

    Cullen Roche:
    “…First, I don’t know why conservatives have such a big beef with the fiscal stimulus. After all, it was mostly tax cuts. I consider myself a centrist who tends to lean slightly towards the fiscal conservative side and I can’t figure out when so many conservatives started suddenly hating tax cuts so much? Sumner says they weren’t “supply side” enough. So, if we’d cut business taxes and rich guy taxes more then that would have been better? How can that be right? Rich guys and businesses continued spending quickly after the credit crisis. Besides, weren’t their balance sheets positively impacted by magnitudes via the “wealth effects” and other measures that helped boost corporate profits and stock prices to all-time highs? If the “weak recovery” is due to something it’s certainly not a lack of wealth at the top or profits…”

    This is the part that Roche gets very wrong. First to be clear, Sumner said in item #5 of his post:

    “And they failed to do the sorts of tax cuts that might have boosted the supply side, such as the employer-side payroll tax cut that Christina Romer recommended.”

    What is meant by a “supply side” tax cut in this sense? Well, this is a tax cut that would shift the short run aggregate supply curve (SRAS) to the right, since it lowers the cost of labor, a major factor input of production. This should lead to a reduction in the rate of inflation and an increase in the rate of RGDP growth, for a given rate of NGDP growth.

    Yes, in terms of *statutory incidence* it is a business tax cut, and this might benefit “rich guys” directly, as the owners of capital tend to be richer than average. But in terms of the *effective incidence*, to the extent that such a cut leads to a rightward shift in SRAS there’s no evidence that businesses or “rich guys” would benefit more than the rest of the population. In fact if it leads to a higher level of RGDP and employment, and to a lower unemployment rate, it probably would benefit labor and “poor guys” more than businesses and “rich guys”.

    So it’s clear to me that Roche doesn’t understand what the purpose of a supply side tax cut really is. It’s not meant to boost the spending of the rich. It’s meant to reduce the costs of production (shift the SRAS curve to the right). It is after all “supply side”, not “demand side”.

    Furthermore, if one doesn’t believe in the liquidity trap, then using fiscal policy to boost aggregate demand (AD) makes little sense. A far better use of fiscal policy then is to boost aggregate supply (AS), since arguably this is something that fiscal policy can directly affect, unlike monetary policy.

    Finally, note that Sumner’s example of a supply side tax cut was proposed by Christina Romer, who as a former member of the Obama administration, probably cannot easily be classified as a conservative.

    Cullen Roche:
    “Second, we know that the crisis was a debt crisis. Consumers stopped spending in large part because they couldn’t service their debts that had been accumulated in the run-up to the crisis…Anyone who says the deficit didn’t help at all either doesn’t understand basic accounting or must reject the idea that this was a credit crisis…”

    Cullen Roche gets this partly right. When he says “[a]nyone who says the deficit didn’t help at all…must reject the idea that this was a credit crisis”, I think that very succinctly states the opinion of anyone who truly understands that there is simply is no such thing as a “debt crisis”.

    Debt crises are better termed “leverage crises” because the the nominal amount of debt is completely irrelevant. Crises of these kind really involve the ratio of debt to income, since it is the inability of income to sustain debt that is at the root of the crisis. And anytime the growth of nominal income falls steadily and significantly, as the rate of NGDP did in the two years prior to Lehman Brothers, there is bound to be a leverage crisis.

    And since a falling rate of growth of NGDP can only be attributed to tight monetary policy, leverage crises, by their very nature, are caused by bad monetary policy.

    Cullen Roche:
    “Lastly, I also don’t see why we have to draw a line in the sand in macro debates and try to establish that one side is COMPLETELY wrong…So I find these outright dismissals of certain policy approaches to be rather counterproductive and often based on an attempt to sweep away the facts in favor of one’s particular politics…”

    The point is that the entire justification for the fiscal stimulus rested on the assumption that the economy was in a liquidity trap. If the economy was never in a liquidity trap, and indeed, if there isn’t even any evidence that the liquidity trap exists, then no amount of fiscal stimulus can ever make up for bad monetary policy.

    Moreover this is not an issue that need involve politics. Speaking as a left of center Democrat I see absolutely nothing in Sumner’s recent post criticizing the fiscal stimulus that could be characterized as displaying political bias. All I see is crystal clear monetary policy analysis.

  18. Gravatar of Steve Steve
    20. February 2014 at 16:56

    http://www.csmonitor.com/USA/Society/2014/0220/Income-inequality-Among-US-cities-bigger-ones-are-more-unequal

    “Atlanta, San Francisco, Miami, Boston, Washington, and New York are the most US unequal cities, the report found. The least unequal cities are: Virginia Beach, Va.; Arlington, Texas; Mesa, Ariz.; Las Vegas; Wichita, Kan.; and Colorado Springs, Colo.”

    Don’t expect Krugman to do a post on this. His boys at Harvard and Berkeley already proved that the blue states have higher “income mobility” than the red states. So now we find that San Francisco, Washington, New York, and Boston are 4 of the top 6 for “income inequality”?

  19. Gravatar of Major_Freedom Major_Freedom
    20. February 2014 at 18:06

    “Not enough NGDP” doesn’t explain why NGDP fell. It’s not good enough to say “The Fed didn’t print enough money.” The question that needs answering is why was the Fed in a position of having to print in order to prevent NGDP from falling the way it did.

    It is not a sufficient explanation that a person who dies of cancer is “the doctor’s fault for not giving medicine.” For it doesn’t explain why the patient needed medicine. That is, what is the cause of the cancer.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. February 2014 at 18:46

    Scott,
    Off Topic.

    You’ll recall that I got into a debate with Philip Pilkington over Krugman’s recent criticism of Argentinian economic policy. The substance of that conversation can be traced at in several places but probably most easily at Pilkington’s blog post:

    http://fixingtheeconomists.wordpress.com/2014/02/04/paul-krugman-pushes-factually-inaccurate-arguments-about-argentina-to-support-his-discredited-monetarist-ideas/

    One thing that came up was the fact that according to the IMF the Argentinian Treasury has never run a fiscal surplus. And since it has no real access to the global credit markets it has taken to borrowing money directly from the central bank.

    Here’s what Alex Fuste, the Chief Economist of Andbank has to say about the matter on Page 4:

    “1. Government spending has been financed by printing pesos.
    2. Since changes in BCRA charter (March 2012), the scope for
    the central bank to print money and lend it to the Treasury
    has been dramatically expanded (see the chart)
    3. In reality the IOUs (non-negotiable debt instrument)
    issued by the Argentine Treasury in exchange of newlyprinted
    pesos tend to be rolled over indefinitely.
    4. This policy probably put further pressure on inflation and
    Fx in the past, but if policy is relaxed even more (in a
    desperate attempt to pump the economy) then, inflation
    could run wild above the 30% and we could witness a
    disastrous impact on the currency.
    5. Incredibly, low quality, illiquid government securities
    (including non-transferable bills and temporary IOUs) now
    account for 60% of BCRA assets. And the pensions agency
    ANSeS have already been drained of a significant amount
    of its liquid assets. Any other movement in the same
    direction, could be critical.”

    http://www.andbank.com/comercial/files/workingpaper57.argentina-yes,windsofchangeareblowingonthehorizonbut…donotputlongyet_181013_1382107731_71_.pdf

    Transitory advances (monetized non-transferable and non-negotiable government debt instruments) totaled 1.1% of GDP in 2011, 2.8% of GDP in 2012 and 2.1% of GDP in 2013. According to the IMF the fiscal deficits were 3.5%, 4.5% and 3.6% of GDP in 2011-13 respectively. Thus transitory advances accounted for about 31%, 62% and 59% of the fiscal deficits in 2011-13 respectively.

    Between August 2011 and January 2014, the monetary base of the Central Bank of the Republic of Argentina (BCRA) has increased from 185.8 billion pesos to 363.9 billion pesos, or by 178.1 billion pesos. During that time transitory advances increased from 46.2 billion pesos to 182.7 billion pesos, or by 136.5 billion pesos. Thus transitory advances have increased from 24.9% to 50.2% of the monetary base and 76.7% of the increase in the monetary base during this time period has been in the form of transitory advances.

    So in short, it’s easy to see why according to State Street (related to MIT’s Billion Prices Project), year on year CPI in Argentina is currently 24.0%. Official estimates of inflation have been systematically underestimated since the government intervened with the National Statistics Institute (INDEC). Moreover I’ve checked the gap between the official peso exchange rate and the black market rate (the “blue dollar” rate) and it appears that the gap between the two is almost precisely equal to the gap between the official price level and the State Street estimate of the price level.

    One of Pilkington’s claims however is that money is endogenous, and thus the Argentinian inflation is not due to the expansion of the monetary base, but rather the expansion of the monetary base is due to inflation.

    I agree that if a central bank is targeting interest rates as the policy instrument then base money is elastically supplied at that rate. But the BCRA does not target interest rates. Moreover its hard to see how purchase of non-transferable and non-negotiable government debt instruments would directly enable the BCRA to hit an explicit interest rate target even if it had one.

    I have already shown that in most cases when a central bank is at the zero lower bound in interest rates, and QE becomes the instrument of monetary policy, then money is no longer endogenous. Argentina is a very different case in the sense that it has very high rather than very low inflation. But since it does not target interest rates it seem logical that money may not be endogenous there either. And in fact econometric analysis shows this seems to be the case.

    This week I performed Granger causality tests on Argentinian monetary aggregates in the typical mode of Post Keynesian empirical endogenous money research. For my time period I chose the period from December 2007 (the beginning of the State Street consumer price index) to January 2014.

    Argentina has three measures of broad money: M1, M2 and M3. For the lending counterpart of broad money I looked at two measures: 1) loans and 2) loans and securities. Here are the results.

    The monetary base Granger causes loans at the 5% significance level, and loans and securities at the 1% significance level. Loans Granger cause the monetary base at the 10% significance level.

    M1 Granger causes loans, and loans and securities, at the 5% significance level. M2 Granger causes loans at the 10% significance level, and loans and securities at the 10% significance level. M3 Granger causes loans and securities at the 1% significance levels. The M3 money multiplier Granger causes loans at the 10% significance level. In short, deposits create loans, but not the other way around.

    Note that the only result supporting endogenous money is the fact that loans Granger cause the monetary base. But this is only true at the 10% significance level.

    I also did Granger causality tests on transitory advances and the monetary base. I find that transitory advances Granger cause the monetary base at the 1% significance level and the monetary base Granger causes transitory advances at the 10% significance level.

    So although there is bidirectional Granger causality between the monetary base and transitory advances, the significance levels tend to support the idea that it is government borrowing that is driving monetary base expansion and not monetary base expansion that is driving government borrowing.

    This exercise confirms for me that the claim of endogenous money is typically used in proofs by assertion. Whenever one checks to see if the empirical evidence supports a claim of endogenous money, it is routinely found to be wanting.

  21. Gravatar of Scott Sumner Scott Sumner
    20. February 2014 at 18:58

    Traveling, but a few quick notes:

    Edward, There were two recessions under Bush, none under Clinton.

    Saturos, Can we rely on wage cut data derived by asking workers? Maybe they meant real wages. Maybe they meant weekly wages.

    Mark. Thanks for the links.

    Krugman was telling the truth when he said he pays no attention to conservative blogs. How else could he not know that he keeps repeating the same mistakes over and over again.

    Roche has never heard of supply-side economics? He seems to think it means demand-side.

  22. Gravatar of Scott Sumner Scott Sumner
    20. February 2014 at 19:01

    Mark, Thanks for the data on Argentina. When inflation runs that high it’s almost always a supply of money problem.

    My problem with “endogenous money” theories is that endogenous doens’t mean what they think it means.

  23. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. February 2014 at 19:27

    Minor correction:

    M2 Granger causes loans and securities at the 1% significance level.

  24. Gravatar of Saturos Saturos
    20. February 2014 at 19:41

    Bullard on 2008; a beautiful example of cognitive dissonance: http://research.stlouisfed.org/econ/bullard/pdf/Bullard_NWArkansas_2013November21_Final.pdf

  25. Gravatar of Tom Brown Tom Brown
    20. February 2014 at 21:08

    Mark, can you guess who recently wrote the following sentence?:

    “Japan, the US, and UK are much more like Argentina and Venezuela than people realize.”

    you can assume this means in relation to gov debt, central bank asset purchases, size of the monetary base, and risk of hyperinflation. Briefly, what are your top two reasons the US is NOT like Argentina in this regard. Thanks.

  26. Gravatar of Tom Brown Tom Brown
    20. February 2014 at 21:17

    … actually let me take a guess (in reference to your long comment on Argentina above):

    1. The Fed’s assets are not composed of over 60% low quality, illiquid government securities (including non-transferable bills and temporary IOUs)

    2. Government spending has NOT been financed by printing dollars.

  27. Gravatar of Vince Cate Vince Cate
    21. February 2014 at 00:09

    For each of Weimar Germany, Zimbabwe, Venezuela, Argentina, USA, UK, and Japan please imagine a black box around the government and central bank. Imagine you can’t tell what is going on inside the black box between the government and the central bank, all you can do is look at how the black box interacts with the rest of the world. In each case, huge amounts of new money is/was coming out of the black box and being spent.

  28. Gravatar of Vince Cate Vince Cate
    21. February 2014 at 00:25

    Actually, as long as the banks keep leaving more and more “excess reserves” at the central bank, inside the black box, the net flow of new money is not yet out of control. When excess reserves stop going up or start going down is when the black boxes for Japan, US, UK will really look like the hyperinflation black boxes.

  29. Gravatar of J.V. Dubois J.V. Dubois
    21. February 2014 at 05:13

    Mark: Very good links and comments, just one question – do you plan to start a blog of your own? I mean I really love how you engage other bloggers out there and by all means please continue doing so, it is a great content to have.

    On the other hand it happened to me that I wanted to check some of the things that I remembered that you wrote and now it starts getting to a point where it is very hard to find something of yours in comment section of various blogposts from different authors. If you ever start a blog of your own I assure you that you will have at least one regular reader here.

  30. Gravatar of Britmouse Britmouse
    21. February 2014 at 06:30

    I second J.V. Dubois – Mark Sadowski, you really should start a blog!

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 06:31

    Tom Brown,
    “you can assume this means in relation to gov debt, central bank asset purchases, size of the monetary base, and risk of hyperinflation. Briefly, what are your top two reasons the US is NOT like Argentina in this regard. Thanks.”

    According to the IMF, gross general government debt was 47.8% and 106.0% of GDP in Argentina and the US respectively in 2013. The year on year increase in the monetary base was 26.6% and 36.1% in January 2014 in Argentina and the US respectively. The monetary base was 11.9% of GDP in 2013Q3 in Argentina and 21.4% of GDP in 2013Q4 in the US. So I imagine that by Vincent’s standards the situation may actually be more conducive to hyperinflation in the US than in Argentina.

    However, recall that US CPI reached its postwar peak year on year rate of increase of 14.6% in March 1980. US gross federal public debt reached its postwar low of 32.5% of GDP the following fiscal year. The year on year rate of increase in the monetary base was 9.0% in March 1980. The monetary base was only 5.5% of GDP in 1980Q1, not far above its postwar low of less than 4.8% in 1985Q1.

    The correlations tend to be in the other direction. In the advanced world especially, high levels of government debt are associated with low levels of inflation or deflation (e.g. Japan). With respect to the size of the monetary base, its velocity is closely correlated to interest rates and inflation. Thus a large monetary base is more likely when inflation is low.

    “1. The Fed’s assets are not composed of over 60% low quality, illiquid government securities (including non-transferable bills and temporary IOUs)

    2. Government spending has NOT been financed by printing dollars.”

    The current Argentinian situation is fascinating, because its fiscal predicament of being shut out of the global credit markets is now feeding into the direct monetization of treasury debt. Unless this is brought under control this is sufficient to bring about hyperinflation. However, I am not at all making any predictions, although by the State Street consumer price index this is the fifth year in a row of 20%+ inflation and that is often a precursor.

    On the other hand, the direct monetization of treasury debt is not necessary to bring about hyperinflation. In particular, Argentina’s 1989-90 hyperinflation was accomplished entirely without transitory advances. In particular, the monetary base increased nine-fold between April and July 1989, and the rest is history as they say.

  32. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 06:46

    Vincent Cates,
    “Actually, as long as the banks keep leaving more and more “excess reserves” at the central bank, inside the black box, the net flow of new money is not yet out of control. When excess reserves stop going up or start going down is when the black boxes for Japan, US, UK will really look like the hyperinflation black boxes.”

    This is a key distinction from a “black box” point of view. In Argentina’s case the year on year rate of increase in currency held outside the financial system was 22.8% in December. In contrast the year on year rate of increase of currency in circulation in the US was only 6.1% in January.

    But as I’ve said before, hyperinflation does not happen suddenly. All known historical cases of hyperinflation occured after several years of double digit inflation.

  33. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 06:51

    J.V. Duboise and Britmouse,
    Thanks. I’ve had so many commenters say this to me by now that I suppose I need to do something about it. The biggest impetus may actually come from the fact I have nowhere to put things like the long comment above on Argentina.

  34. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 08:09

    Scott,
    Off Topic:

    Weirdest thing I’ve read today (so far, and the day is young):

    http://www.voxeu.org/article/deflation-debate

    February 21, 2014

    Clarifying the debate about deflation concerns
    By Mickey Levy

    This:

    “In the US, the year-over-year core Personal Consumption Expenditures (PCE) index is at 1.2%, and the core CPI is at 1.7% – down from 1.8% and 1.9%, respectively, in the previous year. This disinflation is a lagged consequence of the disappointingly modest growth in aggregate demand that has constrained business pricing power, and high unemployment that has dampened wages, along with lower prices of selected goods and services benefitting from technological innovations.

    However, nominal GDP – the broadest measure of aggregate demand – has grown comfortably faster than estimated real potential throughout the soft economic recovery. In the second half of 2013 it grew at an annualised rate of above 5% – a significant acceleration from the previous year’s 3.1%. Such growth in aggregate demand far in excess of productive capacity virtually rules out deflation. If growth remains healthy, which seems likely, fuelled by monetary stimulus and a continued diminution of economic headwinds, the stronger economic activity and associated improvement in labour markets would influence price- and wage-setting behaviour, and begin to generate inflation and wage pressures.”

    Coupled with this:

    “Europe’s recovery from financial crisis and its many necessary adjustments are at a much earlier stage. Weak aggregate demand puts downward pressure on product pricing. Nominal GDP in the Eurozone rose 0.7% in 2012 and an estimated 1% in 2013 – below estimates of potential growth. High unemployment and slack labour markets are expected to persist, and still lower wages are needed in troubled nations to regain competitiveness. To date, the stickiness of wages – which continue to rise in real terms in France and Italy – highlights the slow adjustments to the new economic realities. Despite some positive reforms, an array of regulatory, economic, and fiscal policies continue to constrain productive capacity, and many reforms and austerity measures have been put on hold. Europe’s risks of deflation are nontrivial.

    In the last year, virtually every EU nation experienced downward price pressures, but inflation varies around the Eurozone’s harmonised rate of 0.9%. With the exception of Greece – which has deflation of 1.8% – inflation has been modest in all European nations, ranging from Spain’s 0.3% to Germany’s 1.2%.

    Europe’s road to healthy economic performance will be difficult, and policymakers face tough choices and tradeoffs. Should the ECB move aggressively with a US- or Japanese-style round of quantitative easing in an attempt to avert deflation? No. The challenges facing Europe are real and not monetary, and the ECB’s monetary policy is already accommodative, with a negative real policy rate and ample liquidity in the financial system. Unintended consequences of aggressive QE may be costly. Such an ECB shift may signal to Europe’s fiscal and economic policymakers that they may postpone necessary reforms. Or it may influence private-sector wage negotiations and result in delays in real wage adjustments. While lowering its policy rate or countering banks’ repayment of long-term refinancing operations by otherwise signalling that it will maintain sufficient liquidity seems appropriate, avoiding QE and its potential unintended policy side effects would be best for Europe’s long-run potential. That is, a brush with price stability or even temporary deflation along the road to recovery may be the best – albeit painful – path of adjustment from earlier excesses.”

    Leaves me with the impression that Mickey Levy suffers from a severe case of schizophrenia. I give him points for acknowledging that nominal GDP (NGDP) *is* aggregate demand (AD). But he looks favorable on the US situation despite QE, and unfavorably on the Euro Area situation and advises against QE because of the “unintended policy side effects”. Has he never considered that more NGDP might be attributable to QE and that this is an *intended side effect*?

    A passage towards the end on seems to give a clue:

    “These innovation-based price reductions improve standards of living and free up disposable income to spend on other goods and services. They boost aggregate demand and enhance economic performance. And they contribute positively to longer-run potential growth.”

    What model of the economy is this that nominal effects (AD) are attributable to real variables (technological innovation) and mysterious “unintended policy side effects” are attributed to nominal variables (QE)? The author seems to have gotten his econ diploma from the Ludwig von Mises correspondence school.

    This is Say’s Law run wild.

  35. Gravatar of TravisV TravisV
    21. February 2014 at 08:16

    Major_Freedom,

    Do you agree with market monetarists (and Milton Friedman) that very slow NGDP growth –> low long-term interest rates and vice versa?

    http://www.hoover.org/publications/hoover-digest/article/6549

  36. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 09:06

    Mark, thanks again!

  37. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 10:13

    Mark, I encouraged Vincent to share the following claim w/ you, but I’m impatient so I’ll just post it here myself:

    “Ok. Here is a really key point. For the Fed to unwind its BS by just waiting for Tsy debt to mature, someone else would have to fund the government deficit. If the market had to, interest rates would be far far higher. In fact, they would be so high that the government would be clearly bankrupt if it had to pay them. So it is not really an option any longer.”

    I’d suggested that the Fed could let it’s assets mature. His claims here seem pretty bold. What say you?

  38. Gravatar of Steve Steve
    21. February 2014 at 10:31

    SEPTEMBER 16, 2008 FOMC TRANSCRIPT

    EXCERPTS FROM ECONOMIST MR. STOCKTON’S DISCUSSION:

    We did receive a great deal of macroeconomic data since we closed the Greenbook last Wednesday. We didn’t seem to get any of it right, but it all netted out to just about nothing. [Laughter]

    It all left us still feeling very comfortable with our forecast because it looks to us as though economic growth is going to drop below 1 percent on average in the second half of the year.

    Now, this sharp rise in the unemployment rate is a bit difficult to square with a GDP figure that looks as though it was running above 3 percent in the second quarter and even 2 percent if you want to average the first and second quarters together. There are occasionally large errors in Okun’s law, as I think I’ve noted in the past. It seems as though Okun’s law gets obeyed about as frequently as the 55 mile an hour speed limit on I-95. [Laughter]

    I don’t think we’ve seen a significant change in the basic outlook, and certainly the story behind our forecast is very similar to the one that we had last time, which is that we’re still expecting a very gradual pickup in GDP growth over the next year and a little more rapid pickup in 2010.

    I guess it’s a sad comment that we’re relying on second derivatives turning positive to be the main force generating some upward impetus to economic growth.

    We continue to see reasonably encouraging signs on inflation expectations. The medium-term and long-term inflation expectations in the preliminary Michigan report last week dropped 0.3 percentage point, to 2.9 percent. TIPS haven’t really done very much, and hourly labor compensation continues to come in below our expectations. So based on our assessment, once these cost pressures work their way through the system””and we still think that the process will take place over the second half””we think that we’ll get some receding of core inflation from the 2.4 percent that we’re projecting for this year to 2.1 percent next year and 1.9 percent in 2010.

  39. Gravatar of Steve Steve
    21. February 2014 at 10:32

    SEPTEMBER 16, 2008 FOMC TRANSCRIPT

    MR MADIGAN OUTLINES FED POLICY OPTIONS (THEY DISCUSSED A RATE INCREASE!)

    As in the Bluebook, alternative B would leave the stance of policy unchanged at this meeting, and alternative C would involve a 25 basis point firming today. However, alternative
    A now entails a 25 basis point policy easing rather than the unchanged funds rate that was specified in the Bluebook version of this alternative.

    I will begin by discussing alternative C. The discussion at your last meeting suggested that you generally saw the next move in policy as likely to be a firming, a point that was explicit in the minutes of the meeting. Even though market volatility and financial strains have increased notably in recent weeks, you might view those developments as having only limited implications for the economic outlook and hence see economic fundamentals as continuing to suggest that policy should soon be firmed.

    Under the version of alternative B distributed yesterday evening, the Committee would hold the target funds rate constant at this meeting,…You might also believe that the downside risks to growth have increased as a result of the recent increase in financial strains. But at the same time, you may want to let the dust settle a bit before concluding that these developments warrant an adjustment in your policy stance.

  40. Gravatar of Steve Steve
    21. February 2014 at 10:36

    SEPTEMBER 16, 2008 FOMC TRANSCRIPT

    SELECTED QUOTES EXCERPTED FROM ROUNDTABLE DISCUSSION

    MR DUDLEY
    Either the financial system is going to implode in a major way, which will lead to a significant further easing, or it is not.

    MR LOCKHART
    But I should follow the philosophy of Charlie Brown, who I think said, “Never do today what you can put off until tomorrow.” [Laughter]

    MR ROSENGREN
    Deleveraging is likely to occur with a vengeance as firms seek to survive this period of significant upheaval… I support alternative A to reduce the fed funds rate 25 basis points. Thank you.

    Mr HOENIG.
    I also encourage us to look beyond the immediate crisis, which I recognize is serious. But as pointed out here, we also have an inflation issue. Our core inflation is still above where it should be.

    MS YELLEN. I agree with the Greenbook’s assessment that the strength we saw in the upwardly revised real GDP growth in the second quarter will not hold up. Despite the tax rebates, real personal consumption expenditures declined in both June
    and July, and retail sales were down in August. My contacts report that cutbacks in spending are widespread, especially for discretionary items. For example, East Bay plastic surgeons and dentists note that patients are deferring elective procedures. [Laughter]

    MR BULLARD
    Meanwhile, an inflation problem is brewing. The headline CPI inflation rate, the one consumers actually face, is about 6¼ percent year-to-date…My policy preference is to maintain the federal funds rate target at the current level and to wait for some time to assess the impact of the Lehman bankruptcy filing, if any, on the national economy.

    MR PLOSSER
    As I said, it is my view that the current stance of policy is inconsistent with price stability in the intermediate term and so rates ultimately will have to rise.

    MR STERN
    Given the lags in policy, it doesn’t seem that there is a heck of a lot we can do about current circumstances, and we have already tried to address the financial turmoil. So I would favor alternative B as a policy matter. As far as language is concerned with regard to B, I would be inclined to give more prominence to financial issues. I think you could do that maybe by reversing the first two sentences in paragraph 2. You would have to change the transitions, of
    course.

    MR. EVANS
    But I think we should be seen as making well-calculated moves with the funds rate, and the current uncertainty is so large that I don’t feel as though we have enough information to make such calculations today.

    MS PIANALTO
    Given the events of the weekend, I still think it is appropriate for us to keep our policy rate unchanged. I would like more time to assess how the recent events are going to affect the real economy. I have a small preference for the assessment-of-risk language under alternative A.

    MR LACKER
    In fact, it’s heartening that compensation growth is coming in a little below expected in response to the energy price shock this year. This has allowed us to accomplish the inevitable decline in real wages without setting off an inflationary acceleration in wage rates.

    MR. HOENIG
    I think what we did with Lehman was the right thing because we did have a market beginning to play the Treasury and us, and that has some pretty negative consequences as well, which we are now coming to grips with.

    MR. ROSENGREN
    I think it’s too soon to know whether what we did with Lehman is right. Given that the Treasury didn’t want to put money in, what happened was that we had no choice…I hope we get through this week. But I think it’s far from clear, and we were taking a bet, and I hope in the future we don’t have to be in situations where we’re taking bets.

    Mr. FISHER. All of that reminds me””forgive me for quoting Bob Dylan””but money doesn’t talk; it swears. When you swear, you get emotional. If you blaspheme, you lose control. I think the main thing we must do in this policy decision today is not to lose control, to show a steady hand. I would
    recommend, Mr. Chairman, that we embrace unanimously””and I think it’s important for us to be unanimous at this moment””alternative B

    MR WARSH.
    Those would be my suggestions to try to strike that balance””that we are keenly focused on what’s going on, but until we have a better view of its implications, we are not
    going to act.

  41. Gravatar of Willy2 Willy2
    21. February 2014 at 10:51

    – The entire discussion around NGDP is complete nonsense. And the FED seems to agree because they come up with a chart with Nominal GDP minus 5. It gives a more accurate picture of the REAL GDP and real GDP is more revelant for the average US consumer.

    The discussion surrounding NGDP is therefore completely “pie in the sky”.
    – I now can imagine why Cullen Roche banned Mark Sadowski from his website (“Pragmatic Capitalism”).

  42. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 10:56

    Willy2: Cullen informed me a week or two back that Mark is not banned from his website. And, as Mark has pointed out, Cullen even used one of his comments here as the basis (pretty much the entirety) of a post he did on the gold standard.

  43. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 12:11

    Mark, so maybe two big differences are:

    1. Argentina is not part of the “advanced world”

    2. Argentina has been cut off from global credit markets.

  44. Gravatar of TravisV TravisV
    21. February 2014 at 12:13

    Marcus Nunes’s reaction to the 2008 transcripts:

    http://thefaintofheart.wordpress.com/2014/02/21/the-2008-transcripts-confirm-the-feds-obsession-with-inflation-crashed-the-economy

  45. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 12:17

    Tom Brown,

    Vincent Cates said:
    “For the Fed to unwind its BS by just waiting for Tsy debt to mature, someone else would have to fund the government deficit. If the market had to, interest rates would be far far higher. In fact, they would be so high that the government would be clearly bankrupt if it had to pay them. So it is not really an option any longer.”

    There was never any need to unwind the more than six-fold increase in the monetary base that took place in 1932-48. The most that the monetary base decreased was from $48.413 billion in December 1948 to $42.960 billion in April 1950, or by 11.3%. And even that decrease probably had only minimal negative consequences because of the expected decline in real output following World War II:

    http://research.stlouisfed.org/fred2/graph/?graph_id=145118&category_id=0

    The monetary base remained roughly the same from 1948 until 1960 while NGDP grew.

    So given the history of the last time the Federal Reserve spent an extended period of time at the zero lower bound, as well as the availability of newer monetary policy tools (e.g. interest on reserves), I seriously doubt that unwinding QE will be necessary, much less desirable.

    Also, recall what happened in between QE2 and QE3. The monetary base was kept more or less constant, and long term interest rates collapsed:

    http://1.bp.blogspot.com/-BAnvd5XkIkc/UnKFj667RyI/AAAAAAAAAyM/-xbQBsjqcm0/s1600/QE+Rates.png

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 12:31

    Willy2,
    “And the FED seems to agree because they come up with a chart with Nominal GDP minus 5.”

    Can you please reference this?

  47. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 13:57

    Some things that really stand out to me so far in these transcripts:

    Worst prediction:

    Charles Plosser

    September 16:
    “As I said, it is my view that the current stance of policy is inconsistent with price stability in the intermediate term and so rates ultimately will have to rise.”

    Worst metaphors:

    Richard Fisher

    March 18:
    “The fact of the matter is that we have undertaken significant liquidity enhancement initiatives, and I think we’re going to have to do more, and I’ve been fully supportive of them, but I think 75 basis points, Mr. Chairman, is way too much. My thought is that it encourages the financial markets. They’re not going to be satisfied. I said this last time. It’s Jabba the Hutt. They will keep asking for more and more. We have to quit feeding them.”

    June 24:
    “So, Mr. Chairman, I would say that currently our patient””the economy””is indeed a sick puppy. … I think we have, like loyal practitioners and with the equivalent of the Hippocratic oath, done the job that we are expected to do in terms of resuscitating the victim. That is the good news. The real bad news is that our patient appears to be acquiring a staph infection in this hospital that we have created, and that staph infection is inflation.”

    September 16:
    “Money doesn’t talk; it swears. When you swear, you get emotional. If you blaspheme, you lose control. I think the main thing we must do in this policy decision today is not to lose control, to show a steady hand.”

    October 28-29:
    “Mr. Chairman, I think it is clear that inflation has been rolled over by the steamroller of the credit crisis. I am not going to belabor what I have heard from the CEOs I have spoken to. Basically, the best summary is that things have gone from interesting to unbelievable. We have had an implosion of economic activity. Business women and men, not having any pricing power, are doing what you would expect them to do: They are cutting their costs of goods sold, which means they are shedding head count dramatically.”

    And as Matthew Yglesias observed in a tweet:
    “…[there’s] a strong inverse correlation between being Richard Fisher and knowing what’s happening.”

    https://twitter.com/mattyglesias/status/436908608186753025

    Best damage control ahead of the release of the 2008 transcripts:

    James Bullard

    The St Louis Fed tweeted a speech from last year with him arguing that the real-time economic data in 2008 was badly trailing events:

    https://twitter.com/stlouisfed/status/436895225764921344

    David Andolfatto of the St. Louis Fed also has a new post (“2008”) linking to the same speech.

    The FOMC transcripts show that St. Louis Fed President Bullard, as late as September 2008, was far more worried about high inflation than the possibility of a recession.

    September 16:
    “Meanwhile, an inflation problem is brewing. The headline CPI inflation rate, the one consumers actually face, is about 6¼ percent year-to-date…”

    Inflation expectations as measured by 5-year TIPS closed at 1.23% the day before the September 16 meeting.

    Too bad he didn’t have as good foresight in 2008 as he evidently does now.

  48. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 13:58

    Mark, what if the Fed froze that monetary base: i.e. the Fed purchased just enough debt to replace maturing debt. Then the “market” would still have to “fund” the government’s deficit on it’s own, right? Would Vincent’s warnings about interest rates getting so high that the “government would be clearly bankrupt” have any merit?

  49. Gravatar of Willy2 Willy2
    21. February 2014 at 14:19

    “GDP minus 5” gives a more accurate picture of the REAL GDP. Because US GPD is (highly) overstated by understating Price inflation. So, the reported (REAL) GDP is too high.

    John Williams (no, we won’t get Hyper-Inflation any time soon) of http://www.shadowstats.com has a very good grip on how the REAL GDP looks like.
    Williams gave a number of very informative interviews to the McAlvany Financial Group.
    http://mcalvanyweeklycommentary.com/03-06-13/
    http://mcalvanyweeklycommentary.com/09-11-13/

    http://www.peakprosperity.com/crashcourse/chapter-16-fuzzy-numbers

    http://www.shadowstats.com/alternate_data/gross-domestic-product-charts
    SGS calculations come much closer to the “NGDP minus 5”.

  50. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 14:27

    Tom Brown,
    If the Fed purchased enough to maintain the level of the monetary base, then by definition the non-government sector would not be funding the entire deficit. However I still don’t think this matters.

    David Beckworth has done several posts debunking the idea that the sustained drop in interest rates is being caused by the Fed’s large scale asset purchases. See this one for example:

    http://macromarketmusings.blogspot.com/2012/09/is-fed-really-causing-sustained-drop-in.html

    “Would Vincent’s warnings about interest rates getting so high that the “government would be clearly bankrupt” have any merit?”

    No.

  51. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 14:46

    This statement really bothers me.

    http://ftalphaville.ft.com/2014/02/21/1779582/fomc-transcripts-bernanke-on-japanese-vs-american-monetary-policy-or-qe-vs-credit-easing/

    February 21, 2014

    FOMC transcripts: Bernanke on Japanese vs American monetary policy (or QE vs credit easing)
    By Cardiff Garcia

    “…You might say, if somewhat simplistically, that monetary policy has gone from [Credit Easing] to QE and back to CE, though the later CE obviously didn’t require battling existential threats to the financial system, and has consequently been a lot milder…”

    Yes, Garcia qualifies it with “somewhat simplistically” but in my opinion he is grossly obscuring the clear distinction between the alphabet soup of the Fed’s Credit and Liquidity Programs:

    http://research.stlouisfed.org/fred2/graph/?graph_id=147243&category_id=0

    and QE.

    QE consists solely of open market purchases of Treasury and Agency debt, both of which come with at least the implicit guarantee of the Treasury. The Credit and Liquidity Programs are by and large collateralized loans offered through Section 13.3 of the Federal Reserve Act under “unusual and exigent circumstances.”

    Garcia evidently needs to read the Federal Reserve Act (FRA).

  52. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 15:03

    Mark, thanks again. Maybe I’m thinking of this incorrectly (and I understand it doesn’t really matter in terms of Vincent’s question), but if the Fed purchases just enough Tsy debt to replace maturing Tsy debt it already owns, and if the non-gov sector were not net buyers (or sellers) of Tsy debt, then Tsy (even w/o tax revenue) would not have a deficit, correct? It seems to me that they’d be maintaining a constant level of debt: retiring maturing bonds and creating new ones at the same rate. Add in tax revenue, and they might actually be decreasing their debt (i.e. running a surplus). And thus if they wanted to increase their level of debt (i.e. run a deficit) they’d need non-gov to become a net buyer. Where did I go wrong?

  53. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 15:15

    … I’m implicitly ignoring intra-governmental (e.g. SS) held Tsy debt in the above paragraph: assume it doesn’t exist for the purpose of debugging my logic.

  54. Gravatar of Willy2 Willy2
    21. February 2014 at 15:53

    In other words: anyone who looked at Nominal GDP only missed the entire “recession”.

  55. Gravatar of Mark A. Sadowski Mark A. Sadowski
    21. February 2014 at 16:07

    Tom Brown,
    Perhaps I should have expressed myself better.

    A budget is balanced if revenue equals non-interest expenditures plus interest on the debt. Under such circumstances debt remains constant in nominal terms. However, if old debt is being retired then new debt must be issued to take its place. Whatever new debt the Fed does not purchase must be purchased by someone else.

    So even if the treasury has a balanced budget, a pre-existing debt means there are financing issues.

  56. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 16:17

    Mark, thanks. It sounds like we’re on the same page… although I’d ignored interest expenditures to non-gov. It’s justified to ignore them to the Fed since they are remitted.

  57. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 16:42

    Willy2, you write:
    “In other words: anyone who looked at Nominal GDP only missed the entire “recession”.”

    I don’t understand that: NGDP took a clear downward jag ~2008, and it’s still not back on trend. How is that missing the entire recession?

  58. Gravatar of tesc tesc
    21. February 2014 at 16:44

    I thought this community would like this quote:

    “The Mises-Hayek business cycle theory led Hayek to the conclusion that INTERTEMPORAL COORDINATION IS BEST MAINTAINED BY CONSTANCY OF NOMINAL SPENDING or ‘the total money stream.’ …. Hayek wants, therefore, not a constant money supply, but a neutral money supply- one which will insure that there will be no monetary causes of price changes.”

    White, Lawrence H. (2012-03-22). The Clash of Economic Ideas (p. 83). Cambridge University Press. Kindle Edition.

    So the Great Recession was caused by lack of interporal coordination, which was caused by INconstant nominal spending. Not by interporal coordination caused by low interest rates.

  59. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 17:23

    tesc, great quote! Do you think the author has accurately captured Hayek’s views? David Glasner has recently described Hayek as having changed his mind on the usefulness of the deflation at the start of the Great Depression: he later came to regret his early views on that, and came to believe that the deflation went too far. I wonder if this ties in.

  60. Gravatar of Tom Brown Tom Brown
    21. February 2014 at 19:36

    Mark, in your comment here:
    https://www.themoneyillusion.com/?p=26140#comment-318544
    Can you expand on why you say this?:

    “Note also that in order for this equation to be true, velocity needs to be a constant, otherwise an additional term would have to be included to reflect changes in velocity on bank lending in the previous period.”

    I’m not getting it. Nor am I getting why Keen uses “v(t)” in his paper w/o explanation in several places (e.g. equation 0.12), although he does say that in equation 0.15 that v(1) represents the average velocity over the year. Thus is v(t) in equation 0.12 supposed to represent the average velocity over the period from t1 to t2?

    But “average” over the year does not imply it’s constant, or that it must be the same average for each year does it?

  61. Gravatar of Major_Freedom Major_Freedom
    21. February 2014 at 21:14

    tesc:

    ‘””The Mises-Hayek business cycle theory led Hayek to the conclusion that INTERTEMPORAL COORDINATION IS BEST MAINTAINED BY CONSTANCY OF NOMINAL SPENDING or ‘the total money stream.’ …. Hayek wants, therefore, not a constant money supply, but a neutral money supply- one which will insure that there will be no monetary causes of price changes.“

    That’s impossible with NGDPLT, or any other monetary system.

  62. Gravatar of TravisV TravisV
    21. February 2014 at 22:34

    Major_Freedom,

    Do you agree with market monetarists (and Milton Friedman) that very low NGDP growth expectations -> low long-term interest rates and vice versa?

    http://www.hoover.org/publications/hoover-digest/article/6549

  63. Gravatar of Willy2 Willy2
    22. February 2014 at 00:12

    NGDP is bogus becasue in february 2008 the BLS reported that NGDP was at ~ 3%.

    Yet in november 2008 the BLS determined that the recession started in november 2007.

    Any one who looked at credit spreads (e.g. yield curve) could see that the financial trouble already started in june/july 2007.

  64. Gravatar of Daniel Daniel
    22. February 2014 at 03:31

    Any one who looked at credit spreads (e.g. yield curve) could see that the financial trouble already started in june/july 2007.

    And since unemployment went up in autumn of 2008, it proves that the financial sector does not control the economy.

    In others words – stop begging the question, bro.

  65. Gravatar of Willy2 Willy2
    22. February 2014 at 04:20

    No. Unemployment already started to rise in the 4th quarter of 2007. But when one looks at the official US labor statistics one wouldn’t have known.

  66. Gravatar of W. Peden W. Peden
    22. February 2014 at 04:58

    Major Freedom,

    “That’s impossible with NGDPLT, or any other monetary system.”

    Not in the sense that Hayek presumably meant it. You’re going to have to work a lot harder to prove that Hayek was inconsistent.

  67. Gravatar of tesc tesc
    22. February 2014 at 06:28

    W. Peden
    Do not feed the troll. He is addicted to attention. It would better if you talk him into rehab.

  68. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 06:45

    Tom Brown,
    “I’m not getting it. Nor am I getting why Keen uses “v(t)” in his paper w/o explanation in several places (e.g. equation 0.12), although he does say that in equation 0.15 that v(1) represents the average velocity over the year. Thus is v(t) in equation 0.12 supposed to represent the average velocity over the period from t1 to t2?

    But “average” over the year does not imply it’s constant, or that it must be the same average for each year does it?”

    Let me first explain what I meant by my comment. You’ll see why I left it as short as I did.

    For the sake of simplicity let’s assume both V and D increase between period t and period t-1 and that AD (= Y) = VD. Then:

    ADt = VtDt = (Vt-1 + deltaV)(Dt-1 + deltaD)
    = Vt-1Dt-1 + Vt-1deltaD + deltaVDt-1 + deltaVdeltaD
    = Vt-1Dt-1 + Vt-1deltaD + deltaVdeltaD + deltaVDt-1
    = Vt-1Dt-1 + (Vt-1 + deltaV)deltaD + deltaVDt-1
    = Yt-1 + VtdeltaD + deltaVDt-1

    Note the extra term that is missing from Keen’s equation 0.15. The only way we can make Keen’s equation true is by assuming velocity is a constant.

    Keen defines V as the average velocity in any given period. In the example I gave above, with V increasing between periods t and t-1, not only are we missing a term, since average V is less than Vt, VdeltaD is less than VtdeltaD.

    My comment on Keen’s new equation was meant as a joke. But as I hope I’ve illustrated here, there are in fact as many serious methodical issues with his new paper as there were with his Berlin paper.

  69. Gravatar of ssumner ssumner
    22. February 2014 at 07:01

    Mark, Good point about how debt levels don’t correlate well with inflation.

    Everyone, Lots of good points. I’ll address some of these issues in subsequent posts.

  70. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 07:07

    Willy2,
    First of all monetary policy shouldn’t be targeting real variables. We already went through that in the 1960s and 1970s and it ended up very badly.

    Secondly, year on year NGDP growth in the US fell from 6.5% in 2006Q1 to 5.3% in 2006Q3 to 4.3% in 2007Q1 to 3.1% in 2008Q1 to 2.7% in 2008Q2:

    http://research.stlouisfed.org/fred2/graph/?graph_id=135856&category_id=0

    So the rate of change in NGDP started falling significantly and steadily all the way back in 2006Q3.

    As Nick Rowe points out, in terms of suitable targets for monetary policy, NGDP is the dog that barks:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/09/for-david-andolfatto-why-i-switched-from-it-to-ngdplt.html

  71. Gravatar of tesc tesc
    22. February 2014 at 08:08

    Tom

    “Do you think the author has accurately captured Hayek’s views?”

    From my reading I gather that Hayek was hoping deflation, or better said, fallen NGDP or stream of money, would force wages to be less sticky. That is why he was he was not outspoken about NGDP stabilization. I think he repented later on.

    What I found fascinating, is the connection between stable NGDP and temporal coordinaton between savers and producers. I am going to do more reading on it.

  72. Gravatar of Felipe Felipe
    22. February 2014 at 09:21

    Off topic:

    Wonkblog has a piece arguing these past years have been the austerity years (linked by Mark Thoma): http://www.washingtonpost.com/blogs/wonkblog/wp/2014/02/21/have-we-been-living-in-an-age-of-austerity/

    What is interesting in the whole piece is this:

    I’d argue that you must consider the stance of fiscal policy relative to the environment we’re in. And for the past few years, we’ve been recovering from the worst recession since the Great Depression, and in that environment it makes sense that the government will do what it can to make up for a massive shortfall in demand.

    There is no mention of the Fed in this piece. But the interesting thing is that the fiscal policy stance is measured by the objective. If they only did so for monetary policy too…

  73. Gravatar of Willy2 Willy2
    22. February 2014 at 10:32

    Mark,

    The power of central banks extremely over-estimated/rated. E.g., everyone thinks that e.g. the FED controls interest rates (short term & long term). They don’t. The FED has in fact an extremely limited set of (extremely powerful) tools. Those powerful tools are the reason why the FED is forced to tread lightly. And will respect the will of Mr. Market and follows what Mr. Market dictates.

    In the early 1960s the FED tried to push rates lower by the first operation Twist but rates went higher anyway. It was NOT Volcker’s FED that broke the back of rising interest rates. Decisions made by corporate USA & Europe were the reason that pushed rates lower and lower after 1981.

    That’s why I consider all this talk about “The FED should Target NGDP” to be complete nonsense. It’s all a nice bunch of theories but I don’t buy into it.

  74. Gravatar of Tom Brown Tom Brown
    22. February 2014 at 10:52

    Mark, much thanks: that makes perfect sense. I’m certainly no economist, but I am familiar with basic dynamic systems, 1st order differential equations, and difference equations… and I can’t figure out what’s going on in Keen’s paper, even as early as equations 0.5 and 0.6. Why does he multiply by the time interval and call that AD(t2-t1)? It seems to me once you start multiplying by time intervals, you’ve created a different beast (e.g. power is instantaneous, but energy is average power over a time period). Then there’s the issue of the non-constant V which he brings up, but then ignores. Is there a problem even in going from his equation 0.5 to 0.6?

    Maybe it’s not worth worrying about.

  75. Gravatar of tesc tesc
    22. February 2014 at 11:43

    Felipe:

    “fiscal policy stance is measured by the objective. If they only did so for monetary policy too…”

    Glorious comment

    I think it is because they believe in the mythical tale of the Liquidity Trap, regardless of 2013 evidence of its mythological nature.

    In MV=PY, V went way down, so M has to go WAY up. G is irrelevant or at worst distortionary.

  76. Gravatar of Major_Freedom Major_Freedom
    22. February 2014 at 11:43

    TravisV:

    “Do you agree with market monetarists (and Milton Friedman) that very low NGDP growth expectations -> low long-term interest rates and vice versa?”

    If what you mean is whether the inflation premium model of interest rates is true, then I will say yes, with caveats. For there can be other factors at play that can affect interest rates that counter the inflation premium component even over the long run. I do not subscribe to the absolutist theory that NGDP growth is the only determinant of long term interest rates.

    ————————————

    W. Peden:

    “Not in the sense that Hayek presumably meant it.”

    Actually it is in the same sense that Hayek meant it. Inflation does not affect all prices and all expenditures equally. This is true with NGDPLT, and every other monetary system. Hayek held that central banks cannot perfectly replicate competitive, free market monetary orders. And, he held that a world central bank system would be the “most rational”.

    In his own interpretation, if you read what he wrote, stable NGDP would not have “no monetary causes of price changes.” Hayek did not say what is being claimed he did say.

    “You’re going to have to work a lot harder to prove that Hayek was inconsistent.”

    That isn’t hard to do. I’ve already provided examples of that in the distant past on this blog for example.

    tesc:

    You sound mad.

  77. Gravatar of Major_Freedom Major_Freedom
    22. February 2014 at 11:52

    tesc:

    “What I found fascinating, is the connection between stable NGDP and temporal coordinaton between savers and producers.”

    It is interesting that you find “fascinating” to study something that is untrue.

    Temporal coordination between savers and producers requires a free market in money, not stable NGDP or any other arbitrary politically imposed universal statistic.

    If the federal reserve system inflates to target NGDP instead of prices, it will hamper coordination because of the effect of inflation and credit expansion on interest rates. The market would still not be setting interest rates. As a result, the temporal investment regulating nature of interest rates is hampered.

    You should understand that just because the Fed isn’t targeting a specific variable, it doesn’t mean it isn’t affecting that variable in its targeting of another variable. It is not true that if the Fed stops targeting interest rates, but targets NGDP instead, that interest rates will be “market” rates. It’s pretty easy to grasp this point: If the Fed isn’t targeting NGDP, such as now, then does that mean NGDP is determined by the market? Of course not! The market process is prohibited by government to determine the location and rates of money production (and thus determine demand, prices and interest rates).

    You will not find the key to the universe through political force.

  78. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 11:56

    Some more selected quotes from the 2008 FOMC transcripts:

    1) The “are we there yet?” award

    Charles Plosser

    October 28-29:
    “We have been lowering the funds rate since January, largely in anticipation of a recession or to mitigate the chances of one occurring. Now, it may finally have arrived. Does that mean we have to lower more?”

    2) The “we blew of the economy, but at least we retained our credibility” award.

    Jeffrey M. Lacker

    September 16:
    “I don’t want to be sanguine about it, but the silver lining to all the disruption that’s ahead of us is that it will enhance the credibility of any commitment that we make in the future to be willing to let an institution fail and to risk such disruption again.”

    3) Richard Fisher on December 16 lecturing the rest of the FOMC on effective monetary policy communications (you can’t make this stuff up).

    Mr. Fisher: “Finally, on the issue of communications, one of my colleagues often says that, if you’re Elton John, you are expected to sing “Bennie and the Jets” every single time and at every single concert. It seems to me that, once we get and hone our message, we must repeat it incessantly and stay on message in order to have it penetrate. In Austin, you gave what I consider to be a hallmark and””not trying to flatter you””for monetary policy a historic speech. What was Bloomberg’s first reaction? The Fed may cut rates further. The message was lost. We all need to stay on message. But I think it’s very important, whether we have press conferences or whether you give speeches, that we need to hammer the theme of the new regime that we are about to embrace over and over and over again. So I didn’t pick “Bennie and the Jets” just because of your name, Mr. Chairman. [Laughter] But I do hope you remember that we must have that constant refrain. If we’re going to sell something, we have to sell it by repeating it, not asking the press to interpret it for us but to get the message out in””excuse me, Governor Kohn””full frontal view. Thank you, Mr. Chairman.”

    Chairman Bernanke: “I’m in awe of a presentation that has Rube Goldberg, the Black Death, “Bennie and the Jets,” and full frontal view all in it.” [Laughter]

    4) The “phew, I’m glad that’s all over” award

    James Bullard

    August 5:
    “My sense is that the level of systemic risk associated with financial turmoil has fallen dramatically…As one of my contacts at a large bank described it, the discovery process is clearly over. I say that the level of systemic risk has dropped dramatically and possibly to zero.”

  79. Gravatar of Major_Freedom Major_Freedom
    22. February 2014 at 11:57

    NGDPLT is distortionary.

  80. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 12:34

    Tom Brown,
    “It seems to me once you start multiplying by time intervals, you’ve created a different beast (e.g. power is instantaneous, but energy is average power over a time period). Then there’s the issue of the non-constant V which he brings up, but then ignores. Is there a problem even in going from his equation 0.5 to 0.6?”

    By definition aggregate demand is a rate. So it makes no sense at all to define AD in such a manner that it is proportional to the length of the time period. About the most polite thing I can say is that Keen is doing something extremely idiosyncratic in equation 0.6. It’s an example of what I like to call Keensian Economics.

    “Maybe it’s not worth worrying about.”

    Sometimes it’s useful to verify for yourself that people don’t know what they’re talking about.

  81. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 13:00

    Willy2,
    “It was NOT Volcker’s FED that broke the back of rising interest rates. Decisions made by corporate USA & Europe were the reason that pushed rates lower and lower after 1981.”

    I don’t find this claim to be credible. Do you have any evidence to support it?

  82. Gravatar of Willy2 Willy2
    22. February 2014 at 14:20

    I didn’t find any online source (yet) to prove this.

    But there’re are (at least) 2 persons who forsaw that rates would start to go lower from the early 1980s onwards: Robert Prechter (“Conquer the crash”) & Gary Shilling (Shilling even wrote a book about it in 1979(?)/1980 (?)). I found the most credible explanation in Gary Shilling’s book “Age of deleveraging”(2011).

    The main explanation goes along these lines:
    As a result of increased competition in the 1970s US & european corporations were forced to increase productivity (e.g. produce more with the same amount of people) And increased productivity leads to a gradually decreasing demand for capital. And when demand falls the price of capital (=interest rates) decreases as well.

  83. Gravatar of Tom Brown Tom Brown
    22. February 2014 at 14:21

    Mark, good to know. I guess the old noggin isn’t completely out of commission.

  84. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 15:30

    Willy2,
    The 10-year T-Note yield rate rose from an average of 2.4% in 1954 to 13.9% in 1981 and fell back down to 1.8% in 2012. (Note that I’ve thrown in 3-month T-Bill yields as a bonus.):

    http://research.stlouisfed.org/fred2/graph/?graph_id=162193&category_id=0

    In contrast there is no discernable pattern with productivity (output per hour) growth. Between 1954 and 1981 productivity growth in the nonfarm business sector, business sector and economy as a whole averaged 2.2%, 2.5% and 1.9% respectively. Between 1981 and 2012 productivity growth in the nonfarm business sector, business sector and economy as a whole averaged 2.1%, 2.2% and 1.7% respectively.

    There was no productivity explosion in the 1980s. Productivity growth was about the same in the disinflationary 1980s (1.68%, 1.85% and 1.65%) as it was in the stagflationary 1970s (1.76%, 1.83% and 1.45%).

    And in fact productivity growth averaged less during the period when interest rates declined than during the period when they rose.

  85. Gravatar of Tom Brown Tom Brown
    22. February 2014 at 16:13

    Mark, if you have any patience for further off topic nonsense, maybe you have an opinion on what I asked David Glasner here:

    http://uneasymoney.com/2014/02/20/whos-afraid-of-says-law/#comment-48069

    regarding booms, busts, bubbles, and NGDP. (David’s generally up for it, but he doesn’t visit his blog that often).

  86. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 16:41

    Tom Brown:
    “1. A boom is to a bust as a bubble is to a __________? A popped bubble? A recession?”

    A “panic”.

    “2. If bubbles did exist, what would distinguish them from booms?”

    “Bubbles” refer to irrationally overpriced assets. “Booms” refer to unusually rapid growth in real output in the entire economy, or in a specific sector of the economy.

    “3. In your view, if monetary policy were perfect, would there still be booms and busts? If so, then if we had perfect monetary policy but still experienced a boom or a bust, would the NGDP level still keep on trend?”

    Yes and yes.

    “4. How is a bust different than a recession caused by a modest nominal shock in combination with poor monetary policy?”

    If it is an economy wide “bust” then it would manifest itself in a slowdown in the growth rate of one or more factor inputs (labor, capital, or natural resources) or in a slowdown in the growth rate of total factor productivity (TFP). If it is a sectoral “bust” then it simply manifests itself in declining output within the affected sector.

  87. Gravatar of Tom Brown Tom Brown
    22. February 2014 at 17:00

    Mark, thank you, that’s super helpful!

  88. Gravatar of Tom Brown Tom Brown
    22. February 2014 at 17:01

    … plus I learned what “TFP” means. RBCers like to talk about TFP shocks, true?

  89. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. February 2014 at 17:19

    Tom Brown,
    In most RBC models stochastic changes in TFP are the main source of business cycles. Needless to say reality is very different. Perhaps NGDPLT will make RBC true someday 🙂

  90. Gravatar of Tom Brown Tom Brown
    22. February 2014 at 17:25

    “Perhaps NGDPLT will make RBC true someday” … Ha! that’s the tie in I was looking for with Lars’ quote here:
    http://uneasymoney.com/2014/02/20/whos-afraid-of-says-law/#comment-47923

  91. Gravatar of tesc tesc
    22. February 2014 at 19:28

    Tom

    My two cents on RBC is that , under NGDPLT the only recessions would be cause by negative AS shocks, negative productivity shocks. Never by negative AD shocks like last recession. So that would be close to RBC theory.

    Mark

    Thank you for all the work you do. You are great intellectual influence. I think I forgot to thank you for your comments last time in my question about the drop in the debt holdings by the FED during the recession. Thanks a lot.

  92. Gravatar of Willy2 Willy2
    22. February 2014 at 21:46

    Mark,

    One MAJOR factor that is overlooked is the impact of wages in an economy.

    In the 1950s, 1960s & even the 1970s US workers saw healthy wage increases. But starting around 1981 corporations started to keep lid on the rise of wages. And the government started to underreport inflation as well.

    When the REAL price inflation was say 4%, then the official inflation (as reported by the government) was say 3%. And then corporations gave a wage increase of say 2%. So, the worker saw the purchasing power of their wages fall year after year.

    The lack of wage increase was made whole by the consumer going deeper & deeper into debt.

  93. Gravatar of Steve Steve
    22. February 2014 at 22:59

    Richard Fisher said, “So I didn’t pick “Bennie and the Jets” just because of your name, Mr. Chairman. [Laughter]”

    I wonder if Fisher will now use “Janie’s Got a Gun [Bazooka]” for his musical analogy…

  94. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 06:46

    tesc,
    Thanks for the kind words.

  95. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 07:58

    Willy2,
    These are a couple of claims and it’s not clear what their relationship is to your original claim that it wasn’t the Fed that caused interest rates to fall after 1981 but corporations. You now seem to be arguing that interest rates fell because the rate of increase in real wages fell.

    This claim is in turn based on the claim that the government is underreporting inflation. But then this begs the question, compared to what?

    Inflation itself is based on the abstract concept of an aggregate price level, and in turn our measures of “real” wages and GDP are based on it. There’s no real way to compare the aggregate price level and real wages and GDP between time periods because the things we purchase change over time. The only things that are truly “real” are unadjusted measures such as nominal wages and NGDP.

    Now, based on your claim, I surmise that you believe that the government started to do something very different in the 1980s with respect to inflation. There are two major measures of the consumer price level in the US, the BLS CPI and the BEA PCEPI. The PCEPI has undergone frequent minor adjustments but conceptually it hasn’t really changed in over half a century. The CPI has had several major adjustments but the only thing that changed in the early 1980s was the fact that in January 1983 housing prices were replaced with owners equivalent rent. And mostly, the changes in the CPI have moved it closer in concept to the PCEPI, which in my opinion has always been the far more sophisticated measure. Of course if you think there’s a conspiracy then none of this means anything.

    But here’s the thing. Since inflation is itself an abstract concept, your “real” claim seems to be that corporations started to cause the wage share of income to drop in the 1980s. And in fact the share of national income that was in the form of compensation to employees peaked in 1980 and corporate profits reached their postwar low share of national income in 1982:

    http://research.stlouisfed.org/fred2/graph/?graph_id=162251&category_id=0

    But are corporations responsible for the drop in the share of national income going to compensation of employees since 1980?

    (continued)

  96. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 08:24

    (continued)

    The drop in labor share of income in the US since 1980, and the OECD more generally, is strongly correlated to disinflation:

    Inflation and Factor Shares
    Francisco Alcalá and F. Israel Sanchoy
    August, 2000

    Abstract:
    “We use results from the literature on the determinants of price-cost margins to derive an equation relating labor’s share of national income to the inflation rate (as well as to the output gap, the unemployment rate and the capital stock per worker). The equation is tested with a panel of 15 OECD countries. We obtain a robust positive relationship between inflation and the labor share. Our results suggest that disiflation is not distributively neutral, provide empirical support for the distinct concern about price stability shown by trade unions and employers’ organizations, and help explaining the negative impact of inflation on growth.”

    http://pareto.uab.es/wp/2000/46000.pdf

    Moreover the direction of causality is from inflation to wages, not from wages to inflation:

    Does Wage Inflation Cause Price Inflation?
    Gregory D. Hess and Mark. E. Schweitzer
    April 2000

    Abstract:
    “Recent attention has turned from unemployment levels to wage growth as an indicator of imminent inflation. But is there any evidence to support the assumption that increased wages cause inflation? This study updates and expands earlier research into this question and finds little support for the view that higher wages cause higher prices. On the contrary, the authors find more evidence that higher prices lead to wage growth.”

    http://www.clevelandfed.org/research/policydis/pd1.pdf

    So I would argue that the drop in the labor share of income is at least partially attributable to excessively tight monetary policy.

    Of course, both of these results will probably only be persuasive if you trust US and other OECD nations’ measures of inflation.

  97. Gravatar of Willy2 Willy2
    23. February 2014 at 09:47

    Did you watch & listen to the info from this comment ? It looks like you didn’t.
    https://www.themoneyillusion.com/?p=26219#comment-319400

    No, I don’t trust the official inflation gauges. And your reply confirms my thoughts on what happened to wages after 1981. I see – at least – nothing that (strongly) contradicts my views.

    Here’s another sign that something was wrong.
    In the 1990s the median household income still rose. But oil prices remained flat.
    But from 2000 up to 2008 the reverse happened. US median household income was flat but oil prices rose (from $ 20 to $140). Source: Federal Reserve.
    US households were only able to survive that by going deeper into debt.

  98. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 10:26

    Willy2,
    “Did you watch & listen to the info from this comment ? It looks like you didn’t.”

    Yes, I noticed that. I’m extremely familiar with Shadowstats and John Williams. In a word, I think he’s nuts. Do you really believe that US RGDP has been contracting almost without interuption for 15 years?

    http://www.shadowstats.com/alternate_data/gross-domestic-product-charts

    On the issue of household debt here’s a paper that I think is extremely good. Interestingly the US the household sector ran a primary surplus every year from 1981 through 1999 with the sole exception of 1985. The growth in household sector leverage, at least during that time period, was due almost entirely to high real effective interest rates and low nominal income growth, not to excessive borrowing:

    Fisher Dynamics in Household Debt: The Case of the
    United States, 1929-2011
    J. W. Mason and Arjun Jayadev
    February 2012

    Abstract:
    “We examine the importance of what we term `Fisher dynamics’- the mechanical effects of changes in interest rates, growth rates and inflation rates on debt levels independent of borrowing -for the evolution of household debt in the U.S. over a long time horizon (1929- 2011). Adapting a standard decomposition of public debt to household sector debt, we show that these factors have been important in explaining rising debt levels, especially between 1980 and 2000. We identify and describe three broad regimes in the growth of household debt and several shorter episodes, distinguished by the distinct roles played Fisher dynamics and borrowing behavior in the evolution of household debt. We then provide some counterfactual trajectories of debt burdens that suggest how important nancial changes beginning around 1980 have been in contributing to household debt, independent of any changes in household behavior. Speci cally, if average rates of growth, inflation and interest remained the same after 1980 as before 1980, household debt burdens in 2011 would have been roughly the same as they were in the early 1950s, despite the sharp increase in borrowing in the early 2000s. We then discuss the diculties involved in deleveraging. Under scenarios involving even substantial reductions in household expenditure, returning to debt levels of the 1980s could take decades. If lower private leverage is a condition of acceptable growth,then in the absence of a substantial fall in interest rates relative to growth rates, large-scale debt forgiveness of some form may be unavoidable.”

    http://repec.umb.edu/RePEc/files/FisherDynamics.pdf

  99. Gravatar of Willy2 Willy2
    23. February 2014 at 12:08

    Mark,

    When I looked at the SGS data I was also stunned. But one part of the inflation is explained by the weak USD from 2001 up to 2008.

    Oil went up from $ 20 in 2001 up to $ 140 in mid 2008. A sevenfold increase. The Eur/USD went up as well in the same timeframe, from 0.80 up to 1.60. So, for people in the Eurozone it looked like oil went up from $ 20 up to “only” $ 70 in mid 2008.

    John Williams points out in the first audio interview that one of his clients recognized the SGS pattern as their sales pattern. Do listen to the interview of March 2013 with the McAlvany group.

    No, I don’t think Williams is nuts.

  100. Gravatar of Willy2 Willy2
    23. February 2014 at 12:21

    Williams also points out that the peak in US GDP growth peaked (& was positive) with the peak in house construction in very early 2006.

    Did you watch this video ? About how inflation is understated and GDP is overstated ?
    http://www.peakprosperity.com/crashcourse/chapter-16-fuzzy-numbers

    Williams is in one regard “off his rocker”. He thinks the US will experience Hyper-Inflation. Perhaps the US will. But before that is able to kick in, the US WILL experience Deflation AGAIN.

  101. Gravatar of Tom Brown Tom Brown
    23. February 2014 at 12:42

    Mark (or anybody), rookie question: Going back to Steve Keen’s paper for a moment:
    http://www.debtdeflation.com/blogs/wp-content/uploads/2014/02/Keen2014ModelingFinancialInstability.pdf
    he writes:

    AD = Y

    but I thought AD = Y*P = NGDP = M*V

    Is he assuming P = 1?

    Also, AD is properly a curve, right? Typically down sloping with Y on the x-axis and P on the y-axis?

    Also his equation 0.4 is strange: it implies M(t) = M(0) = 0

    If AD is an instantaneous flow, then is this definition wrong?:

    http://www.investopedia.com/terms/a/aggregatedemand.asp

    Why do they say “in a given time period?”

    Perhaps Keen (in eq. 0.6) is attempting to define an average AD over a time period, but in that case his basic formula should be:

    ADavg(t1,t2) = (integral, t=t1 to t2 of V(t)*M(t)*dt) / (t2 – t1)

    Does it ever make sense to do that? How about a cumulative AD?

  102. Gravatar of tesc tesc
    23. February 2014 at 13:02

    I think NGDP is the area of the AD-AS Model and AD is the behavior of that spending with respect to P.

    Just a thought.

  103. Gravatar of tesc tesc
    23. February 2014 at 13:10

    V is more like the movements of AD curve with M constant and independent of P. I am thinking of the nondynamic AD-AS model. When velocity increases w/o M decreasing, then AD curve shifts right. That is why M or the rate of M have to be decrease to control inflation.

    When V decreases (like last recession) AD shifts left, independent of P. That is why M has to increase as necessary so as to keep the rate of increase of the area of the model (NGDP.)

    I hope I am right.

  104. Gravatar of ssumner ssumner
    23. February 2014 at 13:36

    Mark, Thanks for those gems from the transcripts.

    Tom, I’ve seen people define AD as Y, but it makes no sense. That means a supply shock would be a demand shock.

  105. Gravatar of Daniel Daniel
    23. February 2014 at 13:39

    Willy2

    If I may quote Krugtron

    “Shadowstats doesn’t come cheap: currently, an annual subscription costs $175.

    Six years ago, an annual subscription cost … $175.”

    In other words, they’re selling conspiracy-flavoured bullsh*t to gullible idiots.

  106. Gravatar of tesc tesc
    23. February 2014 at 14:16

    Tom,

    Y=C+I+G+NX (Horizontal axis, one dimension)

    NGDP=P(C+I+G+NX) [the area of AD-AS]

    AD=Y(P)=a+bP, “b” is a negative coefficient. “a” changes with changes in V and M (both exogenous.) “a(V,M)”

    AS=Y(P)=c+dP, “d” is a negative coefficient. “c” changes with inflation expectations and changes in input prices(i.e.70’s inflation.)

    So, AD is equal to Y as a function of P with negative slope, not Y by itself (horizontal axis by itself, which is just real output w/o prices.) No prices would make AD-AS model disappeared.

    Sumner,

    I think I have seen intro to macro test questions that make AD=Y. No wonder there is so much Keynesianism, sorry, confusion about macro. : )

  107. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 14:29

    Willy2,
    “…But one part of the inflation is explained by the weak USD from 2001 up to 2008.

    Oil went up from $ 20 in 2001 up to $ 140 in mid 2008. A sevenfold increase. The Eur/USD went up as well in the same timeframe, from 0.80 up to 1.60. So, for people in the Eurozone it looked like oil went up from $ 20 up to “only” $ 70 in mid 2008…”

    The dollar was probably overvalued when it reached its 2002 peak in terms of the real trade weighted dollar index:

    http://research.stlouisfed.org/fred2/graph/?graph_id=162313&category_id=0

    Note that it fell on an annual basis by 20.4% between 2002 and 2008. On an annual basis the euro rose from $0.90 in 2001 to $1.47 in 2008, so that’s a decrease in the value of the dollar relative to the euro by 39.1%.

    The large swing in the value of the euro relative to the euro is partly explained by the fact that it was likely undervalued in 2001. According to Eurostat’s Price level Index (EU28=100) the US fell from 130.4 in 2001 to 87.1 in 2008. As of 2012 it was back up to 103.6:

    http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-053404_QID_-3B9982B1_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;INDIC_NA,L,Z,0;AGGREG95,L,Z,1;INDICATORS,C,Z,2;&zSelection=DS-053404INDICATORS,OBS_FLAG;DS-053404AGGREG95,00;DS-053404INDIC_NA,PLI_EU15;&rankName1=INDIC-NA_1_2_-1_2&rankName2=INDICATORS_1_2_-1_2&rankName3=AGGREG95_1_2_-1_2&rankName4=TIME_1_0_0_0&rankName5=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23

    Note that the Euro Area had a Price Level Index throughout just a little above that of the EU28. In 2012 the euro averaged $1.29 so that was probably about an appropriate value.

  108. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 14:40

    Willy2,
    portant was the decline in the dollar in terms of its effect on inflation? Well imports of goods and services ranged from 13.0% to 17.4% of GDP in 2001-08:

    http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=x&911=0&903=14&904=1999&905=2013&906=a

    And consequently although the price of goods and services imports rose by 37.7% during this time period (an average annual rate of 5.5%) the PCEPI only rose by 16.5% between 2002 and 2008 (an average annual rate of 2.6%):

    http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=x&911=0&903=4&904=1999&905=2013&906=a

    So it’s all reflected in the price indices. But note that between 2008 and 2013 the price of goods and services imports has only risen by 1.9% or at an average annual rate of 0.4%, although according to the real trade weighted dollar index the dollar fell by 3.6% between 2008 and 2013.

  109. Gravatar of Willy2 Willy2
    23. February 2014 at 14:47

    Daniel,

    That goes to show that Williams’ “Hyper-Inflation” hasn’t kicked in. It’s ONLY possible AFTER the next Deflationary phase.

    Mark,

    I look at the EUR/USD in the 2000s and that exchange rate went from ~ 0.80 or ~ 0.81 (2001) up to 1.60 (mid 2008).

  110. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 14:50

    Willy2,
    “Williams also points out that the peak in US GDP growth peaked (& was positive) with the peak in house construction in very early 2006.”

    Maybe so but his RGDP figures clearly show that apart from a brief period in 2004, US RGDP has been declining for 15 years, and this occurs all through the housing bubble. Most people consider that to be ridiculous.

    “Did you watch this video ? About how inflation is understated and GDP is overstated ?”

    Yes, I forced myself to watch it all the way through. It was painful. This is how aggregate price indices are calculated. If you think it would be any different then your expectations are way out of line. The video should be titled Principles of Inflation Nutterism 101.

    By the way, my favorite ShadowStats price index is the ShadowStats subscription price itself.

    Currently, an annual subscription costs $175:

    http://www.shadowstats.com/subscriptions

    eight years ago, an annual subscription cost … $175:

    http://gyroscopicinvesting.com/forum/index.php?topic=1425.0

  111. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 14:56

    Tom Brown,
    “he writes:

    AD = Y

    but I thought AD = Y*P = NGDP = M*V

    Is he assuming P = 1?”

    No, Keen defines Y to nominal income. (Incidentally AD is nominal expenditures. In the national income and product accounts, expenditures = income. Always. By definition.)

    “Also, AD is properly a curve, right? Typically down sloping with Y on the x-axis and P on the y-axis?”

    Typically yes.

  112. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 15:13

    Tom Brown,
    “Also his equation 0.4 is strange: it implies M(t) = M(0) = 0”

    Yes, it’s strange. (It’s Keensian Economics.)

    “If AD is an instantaneous flow, then is this definition wrong?:”

    No that definition appears to be correct.

    “Why do they say “in a given time period?””

    Because it’s a rate. AD essentially equals NGDP, and is measured at an annual rate.

    “Perhaps Keen (in eq. 0.6) is attempting to define an average AD over a time period, but in that case his basic formula should be:

    ADavg(t1,t2) = (integral, t=t1 to t2 of V(t)*M(t)*dt) / (t2 – t1)

    Does it ever make sense to do that?”

    Your equation makes much more sense than his. But I can’t recall anyone ever using integrals in this context other than Keens. There’s nothing wrong with it, it just seems somehow unnecessary.

    “How about a cumulative AD?”

    I’m not sure what you mean by that.

  113. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 15:27

    Willy2,
    “I look at the EUR/USD in the 2000s and that exchange rate went from ~ 0.80 or ~ 0.81 (2001) up to 1.60 (mid 2008).”

    Yes, on a daily basis, but not on an annual. Those were relatively brief spikes.

    Currency and commodity markets are volatile like that. For example, although West Texas Intermediate closed at $145.31 a barrel on July 3, 2008, it only average $99.67 a barrel for all of 2008. And it was only above $100 from late February to early September that year.

  114. Gravatar of Mark A. Sadowski Mark A. Sadowski
    23. February 2014 at 15:44

    Willy2,
    Some minor edits:

    At 14.29:

    “The large swing in the value of the euro relative to the euro is partly explained by the fact that it was likely undervalued in 2001.”

    should read

    “The large swing in the value of the euro relative to the dollar is partly explained by the fact that it was likely undervalued in 2001.”

    And at 14:40

    “portant was the decline in the dollar in terms of its effect on inflation?”

    should read

    “How important was the decline in the dollar in terms of its effect on inflation?”

  115. Gravatar of Tom Brown Tom Brown
    23. February 2014 at 15:50

    Mark, by cumulative AD I mean the average AD (ADavg) multiplied by the time interval over which it’s averaged. Essentially my same formula for the ADavg(t1,t2), but w/o the (t2-t1) in the denominator. In a similar fashion you could say energy is cumulative (integrated) power I suppose.

    Thanks to tesc, Scott, and Mark for that.

    BTW, if truly instantaneous, I think the investipedia definition should say “at a given time” rather than “in a given time period.” But I understand that practically you’d need some minimum sized interval of time > 0 to measure it.

  116. Gravatar of Willy2 Willy2
    23. February 2014 at 23:39

    Mark, Seems you don’t like that some one has the last word. No, I don’t see any reason to change my mind on inflation.

    Discussion closed.

  117. Gravatar of Daniel Daniel
    24. February 2014 at 01:49

    Willy2

    Shadowstats is bullsh*t (and an expensive one).

    People who buy into bullsh*t are idiots. That means you.

    Discussion closed.

  118. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2014 at 04:38

    Willy2,
    Anyone who takes ShadowStats so seriously they try and turn economists on to it is probably too far gone to help but here’s a couple of things that I think are worth reading:

    http://econbrowser.com/archives/2008/09/shadowstats_deb

    http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/

  119. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2014 at 05:26

    Willy2,
    And here’s one last thing for you to chew on. I notice you call yourself “Mr. Market” over at Pragmatic Capitalism. Such a name implies that one may still have some regard for the wisdom of markets.

    The ShadowStats 1980-based alternated CPI suggests that inflation has actually averaged about 9.5% in the last ten years. During that time the yield on a 10-year T-Note has averaged 3.5%. This means according to ShadowStats real interest rates have averaged (-6.0%) in the past decade.

    If Shadowstats is true, why are people willing to pay the government 6.0% interest for the priviledge of loaning it money? Or is there also a massive conspiracy over the actual yields on US Treasuries involving all of their investors?

  120. Gravatar of Willy2 Willy2
    24. February 2014 at 07:07

    I also used the username “”Bond Vigilante” on the PragCap website. It was meant to rile up/irritate Cullen Roche who (wrongfully) thinks that interest rates can’t go up.

    I wouldn’t be surprised to rates go as high as 15% (TNX) when the USD goes through the roof.

  121. Gravatar of Willy2 Willy2
    24. February 2014 at 07:17

    Inflation DOES NOT drives interest rates.

    Every Inflationista points to the 1970s. Yes, back then both inflation (read “Weak USD”) and rates went up.

    But if inflation would drive interest rates higher then why did rates (TNX) fall from the year 2000 (TNX at ~ 6%) down to (TNX at ~ 4.5%).
    From 2001 up to 2008 oil went up from ~ $ 20 to over $ 140 in mid 2008. The CRB index tripled from the year 2000 up to mid 2008.
    This clearly would indicate that rates are driven by another force.

  122. Gravatar of Willy2 Willy2
    24. February 2014 at 07:22

    Correction: in mid 2008 the TNX was at ~4.5%

  123. Gravatar of W. Peden W. Peden
    24. February 2014 at 09:00

    The closing of the discussing didn’t last long!

    Willy2,

    Commodities prices are not the same as inflation, and inflation isn’t the only thing that affects interest rates.

  124. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2014 at 09:18

    Willy2,
    “Inflation DOES NOT drives interest rates.”

    There are multiple theories about the term structure of interest rates:

    http://en.wikipedia.org/wiki/Yield_curve

    The Liquidity Premium and Preferred Habitat theories are the most widely accepted theories of term structure of interest rates because they explain the major empirical facts about the term structure so well. They also combine the features of both the Expectations Theory and the Segmented Markets Theory by asserting that a long term interest rate will be the sum of a liquidity premium and the average of the short term interest rates that are expected to occur over the life of the bond.

    The bottom line is that it’s possible for interest rates to be *higher* than the average of the short term interest rates that are expected to occur over the life of the bond by the amount of the liquidity premium, and that the liquidity premium could be driven *up* by fears of default. But there is no credible mechanism by which people are willing to take a loss of 6% a year simply for the priviledge of loaning the government their money.

    “But if inflation would drive interest rates higher then why did rates (TNX) fall from the year 2000 (TNX at ~ 6%) down to (TNX at ~ 4.5%).
    From 2001 up to 2008 oil went up from ~ $ 20 to over $ 140 in mid 2008. The CRB index tripled from the year 2000 up to mid 2008.
    This clearly would indicate that rates are driven by another force.”

    No, it indicates that investors quite rationally recognize that the price of oil and other commodities are highly volatile because of inelastic demand. Consequently their price today tells us almost nothing about inflation over the longer term.

  125. Gravatar of Willy2 Willy2
    24. February 2014 at 13:48

    The level of interest rates is simply a matter a Demand & Supply of capital. I’ve read many a explanation of what’s the driver of interest rates but this is – IMO – the best & simplest explanation. It simply makes A LOT OF sense.

  126. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2014 at 16:18

    Willy2,
    “It simply makes A LOT OF sense.”

    Fine. Then maybe you can explain to me why the suppliers of financial capital are willing to pay 6% a year for the priviledge of loaning their money.

  127. Gravatar of Willy2 Willy2
    25. February 2014 at 08:14

    Because A LOT OF people are only looking at the nominal rate they get paid. You’re touching upon a thing called “Negative REAL interest rates”.

    I agree, negative REAL rates are beneficial for the issuer of the bond. Don’t worry, in deflation we’ll get positive REAL interest rates. Finally good news for the investor but it’s bad news for the issuer. Then that’s the one who’s suffering. And it will ultimately lead to much higher unemployment.

  128. Gravatar of Tom Brown Tom Brown
    25. February 2014 at 08:58

    Scott, would my story above be any different, if prior to $X in bonds being purchased by the CB, all commercial banks were merged and nationalized. The new national commercial bank was nominally independent, but under the Tsy (just like the Fed is). So the $X in base money the Fed pays for the bonds now goes to this one nationalized bank: i.e. the government still has it in a sense. Do we draw a line around the Tsy, the Fed, and the new national bank and say it’s government, or do we draw a line around just the Tsy and the Fed and say that’s government?

    Now interestingly enough coins are not a liability of the Fed or of any entity. If in our current system, the Fed purchased $X of coins from the Mint, does that count as increasing the stock of base money?

    Do you see a similarity between my story about the nationalized commercial bank and the story about the Fed buying assets (coins) from the Mint? Why or why not?

  129. Gravatar of Tom Brown Tom Brown
    25. February 2014 at 08:59

    … in my nationalized commercial bank story, do bank deposits at the new bank suddenly become base money?

  130. Gravatar of ssumner ssumner
    25. February 2014 at 12:15

    Tom, Bank deposits are not base money, and coins are.

    Even in the nationalized bank the bank’s deposits are liabilities of the government. So even though the reserves are no longer a liability, the deposits are.

  131. Gravatar of willy2 willy2
    27. February 2014 at 13:06

    There’s another sign that US GPD is overstated.

    From 2000 up to 2008 the increase of debt was at a rate of ~ 4 trillion a year. That added ~ 4 trillion to US GDP each year. Or GDP was overstated by 4 trillion a year. Assuming the 2007 GDP being at $ 15 trillion it means that the US economy excluding debt accumulation was actually not 15 trillion but only 11 trillion.

    Source: Steve Keen.

  132. Gravatar of Tom Brown Tom Brown
    12. April 2014 at 11:26

    Mark A. Sadowski,

    “The biggest impetus may actually come from the fact I have nowhere to put things like the long comment above on Argentina.”

    One option is to have a minimal effort blog where you essentially just store your long comments. It takes no more than a minute or two to start a blogger blog for example, with all the default settings. Then you could still concentrate your efforts fighting for truth and justice and the American way all over the web, but you could have a central clearing house for all your carefully constructed comments. If you don’t want to worry with answering comments there you can do like Ramanan and simply eliminate the comments section.

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