Asymptosis

David Beckworth Scott Sumner talks very good sense sometimes

Asymptosis — Sat, 04 Feb 2012 20:15:57 +0000

Don’t tell me that the Dems favor fiscal stimulus because they like big government. The payroll tax cut will make it a bit more difficult to expand the size of government in future years. (As Clinton found in 1993, when he was told the “bond markets” (i.e. the Reagan tax cuts) wouldn’t allow him to enact all his policy ideas.

TheMoneyIllusion » An odd question.

Cross-posted at Angry Bear.

A Surfeit of Dearth Revisited: The Global Shortage of Safe Assets

Asymptosis — Fri, 03 Feb 2012 19:01:27 +0000

David Beckworth:

global economic growth over the past few decades has outpaced the capacity of the world economy to produce truly safe assets

Really? The U.S. could have just deficit-spent more, crediting people’s/businesses’ checking accounts and thereby increasing the global stock of the world’s safest asset: U.S. dollars.

It could (by U.S. law is required to) simultaneously issue bonds in/borrow an equivalent amount, but it comes to the same thing as regards the inflationary impact. (Issuing bonds is actually a bit more inflationary because of the future money-creation needed to pay the interest.)

That fear of inflation — and the resultant unwillingness to provide the safe assets that Beckworth thinks the world needs — is the only constraint on Beckworth’s “capacity.”

If he is correct that the supply of dollars is, has been, insufficient to meet global demand, then inflation is not currently a concern — arguably quite the contrary.

Cross-posted at Angry Bear.

What Will Be the New Economic Paradigm?

Asymptosis — Thu, 02 Feb 2012 18:39:04 +0000

Matt Yglesias has a great post over at Moneybox (paragraph breaks added):

The need for regime change.

… The Depression discredited the gold standard and a whole set of related notions.

The Great Inflation discredited ideas about the Phillips Curve …

We had, until recently, the Great Moderation Consensus that … the Federal Reserve has the ability to stabilize the macroeconomy by fiddling with interest rates.

Well now here we are and the Federal Reserve can’t stabilize the macroeconomy by fiddling with interest rates.

That calls for the creation of a new regime.

I’ve dumbed it down a bit here. He also talks about employment, for instance, including this great line:

…if the government isn’t abandoning the idea of full employment then they have a mighty strange way of showing it.

But I think I’ve imparted the main question. We’ve been or are going through a paradigm-falsifying “moment.” (As always, some good thinking will be cast aside along with some bad.)

What will move into the vacuum left by the (at least partially) ravaged Great Moderation paradigm?

Courtesy of David Beckworth and The Kauffman Foundation (PDF), here’s how econobloggers would like that question to be answered (thanks, FTA, for the great question):

Personally, I fondly envision some coherent amalgam of the M&M gang: Market Monetarists (NGDPers) and Modern Monetary Theorists (with a decent dose of the Austrian’s insight into real-economy production and productivity). I’m guessing that some have already ventured (some parts of) this amalgamation, quite possibly in posts I’ve already read and since forgotten. Thoughts? Links?

(Even as I post this I find that vimothy, JKH, and Steve Randy Waldman are worrying productively at parts of this very question in the comments here.)

Cross-posted at Angry Bear.

Why Economists Don’t Understand Accounting, or Business

Asymptosis — Wed, 01 Feb 2012 21:46:47 +0000

I just searched Harvard, U Chicago, and a few other top econ departments’ course offerings and major requirements. The string “account” barely appears.

Chicago says quite explicitly:

Courses such as accounting, investments, and entrepreneurship will not be considered for economics elective credit.

Much less requirements!

No wonder so many economists:

• Have such profound misunderstandings of the National Income and Product Accounts and the Fed Flow of Funds reports (and how they relate to each other). Nobody ever taught them how to read or understand the darn things.

• Have such crazy notions about how producers think when they’re setting prices.

Speaks volumes.

Cross-posted at Angry Bear.

How Accounting “Constrains” Economics

Asymptosis — Wed, 01 Feb 2012 19:16:08 +0000

There’s been a running discussion of this on various blogs (sorry if I missed linking some!), inflated simultaneously by Krugman and by magisterial and mysterious commenter JKH’s “paradigm riff,” here.

That discussion has brought me to the following conclusions.

Assuming you have a coherent and accurately representative System of National Accounts*:

• Accounting, and accounting identities, do (or should) impose a constraint on our economic reasoning and predictions.

• If some piece of economic reasoning predicts something that simply can’t happen according to the accounting (things don’t add up, balance), that reasoning/prediction is wrong.

• Accounting can’t tell us whether a piece of economic reasoning is right. It can only tell us if it’s wrong.

• Accounting won’t necessarily tell us that a piece of economic reasoning is wrong. There are plenty of economic ideas out there — behavioral notions about how people (will) respond to incentives and constraints – that conform to accounting identities and balances, but are nevertheless wrong.

• Accounting tells us exactly nothing about how people will behave, nor can it cause or constrain that behavior. It can only tell us that that it’s logically impossible for them (all) to behave in a given way.

Takeaway: Conformance to the rules and balances of accounting is a necessary but not sufficient condition for economic reasoning and predictions to be correct.

Or to put it another way: Accounting is a constraint on economics, not economies.

Simple example: if somebody suggests that all countries should/can get out of depression by increasing their net exports, it’s false/bad reasoning. Because global imports equals global exports; the books can’t add up that way.

Or suppose someone says:

1. We should reduce government debt.

2. There’s not much we can do about net imports, the trade imbalance. (Exports are determined largely by international demand, and we don’t want to use trade policy to deny our people the benefits of cheap imported goods.)

3. People should save more.

This is impossible, by accounting identity. The only way to increase private savings (the stock of net financial assets) without changing imports is to increase exports or run government deficits.

People, institutions, and policy makers could certainly try to achieve these mutually incompatible goals. They could even believe that it’s possible to achieve them all. But the arithmetic of stock-and-flow accounting tells us that they will fail — and that if they believe they will succeed, they’re wrong.

That’s all.

* Even though I have real qualms about the conceptual structure of the current system — I find it much easier to do good thinking using Wynne Godley’s modification of that system — the current system is coherent and accurately/usefully representative. It’s coherent in that all the stocks and flows balance out, and representative in that it covers most of the important stocks and flows. No system could be perfectly representative, of course; the map is not the territory. In both systems there’s a great deal that’s not considered — nonremunerated work, for instance. But that doesn’t discredit, is peripheral to, the logical thrust of this post.

Cross-posted at Angry Bear.

Ironies Never Cease: Great Moments In Libertarian History

Asymptosis — Wed, 01 Feb 2012 02:15:49 +0000

Why have I never posted about Yasha Levine over at The Exiled? They’re the ones that first broke this story about Koch luring Hayek to America with Social Security, and I make a point to put down my coffee when reading Yasha, to avoid expensive and embarrassing spit-takes.

Just a week ago he gave us this:

More Great Moments In Libertarian History: Ancient Sumerian Word For “Libertarian” Was “Deadbeat”, “Freeloader”

… If you go onto one of the Liberty Fund’s project websites, the Library for Economics & Liberty, you’ll find this ancient cuneiform symbol at the footer of the home page:

The Liberty Fund-backed website goes on to explain that the significance of the amagi symbol goes deeper than just the word “liberty.” It represents the first popular struggle against big government tyranny

Except it doesn’t (emphasis mine):

What the history-failures at Liberty Fund hilariously mistranslated was that the term “return to mother” is Sumerian-speak for “jubilee”–as in “debt forgiveness” or “freedom from debt.”

Here’s how David Graeber explains it in his brilliant book Debt: The First 5,000 Years:

…Sumerian word amargi, the first recorded word for “freedom” in any known human language, literally means “return to mother”—since this is what freed debt-peons were finally allowed to do.

If you haven’t read Graeber, run don’t walk. In the meantime, read Yasha (too much good copy to highlight; read it all):

So in other words, amagi’s not about “freedom” from government interference at all–it’s about welching on your debts and sending Sumerian deadbeats back home to mooch off mommy. “Moochers,” “deadbeats,” “debt welchers”–Now that sounds more like the true face of libertarianism!

Despite the misunderstanding—or maybe because of it—the amagi symbol has become all the rage with baggertarian youngins’ all across the USA, many of whom have been known to get their pasty white hides branded with “deadbeat 4-ever” tats en masse at Koch-sponsored Free State campouts.

So does this make them moocher-bashing moochers? Or maybe closet-freeloader freeloaderphobes?

We’d like to thank Koch operative Peter Eyre for taking the time to maintain an up-to-date bagtard tat page, which includes a big collection of Sumerian deadbeat tats, as well as a nice range of other freemarket groupie ink. Eyre’s got himself branded a “deadbeat” in 2007, back before it was considered cool:

Cross-posted at Asymptosis.

Full-Reserve Banking, the “Right” to Earn Interest, and “Financial Repression”

Asymptosis — Mon, 30 Jan 2012 15:38:36 +0000

Nick Rowe replies to Richard Williamson re: full-reserve banking (emphasis mine):

The key reading here (even though it appears to be about a different subject) is Milton Friedman’s “The optimum quantity of money”.

Foregone nominal interest payments is a tax on holding currency…. 100% required reserves mean you impose the same tax on chequing accounts …

My reply, edited and links added:

Nick, just because people (“the market”) want risk-free long-term holdings that pay interest does not in any way imply what seems to be the unstated assumption here: that the government is obligated to provide them, or that failing to provide them is a “tax” — a “taking” of something that they own or deserve by some natural right.

The government could issue dollar bills instead of t-bills without violating anyone’s rights.

This is no different from saying that foregone transfer payments to the poor constitute a “tax” on the poor.

You could call either (as in Carmen Reinhart’s “pity the poh’ bondholders” perorarations) “financial repression” — though the charge seems sadly misplaced in one of the two contexts. (This locution is the most egregious example I’ve seen of economists shilling for creditors. Witness its widespread repetition by said creditors, their congressional toadies, and their money-media water carriers.)

You could certainly say that either of these “foregoings” creates incentives similar (identical?) to those created by taxes. As long as it’s presented as such — which it decidedly is not in Friedman — it can serve as a useful pedagogical conceit. But the implicit, undeniable normative baggage must be ditched and explicitly disclaimed.

As for checking accounts, full-reserve banking might indeed result in account holders paying banks a fee to hold their money for them securely and conveniently.

And banks would be in the surprisingly novel situation of earning a living by providing a service to individuals in return for fees paid by those individuals.

It’s not immediately clear to me how that constitutes a “tax” on checking accounts.

Cross-posted at Angry Bear.

Full-Reserve Banking and Loanable Funds

Asymptosis — Mon, 30 Jan 2012 14:33:30 +0000

Richard Williamson asks a sensible and straightforward question: If, as Modern Monetary Theorists propose, banks’ reserve levels put no significant constraints on their lending, why don’t we have 100%-reserve banking — and presumably no runs on banks as a result?

First an explanation — I hope simple, clear, and generally accurate (if simplified):

Say you start your own bank. You take in $100 in checking-account deposits and lend it all out, holding no reserves. That’s not safe or even workable. You need some buffer so your depositor’s checks will clear.

So there’s a rule: you can only lend $90, and you leave $10 sitting in your “reserve account” at the Fed — essentially your bank’s checking account. When everybody’s checks clear each night through the Fed’s system, reserves get transferred between banks, and you’ve got enough on deposit so nothing bounces.

If the Fed says you need to hold 12% reserves instead of 10%, that means you can lend $88 instead of $90 — not exactly the massive asphyxiation of the “money multiplier” that many people imagine.

That multiplier is actually related not to your reserves, but to your bank’s capital — the money that you and others have invested (Update: plus profits that haven’t been distributed to owners). That capital is your bank’s buffer against losses from making bad loans. It’s your “skin in the game.”

The amount of capital limits how much you can lend (irrespective of 90%-lent deposits). If the allowed capital-to-loans ratio is 10%, you can lend $10 for every dollar in capital. Now that’s a money multiplier.

The reserve ratio and the capital ratio are completely different things.

So back to Richard’s question: if the Fed required 100% reserves, the banks couldn’t lend out all those checking-account deposits. The quantity of “loanable funds” would decline. But banks could still lend, 10-to-1 (or so), against their capital.

What do those numbers look like in practice? U.S. checking and savings deposits total about $6 trillion right now.

Circa 90% of that would be removed from the loanable funds market. Call it $5 trillion — sounds like a lot.

But total credit market debt outstanding is about $55 trillion.

That makes $5 trillion sound…not insignificant (and profound at the margin), but less onerous.

Which raises my question, one that I’m not knowledgeable enough to answer: Would 100%-reserve banking result in there being more bank capital available — more equity investments in banks — which via its money-multiplying power would offset or more than offset the otherwise decline in loanable funds?

Would we end up with roughly the same amount of credit market debt outstanding?

The answer, it seems to me, would depend on a whole lot of complex and interacting incentive effects. Anyone care to take a stab?

P.S. Like me, you’ve no doubt noticed that debt outstanding is in fact about ten times bank deposits. Does this put the big-picture lie to the MMTers’ claim that lending is not reserve-constrained? Is it just a coincidence? Other?

Cross-posted at Angry Bear.

Social Security: The Elevator Pitch

Asymptosis — Sun, 29 Jan 2012 15:35:28 +0000

• Since Social Security started it has always brought in more money than was spent. It contributes a surplus to the total federal budget. That’s true today and will continue for quite some time.

• The extra revenue needed to make SS solid far beyond the foreseeable future (75 years) is tiny: 0.6% of GDP.

• A 0.6% revenue increase would not be a big burden. The U.S. has been taxing about 28% of GDP for decades, compared to 30-50% in other rich countries (average: 40%).

• Coincidentally, Scrapping the Cap on SS contributions — so high earners paid payroll tax above $110K — would deliver … 0.6% of GDP.

Worried about our fiscal future? It’s the health care costs, stupid. What providers charge.

U.S. providers charge two to five times what they charge in other countries, and it’s rising faster — and faster than wages, GDP, inflation.

If you’re not talking about that, you have nothing useful to say about our fiscal future:

Cross-posted at Angry Bear.

Why This Time Is Different

Asymptosis — Sat, 28 Jan 2012 03:24:29 +0000

A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.

And I puzzled about why this wasn’t true of our latest little…event:

We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history?

Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while.

I think this chart may make that point better than any I’ve seen (click for source):

Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic). The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation on what Steve Keen’s been saying all along.)

We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.

So it seems that Wray’s pattern holds, except — to quote dear Ophelia just before she drowned her sorry self — we wear our rue with a difference.

Cross-posted at Angry Bear.

Economies Need a Gardener’s Invisible Hand

Asymptosis — Fri, 27 Jan 2012 19:43:43 +0000

I haven’t posted on Nick Hanauer and Eric Liu’s stuff, and I should have, long ago. Nick, along with Bill Gates Senior, was one of the big proponents of the Washington State high-earner income tax initiative a while back (which failed utterly, I’m sad to say). As was I, in my little way.

I think this new Bloomberg piece says what they’re trying to say better than I could, so I’ll just say “go read it.” It’s short.

Economies Need a Gardener’s Invisible Hand: Hanauer and Liu – Bloomberg

Cross-posted at Angry Bear.

Does Government Debt Impose a Burden on Future Generations/Periods/People? #12,143

Asymptosis — Thu, 26 Jan 2012 17:42:08 +0000

I think (after a lot of effort) that I’ve internalized Nick Rowe’s modeling of this question (follow links from here) pretty well conceptually. His answer is Yes.

There have been thousands of posts and comments across the blogosphere since Nick took Krugman to task on the issue a couple of weeks ago, and Nick has been remarkably generous with his time in helping people understand his thinking. (A kudos also to Bob Murphy.) And it’s worth pointing out that Krugman hasn’t really responded to the core argument head-on. Feel free to follow the threads.

Here’s Nick’s model in brief, in my words:

Government borrowing/bond issuance today — considering only its costs, not the potential up/downsides of the associated spending — propagates incentives into the future, like waves are propagated when you throw a rock in a pool. Those incentives cause the old people in every period to consume more than the young people. In each future period, parents will eat some of their kids’ lunch.

Each generation consumes the same amount as they would have otherwise (because first you’re young, then you’re old, first you’re a child, then you’re a parent). But if government eventually has to tax to pay back the debt, the young people in that period are forced to consume less over their lifetimes, because they don’t get to eat their kids’ lunch.

(Nick acknowledges the point that Jamie Galbraith and others have been making for years: if the future GDP growth rate is higher than the interest rate, on average, the taxation never needs to happen, so the burden is never imposed.)

Here’s why I haven’t updated my priors much based on this thinking:

1. The wave model of propagated old/young bond-buying/spending patterns, extending to eternity, doesn’t seem plausible to me intuitively. It seems like the rock-in-the-pool ripples would probably flatten as they spread through time — maybe (?), as discussed in various posts and comment threads, because over the generations a certain percentage of parents bequeath their bonds to their children. That leaves us with “we’ll have to tax to pay for it eventually, so somebody will have to consume less,” which is pretty much where we started.

2. I wonder whether a real agent-based dynamic simulation modeling of Nick’s scenario, with continuous time and using differential equations, would give the same results. I’m not enough of a mathie to even guess, but I wouldn’t be surprised to see very different patterns and/or results.

3. The huge majority of government bonds are bought and traded not by people but by institutions (many of which — this seems significant — are licensed to create credit money and associated debt ex nihilo, and use government bonds as debt collateral in that process). Those institutions don’t have generations — birth/death, parents/children — and they don’t consume real goods (much). Again, my intuition tells me that these facts would bring complex dynamic interaction effects into play. While it might suffice to simplify by modeling things “as if” children were buying bonds from their parents, I don’t feel confident that that’s true.

4. The question Krugman was really asking, underlying his “is debt a future burden” locution, was: A. should we be taxing more or less? and B. should we be spending more or less? (Hence, should we be borrowing more or less?) Since I’d expect to see complex interaction effects from any of the four sources/uses choice combinations, isolating the question in this way seems like a questionable analytical technique. It’s kind of (not wanting to offend, can’t resist the word) petifogging. I’m not at all sure it provides useful information when divorced from the relevant context.

5. Semantics: assuming the model’s right, that we’re forcing a future generation of people to pay for their parents’ (our?) extra consumption — but not changing the amount that all future people will consume in toto — should we call that “a burden on future generations”? I’ll leave that to the philosophers.

I may (still) be displaying an inadequate understanding of the model in some points here, but I think there’s enough of merit above to discourage certainty — to question the ultimate utility of the model.

In short, if I was running a business of any size (yes: I have done so), with any decent amount of money on the line, I would 1. not give a huge amount of weight to the results of this model, and/or 2. be asking for a much more sophisticated analysis.

Which (#2) leaves us again where we were, wrestling with many/most of the big questions of growth macro.

So when Nick says “I thought we all had this debt burden stuff sorted out 30 years ago,” I agree. The answer was “maybe.” (Especially given the long-term historical reality of the Galbraithian scenario described above.) And in my mind it still is — with a little more weight on the “burden” side.

Cross-posted at Angry Bear.

Financial Markets Are the Real Barter Economy

Asymptosis — Tue, 24 Jan 2012 15:31:11 +0000

As (mis)conceived by most economists, money (which they confute here with currency) emerged as a solution to the time problem of barter economies: my spinach is ready now, but your apples won’t be ripe for months. How can we trade? Answer: you give me money for my spinach, and I give it back to you later for your apples.

That armchair-sourced fairy tale has been resoundingly debunked — that’s not how money (or even currency) emerged, and the Adam Smithian butcher/baker barter-exchange economy has never existed. Credit money — first embodied in tally marks on clay tablets — emerged and was in widespread use a couple of thousand years before coinage was invented (the latter largely to pay soldiers, whose itinerancy makes other methods problematic).

But the notion of barter economies lives on.

The whole system of national accounts (the NIPAs), in fact, was constructed by Simon Kuznets and company in the 30s as if we lived in a barter economy — with money being merely a time-shifting convenience, and with no accounting for financial assets at all. That accounting was only added a decade or so later, with publication of the Fed Flow of Funds accounts.

I’d like to suggest that this barter model for the real economy results in a great deal of confusion — including (especially?) among economists — largely because the NIPAs don’t usefully model the distinction between saving wheat (which can be consumed) and “saving” money (which can’t). By “useful” I mean “conceptually tractable, subject to consideration without logical error.”

I’m asserting that the barter model of the real economy results in lots of confusion and logical error. Viz: careful economic thinkers like Nick Rowe, Scott Sumner, and Andy Harless feeling the need/inclination to write lengthy think-pieces on that nature of “S.” Or the widespread misconception that “saving” (by whatever definition) “creates” “loanable funds.”

I’d even go so far as to say that those barter-model-induced logical errors pervade most thinking about economies and economics, both among economists and among the laity.

However: If you want to see a market that does operate as a barter economy, look no further than the market for financial assets. In this market, you trade your checking-account or money-market deposits for shares of Apple stock. Somebody else makes the opposite trade. The transaction is mutual and (effectively) instantaneous and simultaneous. It’s a barter.

In a very real and very counterintuitive sense, there is no money exchange in the financial markets. There are just barter swaps of financial assets.

A proleptic response to inevitable objections, and a definition of terms:

1. By “financial asset” I mean something that has exchange value — somebody will give you something in exchange for it — but that cannot be consumed (directly or through use or time/natural decay/obsolescence), providing actual human value — “utility” — in the process. (Things that can be so consumed, and do provide human utility — and derive their perceived value from that utility — are real goods/assets.)

2. “Money,” then, would be that exchange value as embodied (or metaphorically “stored”) in financial assets. Money cannot, in fact, even exist except as it is so embodied. Financial assets are money’s sines qua non – the things without which it does not exist.

Those financial assets (and the money they embody) can be tallied — represented — on clay tablets or in electronic accounting systems, in mental accounting ledgers (“You owe me”), or in physically exchangeable representations of those ledger tallies, such as dollar bills or stock certificates.

By this definition, a dollar bill or a deposit in a checking account is a financial asset, just as much as a share of stock or a government bond is. Which means that all exchanges of financial assets are swaps. Trades. Barters.

Exchanges for real goods, however, are different. When you buy or sell a real good, money (embodied in a financial asset) moves from one account to another, and — this is key — doesn’t disappear. It keeps getting passed on, exchanged. Real goods move the other way, and do disappear. You’re trading something that only has exchange value for something that can — will – be consumed. Conceptually: Financial assets travel in circles. Real goods travel in one direction only: from birth to death, production to consumption.

A physical metaphor may help: think of the financial system (including physical currency transactions) as a giant wheel, pushing along a conveyor belt of real goods.

But economists try to think about/model these very different situations as identical — as if “money” were being exchanged for bonds (and implicitly, as if those bonds will eventually be “consumed”). Since (mental) models for barter economies must be structured very differently from models for monetary economies,* modeling both of these as the same is problematic, confusing, and productive of logical errors — and perhaps even just plain wrong.

The gist of this thinking is not new — much of it reflects ideas floated long ago by circuitists, chartalists, modern monetary theorists, and other such (g)ists. But I’m hoping the formulation as presented here may be useful to others, as it is to me, in 1. forming mental/conceptual models of how economies work, and 2. evaluating the models bruited by others — notably the inherent validity of their underlying and often unstated assumptions.

I would point out in particular that as with my discussion here, the accounting-based modeling approach of Wynne Godley (and his predecessors, successors, collaborators, and parallel travelers) begins not where Kuznets did — with the interchange of real goods and services — but with the nuts and bolts of financial accounting. This approach imposes logical constraints on economists’ reasoning, constraints that seem sadly lacking in much barter-economy thinking.

As Godley says in the conclusion to his seminal paper:

In contrast to the standard textbook methodology, which starts by making very strong behavioural assumptions based on no empirical evidence at all (for example regarding the shape and role of an aggregate neo-classical production function), [this methodology suggests that] a different paradigm is indicated in which knowledge is gradually built up by empirical study, within the formidable constraints imposed by double entry accounting.

I’m not saying it’s impossible to think logically and coherently using the NIPA/Flow of Funds economic model, with the (confusing) barter and savings models embodied in the NIPAs. I’m saying it’s very difficult — especially since economists aren’t trained in financial accounting — and that as a result logical failures are widespread.

* Nick Rowe quoting Clower: “Hang on. In a Walrasian economy there is one big market where all n goods are exchanged; in a barter economy there are (n-1)n/2 markets where 2 goods are exchanged; and in a monetary economy there are (n-1) markets where 2 goods are exchanged, one of which is money.”

Cross-posted at Angry Bear.

There is Only One Trustworthy News Source: Fox. There is Only One Trustworthy News Source: Fox. There is Only One Trustworthy News Source: Fox. There is Only One Trustworthy News Source: Fox.

Asymptosis — Thu, 19 Jan 2012 21:08:01 +0000

Repeat as needed to avoid cognitive dissonance.

“Trust” percentage minus “Distrust” percentage:

Via: Chart of the Day: Republicans Don’t Trust Anyone (Except Fox News) | Mother Jones.

Cross-posted at Angry Bear.

Saving Equals … Inventory?

Asymptosis — Tue, 17 Jan 2012 16:33:26 +0000

I’ve noticed that many others, like me, are puzzled by the mechanics of the Saving=Investment accounting identity. How do household savings get instantly and perfectly intermediated, in a period, into investment spending — the purchase/creation of long-term productive fixed assets?

An Aha! for me: According to Krugman’s textbook, they don’t (click for larger):

First a correction: “The savings[sic]-investment identity is a fact of [the] accounting [methods developed in the 30s by Kuznets and company to model production of goods and services the national economy].”

But that aside.

If people spend less than producers expect in a given year, the producers create too much product, and it builds up their inventories. That’s easy to understand. (It’s easier if you think about the producers instead of the car-dealer intermediaries that Krugman talks about.)

In the NIPA model, that inventory is counted as “investment.” This makes sense as far as it goes — that inventory is stored real value, stuff that can be consumed/sold for consumption in future periods. As Mankiw explains it in his textbook:

But this explanation also pretty much obliterates the widespread and sloppy notion that increased saving (“not spending”) results in — causes — more productive “fixed investment.” The increased “investment” resulting from increased personal savings just expands inventory. The causations/incentives driving fixed investment are utterly other.

This also makes sense: when people are spending less (are “saving” more), does that spur producers to invest more in their businesses — to buy/create more fixed assets?

Both recent and immemorial history suggest quite the opposite.

Cross-posted at Angry Bear.

American Exceptionalism #238: Opportunity (Not)

Asymptosis — Mon, 16 Jan 2012 19:37:25 +0000

I don’t usually link to Paul Krugman because everyone reads him anyway, right? He doesn’t need my google juice.

But I have to make an exception here because he adds to my trove of graphs demonstrating how America today — after thirty years of Reaganomics policies that were supposed to be all about freedom, liberty, and economic opportunity for all (yeah, and I have a bridge for sale), is at the bottom of the heap when it comes to economic opportunity.

The shining city on the hill keeps getting smaller and richer, and the slopes leading up to it steeper, rougher, and slicker.

That opportunity is best displayed through intergenerational mobility — what my friend Steve calls “convection.” What are the odds that a child will be in a different economic stratum from his parents? It’s a darned good measure of “meritocracy.”

Here’s the key graphic:

On the vertical axis is the intergenerational elasticity of income — how much a 1 percent rise in your father’s income affects your expected income; the higher this number, the lower is social mobility.

As you can see, it’s only getting worse. My explanation is here.

The Great Gatsby Curve – NYTimes.com.

Cross-posted at Angry Bear.

John Galt, “Genocidal Prick”

Asymptosis — Mon, 16 Jan 2012 16:51:29 +0000

John Scalzi:

…in Ayn Rand’s world, a man who self-righteously instigates the collapse of society, thereby inevitably killing millions if not billions of people, is portrayed as a messiah figure rather than as a genocidal prick, which is what he’d be anywhere else. Yes, he’s a genocidal prick with excellent engineering skills. Good for him. He’s still a genocidal prick.

What I Think About Atlas Shrugged – Whatever.

Cross-posted at Angry Bear.

An MMT Thought Experiment: The Arithmetic and Political Mechanics of Net Financial Assets

Asymptosis — Fri, 13 Jan 2012 18:48:29 +0000

Imagine that over the next week (in a closed American economy — the rest of the world has never existed) everyone sold all their financial assets, paid off all their debts, and deposited the remaining money (and any currency they have) in their checking accounts. No money-market funds, even. Just banks with reserve accounts at the Fed, holding everybody’s money in “cash.”

All those other financial asset prices would dive to zero. Late sellers would sell for nothing.

Would the remaining money in all the bank accounts equal U.S. government debt? That seems to be the implication of MMT thinking, because the remaining money only exists because it got spent into existence by the government deficit spending — crediting bank accounts with that fiat, ex nihilo money in the first place.

Net financial assets = gross financial assets = government debt

(If the government had always just deficit-spent instead of borrowing to cover its deficits, “government debt” would be replaced by “cumulative to-date government deficit spending.”)

I ask not just for clarity, but because (as always), I’m struggling with the relationship between fixed assets and financial assets, between saving and investment.

It’s said that the true wealth of the nation — the “national savings” — consists of its real assets: stuff that can be consumed in the future through use and time/natural decay. The NIPAs only count “fixed assets” — hardware (equipment), software, and structures, so let’s pretend that those constitute all real assets (which they don’t in actuality — not by a long shot). Net investment — purchases/creation minus consumption of fixed assets — increases the stock of fixed assets/”savings.”

In theory, financial assets are just financialized, monetized representatives, proxies, for the real, fixed assets that underly them. And indeed over the (very?) long term, the quantity of fixed assets and net financial assets rise together. Both are much larger today in the U.S. than they are in Thailand, or the U.S. in 1910. Financial-asset values wander all over — even over decades — based on “animal spirits,” but again in the long term…

If that’s so, then in our thought experiment:

Net financial assets = gross financial assets = government debt = fixed assets

The quantity of fixed assets increases over time through net investment. But by MMT thinking, net financial assets can only increase through government deficit spending (or trade surpluses). What is the mechanism whereby government deficit spending is translated into more net financial assets that embody the increased stock of fixed assets?

I imagine a necessarily political mechanism something like the following:

1. People and businesses buy/create fixed assets, resulting in more economic activity — creating/consuming, buying/selling, spending/income.

2. Those increased quantities (both stocks and flows) create more demand for government services. Both individuals and businesses would be decidedly unhappy, I’m thinking, if today’s government were the same size it was, at least in absolute terms, in 1870. (Conservatives and libertarians may say otherwise, but they’re talking through their hats.)

3. Legislators and executives who don’t provide those increased services don’t get re-elected.

4. Taxation lags behind spending — resulting in deficits — because A) people hate taxes and vote against politicians who raise them, and B) if deficit spending is not sufficient to match the increases in fixed assets, depressions result, and the “fiscally responsible” leaders get voted out.

5. The new money from government deficit spending is used to purchase financial assets, driving their prices up to (roughly) match the value of fixed assets.

This is thinking of government and the Fed as one consolidated entity. If you think of them as separate, you can imagine a different mechanism, in which the Fed and the congress/president are engaged in a constant chicken game over inflation, unemployment, and GDP growth, to determine how and when to increase the amount of money/net financial assets (ultimately through deficit spending) to match the stock of fixed assets.

These mechanics would also explain how buying/creating a bunch of drill presses will — through a long, tangled, and messy political process, and in the long but not the short run — result in more “loanable funds.”

Cr0ss-posted at Angry Bear.

The Most Important Econoblog Post This Year: The Steve Keen/MMT Convergence

Asymptosis — Tue, 10 Jan 2012 17:41:50 +0000

Neil Wilson has done yeoman’s duty to (perhaps) achieve a convergence that has been too-long delayed.

A Double Entry View on the Keen Circuit Model.

Steve Keen is, to my knowledge, the only person who is actually encoding a Godley-esque, MMT-style, accounting-based, stock-flow-consistent dynamic simulation model of how economies work. But many MMTers have been quite hostile or at least resistant to Steve’s work, based on some different concepts of endogenous/exogenous money, and — this may seem trivial but it isn’t, at least as it has played out over time — based on details of single- versus double-entry accounting.

The debate has been quite acrimonious at times, and that acrimony has greatly hindered a convergence that in my eyes would be the most salutary event possible in the development of economic thinking and practice.

You can read the details in Neil’s post, but in short he’s re-jiggered Steve’s accounts to make them conform better to (at least Neil’s view of) standard bank-accounting practices. I’m not qualified to evaluate his new formulation, but I am excited to read Neil’s comment on the post, replying to uber-MMTer Scott Fullwiler:

We need to get all this pulled together into a coherent overall model.

Steve’s up for it. I hope you are too.

I’ll just say: I’m very much up for watching it happen.

Also: run don’t walk to read Steve’s Debtwatch Manifesto, posted last week.

Cross-posted at Angry Bear.

The Upper Bound in the Fed’s Head: Inflation

Asymptosis — Tue, 10 Jan 2012 15:42:03 +0000

Continuing with one of my current hobbyhorses:

Ryan Avent reports on the American Economic Association meeting, with special attention to a presentation by Robert Hall:

Monetary policy: The zero lower bound in our minds | The Economist.

Mr Hall argued that:

A little more inflation would have a hugely beneficial impact on labour markets,

And a reasonable central bank would therefore generate more inflation,

And the Federal Reserve as currently constituted is, in his estimation, very reasonable; therefore

The Federal Reserve must not be able to influence the inflation rate.

… Why is Mr Hall—why are so many economists—willing to conclude that the Fed is helpless rather than just excessively cautious? I don’t get it; it seems to me that very smart economists have all but concluded that the Fed’s unwillingness to allow inflation to rise is the primary cause of sustained, high unemployment. …a macro challenge that actually boils down to the political economy constraints (or intellectual constraints) facing the central bank.

Emphasis mine.

I, of course, am less charitable, and impute other motives.

Hat tip to David Beckworth, whose feelings I fully understand:

I found the whole affair so depressing that I wasn’t able to drag myself to many sessions.

Cross-posted at Angry Bear.

Answers: Taking IOR to Zero

Asymptosis — Sat, 07 Jan 2012 18:06:47 +0000

I want to thank all the commenters on my last post — at Angry Bear, at Asymptosis, and at Mike Norman’s blog. You’ve provided me with exactly the education I hoped to achieve. Here’s hoping others benefited similarly.

I asked: what would happen if the the Fed cut the interest rate on reserves from its current .25% to zero. I was not suggesting it should be done. I simply wanted to understand what would happen if that one variable changed.

I want to summarize the conclusions I’ve come to based on all the discussion.

This is me speaking, based on sifting and considering all the responses. I won’t link to all the excellent comments that brought me to this. (Though I do want to highlight the Angry Bear comment by Bad Tux beginning “At 0% IOR”. It arguably explains things better than I do here, and at significantly less length.)

First, the market monetarists responses. Scott Sumner said (in comments a while back on his blog, which I linked from my original post):

It could be slightly expansionary, or if accompanied by other moves, wildly expansionary.

I’m presuming he says “slightly expansionary” based on the theory Mark Thoma gives us in a November 17 post that Cameron was nice enough to link to on Angry Bear:

it would slightly lower the incentive for banks to hold cash rather than loaning it out, and more loans would help to spur the economy

So banks could lend a quarter point cheaper, or loosen their lending requirements slightly. Assuming there’s some decent amount of demand at lower rates (elasticity of demand is appreciably > 0), or that good borrowers are asking for loans but being turned down cause they’re too risky, this could have a small effect. Scott’s “other moves” presumably include NGDP level targeting by the Fed, but that’s all beyond the contained question I asked here.

James Oswald — who cites himself as a market monetarist but who seems to understand and adhere to much MMT thinking in his other comments and writings — said at Asymptosis:

There is no reason to think they [reserves] would not decrease back to the pre-IOR levels, at least over time, pushing around around 1.4 trillion dollars of high powered money into the economy and triggering significantly higher inflation.

This doesn’t seem to make any sense at all. (And I rather doubt that the Sumners and Beckworths of this world would agree with it.)

In (simplistic) theory, taking IOR nominally negative (the extreme case) would make banks want to instead hold physical currency, with its higher (zero) nominal return. Continuing the simplistic theory, that more-liquid money would be lent and spent more.

But:

1. There are significant costs and management headaches associated with holding currency — trucks, warehouses, security guards, all that rot.

2. It’s completely unclear why banks holding warehouses full of currency would have any incentive effects on borrowing and lending — hence real-economy purchases/velocity. Lenders and real-economy borrowers do their thing because they see valuable risk/return opportunities in the real economy. Changing the form of banks’ holdings will not affect that real-economy reality. Recent history: the QE trades — giving banks reserves in return for bonds — doesn’t seem to have had such an effect, if the massive runup in excess reserves is any testament.

3. Explaining #2: For banks, currency is (see #1) less liquid than reserves. They’re not carrying it in their pockets so they can buy gum at the corner store. They want to make loans; are they going to make them in cash?

4. Even if they did make the move to currency:

A) They couldn’t all do it; there’s not enough currency around.

B) The effect would be to reduce the amount of currency “in circulation” (it’s stuffed under banks’ mattresses), presumably prompting exactly the opposite of what market monetarists suggest:

a. Less real-economy spending/circulation/velocity and

b. Deflation — dollar bills would be harder to come by, so they’d be more valuable relative to real goods

At least in the discussions I’ve been perusing, this “currency” theory of “pushing” “more-liquid” money into circulation doesn’t make any sense. At all.

Market monetarists do seem to at least loosely and implicitly adhere to the (questionable) theory that people and businesses spend more because they hold money in more-liquid form — and they might even confute bank’s incentives and behavior with people’s incentives and behavior at times — but still this currency thinking is probably not a good or widely held market-monetarist theory. In any case it deserves unequivocal debunking.

So: Numerous cogent and convincing commenters agree that taking IOR to zero would have negligible first-order effects on lending and spending. And (invoking authority here) Mark Thoma agrees, in the post cited above:

It probably wouldn’t do much

But – considering the practical, workaday effects on the financial system such as those depicted in the currency fantasy above — Thoma links to an article by Todd Keister from the NY Fed. In short, IOR of zero would break a whole lot of financial entities’ business models. The gang at Mike Norman’s blog point to the problems already facing primary dealers, which could be (greatly?) exacerbated by a drop to zero. StreetEye on Angry Bear says that it would trash the main-street banking model. And etc. Various institutions would die or just withdraw their services/trades from the financial system.

The second- and third-order effects of such eventualities could have profound negative impacts on the real economy.

Which perhaps explains another thing I’ve been wondering about: why did the Fed institute IOR in the first place, and why did it do so when it did?

We can at least give the Fed credit for understanding the business models of various financial entities. When they saw interest rates heading toward zero, they instituted IOR to prevent the systemic lockup/breakdown described above.

IOW, nothing (much) to see here folks. Move along.

Sorry if I’m so dull that I had to go through all this to figure it out.

Make sense?

Cross-posted at Angry Bear.

Question for Market Monetarists and MMTers: What Happens if IOR Goes to Zero?

Asymptosis — Thu, 05 Jan 2012 17:19:05 +0000

For the non-cognoscenti: “IOR” is interest on reserves. Banks keep money in their accounts at the Fed. In October, 2008 the Fed started paying .25% interest on those accounts.

The Fed’s also engaged in “quantitative easing,” a.k.a. open-market purchases on steroids, creating new money and using it to buy $1.6 trillion dollars worth of bonds from banks. The money is deposited in banks’ reserve accounts.

The result: banks have $1.6 trillion dollars in excess reserves (in excess of what they’re required to hold) sitting in their accounts at the Fed.

This is the heart of the “pushing on a string” argument — giving the banks more reserves (making their holdings more “liquid”) doesn’t (necessarily) increase real-economy transaction volumes (on consumption or investment), either directly through spending by the banks or via bank loans to people and businesses who will spend it. This $1.6 trillion in new money issued by the Fed is effectively stuffed in an electronic mattress.

So I’m curious what would happen if the Fed no longer paid IOR.

I asked Scott Sumner this a while back:

if tomorrow the Fed dropped IOR to zero or even negative, what would happen to:

o Excess reserves
o NGDP
o Inflation

He gave a somewhat less than satisfactory answer:

The IOR question is a good one, and at the risk of being annoying I’m going to slightly dodge the question. I do think it would be expansionary, but it’s hard to know how much, because it’s almost inconceivable to me that it would be done by itself, without any other policy changes. It could be slightly expansionary, or if accompanied by other moves, wildly expansionary.

Less than satisfactory (for me) because he often engages in these kind of simplified thought experiments. Change Variable X, ceteris paribus: what would happen?

I’m basically asking for a free education here (hoping others would appreciate such an education as well), but I’m also hoping to spur a discussion on a tightly focused question that has not been cogently discussed, as far as I can find. (I certainly could have missed it. Pointers welcome.)

Cross-posted at Angry Bear.

Menzie Chinn Explains it All for You: Demand Inflation Now!

Asymptosis — Wed, 04 Jan 2012 01:10:03 +0000

Whether it’s Market Monetarist NGDP targeting (a.k.a. Damn The Inflation Rate; We Need Growth!) or Menzie’s recommendation of Conditional Inflation Targeting with a notably higher target, everything tells us that somewhat higher inflation is the current path to greater and more widespread long-term prosperity.

Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems.

Like the market monetarist approach, Chinn’s proposal is basically for an automatic stabilizer based on unemployment levels, that anchors expectations (emphasis mine, both above and below):

a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.

As I said a while back:

Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.

In other words:

Demand Inflation Now! Up the Real Economy

Full disclosure: as a wealth-holder/creditor, the policy proposed here is directly contrary to my own short-term best interests. I would much prefer to see a crash in financial asset prices resulting from deleveraging and slow-growth expectations, so I could buy those assets cheap with all the cash I’m sitting on. But for whatever crazy reasons, I’d rather that my (and your) children and grandchildren spend their lives in a thriving and widely prosperous country.

Cross-posted at Angry Bear.

The Great Ricardian Equivalence Debate of 2011: Do Mainstream Economists Agree on Anything?

Asymptosis — Sat, 31 Dec 2011 19:54:54 +0000

Krugman started it, in response to Lucas. Everyone piles on. Plutocracy Files has the list of links. (Plus don’t miss Nick Rowe’s, which includes a long comment thread.)

Here’s what wows me: all these world-classical economists are accusing each other of contradicting “textbook economics,” and circling through extraordinary contortions in their efforts to reconcile that school of economics with some version of reality.

There is no consensus. None.

Every one of these folks is bought into classical assumptions, or at least into the Keynesian/classical “synthesis” that’s embodied in the IS-LM model (a model that was created explicitly to render Keynes classical, i.e. without the the Keynes, and was later disavowed by its own creator, John Hicks, as nothing more than a “classroom gadget”).

And they’re all trying to do intergenerational macro in their heads, as a bunch of stylized and simplified thought experiments.

I just finished re-reading Lucretius, and the methodological similarities are striking.

Given that several of the world’s most notable “textbook” economists can’t agree on how to define what in physics would be the equivalent of angular momentum, some of us have to wonder if the whole discipline as taught today offers any useful macro-level insight or modeling utility at all.

I think it’s significant that an authoritative MMT voice has yet to weigh in (I think they all probably think it’s silly — or would be if it didn’t reveal such dysfunction), aside from a passing shot by Mike Norman.

Cross-posted at Angry Bear.

New Year’s Tax Wishes: If I Was Dictator of America

Asymptosis — Tue, 27 Dec 2011 21:11:08 +0000

Based on the notions of economic efficiency that I laid out here, if I could do whatever I wanted I would make the following changes over a ten-year period. (Some faster, some slower, some phased in, some implemented instantly on a given date.) The appropriate amounts in each case require a better calculator than I have access to.

Tax All Corporate Profits Like S-Corps, and Eradicate Taxes on Corporations, Dividends, and Capital Gains. Credit for the idea goes to Milton Friedman (Capitalism and Freedom, page 174 in my edition). Shareholders pay taxes on the year’s corporate profits (at normal earned-income rates or higher), whether or not they’re distributed. No more double taxation, but no more preferencing over earned and interest income, or indefinite/eternal deferral.

Eradicate Tax Deductions for Interest Payments — Personal and Corporate. Mortgage- and corporate-interest deductions are terribly distortionary; they encourage borrowing — debt financing — over equity- and self-financing. And they’re regressive.

Eradicate Business Deductions for Employee Health Care/Insurance. Destroy the distortionary historical artifact of employer-based health care coverage. Stop discouraging self-employment and personal choice of health-insurance options. (Having been self-employed for decades, I take this very personally. It’s cost me many tens of thousands of dollars.)

Scrap the Cap on Social Security Taxes. Include all earned income. This only makes a terribly regressive tax somewhat less regressive, and it expands the tax slice from that still-regressive tax — a tax that discourages working for a living because it only taxes earned income. But it makes Social Security cash-flow solvent beyond the foreseeable horizon (revenues support outlays). Other propositions here should be scaled to compensate for its regressiveness and work disincentive.

Change All Local Property Taxes to Land-Value-Only Taxes. Land value taxes are the least distortionary taxes around. This would remove the disincentive to improve land. Since it’s non-distortionary, it would also be good to increase its total share of the tax take.

Greatly Expand and Simplify the Earned Income Tax Credit, and Deliver it on Weekly Paychecks. Beyond its manifest benefits to tens of millions, and turbocharger effect on the economy, it could allow for some reduction or eradication of other (economically inefficient) means-tested payments.

Tax Carbon. Since people/businesses aren’t paying for their negative externalities, it’s distortionary not to tax carbon. All hail Arthur Pigou. This is a non-progressive tax, so other taxes would need adjustment to compensate.

Reduce Income Taxes and Make Them More Progressive. As possible and needed, given the other changes, to achieve:

Overall Results:

1. Make the whole tax system — local, state, and federal combined — actually progressive. All the way from the bottom to the top.

2. Increase the total tax take by a few percentage points of GDP. Because Americans (notably, Tea Partiers) want the amount of government we’ve got. So they need to cover the costs. True conservatives pay their bills.

Cross-posted at Angry Bear.

Casey Mulligan Wonders Why People Use Unemployment Insurance

Asymptosis — Mon, 26 Dec 2011 16:56:47 +0000

Casey Mulligan is curious: what could have caused the big uptick in the uptake on unemployment insurance in recent years?

It’s a mystery.

Or, maybe not:

Sorry, the JOLTS data only goes back to 2001.

Which directly addresses Mulligan’s basic assertion: People are lazy. They don’t like to work.

Well yeah. (People especially don’t like working at unpleasant jobs — those at the low end of the spectrum.)

But how lazy are they?

Rob Valletta and Katherine Kuang of the Federal Reserve Bank of San Francisco do a lot to answer that question. Returning here to an earlier post, on Valletta and Kuang’s study of unemployment insurance and unemployment. This graphic stands out:

People who quit their jobs or are just entering the job market aren’t eligible for unemployment compensation. People who lose their jobs are. The money quote:

The differential increase of 1.6 weeks for job losers is the presumed impact of extended UI benefits on unemployment duration. It is straightforward to translate this increase in unemployment duration into an effect on the unemployment rate, based on their proportional relationship and adjusted for the share of job losers in overall unemployment, which was about 67% in December 2009. The implied increase in the unemployment rate is quite small, slightly less than 0.4 percentage point, indicating that without UI extensions, the measured unemployment rate would have been 9.6% in December 2009 rather than the observed 10.0%.

Job losers (eligible for UIC) take an extra week and a half to get jobs.

So the “obvious” is true: if you pay people not to work, they will work less, in aggregate. Some people will opt for “funemployment” insurance and take the summer off. But that simplistic truism hides the truly important reality:

The effect is very small — even when you throw five UI extensions into the mix.

Simplistic arithmetic based on this study suggests that any given moment, because of UIC there are about 600,000 people not working, who would be working without it. (.004 times the U.S. work force of 150 million.) That sounds like a lot, and it’s certainly enough to inflame many people’s hot-wired “cheater resentment” genes.

But I say: Get Over It. They’re a tiny percentage, and in the big picture the effects are trivial. The shortage-of-job-openings effect utterly dwarfs the “laziness” effect.

Maybe my resentment genes are pathologically inoperative, but these numbers do a hell of a lot more to light up my compassion genes — compassion for the 14.4 million hard workers who are protected from personal economic meltdown, resulting from an economic catastrophe that was none of their doing. (I won’t even start on how the whole economy is better off as a result of their spending.)

If 600,000 people at a time get a week and a half of extra leisure along the way — the kind of extended leisure time that I, lucky soul, have been blessed with throughout my life — I say more power to ’em.

Cross-posted at Angry Bear.

This Time Is Different: Federal Debt Didn’t Dive Before the Depression

Asymptosis — Fri, 23 Dec 2011 18:02:19 +0000

Randall Wray made a fascinating observation a while back:

Since 1776 there have been six periods of substantial budget surpluses and significant reduction of the debt. … The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929.

And I confirmed it (graphs):

Every depression in U.S. history was preceded by a big drop in nominal Federal debt.

Except this one. (Assuming that it would have been a depression absent herculean efforts by the Fed et al.)

There was that dip in the 90s, but if we want to posit that, based on history, it was an at-least-necessary cause of the crash, we have to ask: why, in this case, did it take almost a decade to have its effect?

A lot of things have changed since 1929.

• We have the FDIC and similar (explicit and implicit).

• The Fed is a much more active player in controlling government “debt” levels.

• The financial system is far more globalized. International flows of financial capital are much larger in proportion to the real economy.

• The stock of outstanding private debt is proportionally much bigger relative to government debt. Ditto the issuance and retirement of private debt relative to government issuance.

• In the 00s in particular, private debt issuance went crazy.

I think there might be a story about private debt carrying the economy for years after government debt got pulled, so we didn’t experience the effect right away.

But I’d love to hear other and better-articulated stories to explain what strikes me as a pretty big anomaly.

This brief conversation might provide a springboard:

rjs: as i’ve understood it, when it became clear to george bush that if clinton surpluses continued & our debt was paid down, the financial system would soon experience a dearth of safe assets & would freeze up; so his adminstrations tax cuts were initiated in order to keep levels of AAA assets high enough for the markets to operate…

David Beckworth: I remember some commentators making that point back in the early 2000s. It would have been interesting to have seen, though, what would have happened had the debt been paid down. Would structured finance made even more AAA-securities to compensate? Would interest rates been lower back then too?

rjs certainly gives George Bush far too much credit for monetary sagacity. But the general point remains.

Cross-posted at Angry Bear.

A Surfeit of Dearth? Tight “Money” and the Decline of AAAs

Asymptosis — Fri, 23 Dec 2011 16:31:30 +0000

This Credit Suisse graph posted by Cardiff Garcia on December 5 has been getting some serious attention in wonkier sections of the econoblogosphere:

And Angry Bear‘s own Rebecca Wilder gave us this on December 21:

2007-2011 in charts: moving down in quality

2007…

…Vs. 2011

Brad DeLong discussed this on December 21, riffing off David Wessel’s piece where he jumps on the bandwagon with a tarted-up version of the Credit Suisse chart.

David Beckworth has the best commentary I’ve found on the subject so far:

…many of these safe assets serve as transaction assets and thus either back or act as a medium of exchange. AAA-rated MBS or sovereigns have served as collateral for repurchase agreements, which Gary Gorton has shown were the equivalent of a deposit account for the shadow banking system. The disappearance of safe assets therefore means the disappearance of money for the shadow banking system.

Emphasis mine.

This prompts me to suggest a radical idea that I’ve been hesitant to broach for fear of revealing myself to be the internet econocrank that I am: that all financial assets are, in some very real or at least useful definitional sense, ”money” — even though you can’t necessarily use them to buy a pack of gum at the corner store (you have to trade them for something currency-like first). I’ll get back to that in a future post.

Izabella Kaminska made a similar point back in November:

…quality collateral has become the most sought over security in town. So much so, in fact, that some quality collateral is hardly circulating.

…the best indicator of collateral crunch intensity is instead the repo rate. The lower the rate, the greater the crunch.

The wider the spread between Libor and the secured (repo) rate, the greater the general distress in the market. The following chart reveals just how good an indicator of general market stress it is:

“Some quality collateral is hardly circulating.” That starts to sound decidedly like a “velocity of money” argument.

And indeed, Cardiff Garcia frames it just this way:

Now, if you’ve read your Manmohan Singh (or your Izzy Kaminska or your Tracy Alloway), you’ll know that this availability is the first of two parts of the collateral shortfall effect. The other part is the shortening of “re-pledging chains”, otherwise known as a reduction in the velocity of collateral and which Singh explains thusly:

Intuitively, this means that collateral from a primary source takes ‘fewer steps’ to reach the ultimate client. This results from reduced supply of collateral from the primary source clients due to counterparty risk of the dealers, and the demand for higher quality collateral by the ultimate clients.

And why does it matter? Singh again, emphasis ours:

The “velocity of collateral”—analogous to the concept of the “velocity of money”—indicates the liquidity impact of collateral. A security that is owned by an economic agent and can be pledged as re-usable collateral leads to chains. Thus, a shortage of acceptable collateral would have a negative cascading impact on lending similar to the impact on the money supply of a reduction in the monetary base.

Brad DeLong gives us some theory that will sound familiar to readers of my recent posts:

And when an economy is short of AAA assets, it can fall into a recession — but not a monetarist or a Wicksellian recession, rather an Minskyite recession–because in the absence of long-enough collateral chains the web of banking intermediation would have to run on trust that isn’t there.

Again, emphasis mine.

The upshot: the global economy needs more babysitting scrip. Since money issuers continue to labor under the gold-standard fallacy that they can’t just create money, issue more scrip like the babysitting co-op did — that they have to “borrow” it (and this stricture is inscribed in law) — the only way to create that scrip is for governments to issue more bonds. So banks can issue money using those bonds as collateral, allowing shadow banks to keep their collateralized towers from teetering.

It’s a stunningly byzantine and dysfunctional approach to managing the supply of money to the real economy that produces human-consumable goods and services (though it works out very nicely for the bankers, personally). But it’s what we’re stuck with.

If this doesn’t make sense to you, try here.

Cross-posted at Angry Bear.

It’s Beginning to Look a Lot More Riskless (To the tune of…)

Asymptosis — Fri, 23 Dec 2011 14:33:01 +0000

There’s such fun in disastering.
When you’ve won the mastering.
Of the u-ni-verse!

Hat tip to RJ Sigmund:

Lyrics by Marcy Shaffer

It’s beginning to look a lot more riskless.
At least for guys like me.
It’s neat being this elite.
The government makes it sweet.
Complete with robber baron guarantee!

It’s beginning to look a lot more riskless.
Chill has turned to thrill!
We converged, now our flanks give thanks.
We merged all the ranks of banks.
That we did not kill!

When liquidity traps
Slid to maps of collapse?
We heeded treasury’s pleas.
Leapt to the call, and adept-er than all.
Kept the stall from becoming a freeze.
And since what cracked is still intact?
We act like regencies!

It’s beginning to look a lot more riskless.
Unemployment’s popped!
Though i know how the bleeding hearts.
Show their misleading charts.
Neighbor, all my labor costs have dropped!

It’s beginning to look a lot more riskless.
Bonuses restored!
When up yon in this monarchy.
Echelon-esty, you see.
Is its own reward!

Parades of more aides
For high frequency trades.
Since brigades want into our pools.
Incentive retentive
For those thought inventive.
Who plot augmentive new tools.
So abstruse that we’re let loose
To go produce new rules!

It’s beginning to look a lot more riskless.
As we nurse the purse.
There’s such fun in disastering.
When you’ve won the mastering.
Of the universe!

There’s such fun in disastering.
When you’ve won the mastering.
Of the universe!

“Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive”

Asymptosis — Wed, 21 Dec 2011 03:38:36 +0000

Real Reasons Bankers Don’t Like Basel’s Rules: Clive Crook – Bloomberg. Why bankers’ whining about higher equity requirements is just that:

A much-cited paper by Stanford’s Anat Admati and colleagues — “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive” — should have ended this debate once and for all. It dismantles the banks’ position step by painstaking step.

The study makes the crucial distinction between the interests of bank managers, bank shareholders and the public at large. Managers are being disingenuous. They do have reasons, valid after a fashion, for opposing higher capital requirements, just not reasons they can admit. The one they emphasize — cost of funding and its effect on future lending — is fit for public use, but bogus.

What might their real reasons be? If banks sell more shares, it’s true that the return on equity will fall. If managers’ pay is tied to return on equity (as it often is), they will be worse off. Shareholders, on the other hand, shouldn’t mind, because the risk of their investment is reduced in proportion. Taxpayers, of course, would be better off — less likely to be stuck at some point with the cost of bailing out the bank.

The paper is here.

Cross-posted at Angry Bear.