Wednesday, February 10, 2016

Velocity or inequality?

I'm pretty sure a lot of the disagreement between people, when it comes to economic discussions, arises because we are talking about different economies. I generally talk about the one that produces GDP. And I generally see financial activity as a parasite on the economy like heartworms on a dog.

Many people, like Scott Sumner, I think, generally talk about the financial economy: I talk about the medium of exchange. Sumner talks about the medium of account.

The trouble with Scott's view is that finance is a parasite. The productive economy is the host. The parasite cannot live without the host. Left unchecked, the parasite kills the host.

Scott Sumner:
Interest rates are the opportunity cost of holding cash. If you lower interest rates, people will choose to hold more cash.

What people are those?

Sumner says velocity follows the interest rate because when the interest rate goes down, people hang on to more of their cash. And when the interest rate goes up, well, I guess when the interest rate goes up they switch out of cash and into forms of money that pay interest.

For that to be true, you have to be looking at people who have money they can choose to hang on to. I'm not among those people. Most people are not those people. Most people struggle to get by, clip coupons, get extra miles out of worn tires, and have little or no savings.

It's an inequality thing. A few people have most of the money. Most of us have little. Who are the people that hold on to their cash when interest rates go down? The ones who can afford it.

Tuesday, February 9, 2016

Idle money, idle chatter

Graph #1: M1 Velocity (blue) and the FedFunds Rate (red)
If you go to FRED and look at M1V it doesn't look like the blue line on Graph #1 here. Here, the blue line uses M1 with "sweeps" added back in. "Sweeps" is the money banks take out of your checking account at night while you're sleeping and use it to make themselves money. The M1V you'll find at FRED is figured while you're sleeping, when the banks have that money out and the M1 number is low.

I guess they figure M1 is the money we spend, and we won't be spending while we sleep, so that money really shouldn't be in M1 anyway. I don't know what they figure. But if I have $100 in my checking account in the daytime, unspent, I expect to have $100 in my account while I sleep.

Anyway, the blue line here is based on the higher M1 number, the one that includes "sweeps". So the blue M1 Velocity line is different from what FRED shows.

Actually I don't like thinking of it as velocity. I think of it as GDP relative to the money we have for spending. Usually I do that ratio other side up: the money we have for spending relative to the stuff we buy with that money. Stuff = GDP. Goods and services. You know the drill.

When you look at it as the money we have for spending relative to the stuff we buy with that money, you can see if we have a lot of money in the economy, or little money in the economy. And actually, you can see the changes from lot to little. To me that's meaningful. When we have a lot of money the streets are paved with gold. When we have little, times are hard.

But economists don't look at it that way. They turn the ratio other side up, as it is on the graph above. This way we get to look at how much GDP we bought with each dollar we have. We bought about $5 of stuff with each dollar in the late 1960s. Then it went up, and we bought about $7.50 of stuff with each dollar in the early 1980s. Then it drifted down to about $6.50 of stuff by the time of the crisis. After that, quantitative easing increased the M1 number, and the blue line ends up about where it started.

I don't really find that useful information. Economists say we were spending money faster. I think that's bullshit. We were using more credit and accumulating more debt. Oh, but they can't say that, because they say debt doesn't matter. They say our debt doesn't matter. As opposed to the Federal debt.

You really shouldn't spend a lot of time listening to what economists say.

Anyway, the graph. Velocity went up regularly before 1981 while interest rates were spastic from the inflation of the time. But since 1981 the red and blue lines move together. Really quite remarkably together, I think.

Oh, and you see there at the end, after 2010, the blue line goes down a lot but the red line runs flat. The red line runs flat because that's the interest rate at the zero bound, where it won't go lower. Some economists say interest rates should have gone down below zero. You could see that. The red line would continue to run parallel to the blue, and interest rates would end up below zero. Other economists dispute that.

It's all idle chatter.

Monday, February 8, 2016

The Fiscal Policy of Emperor Constantine

From Inflation and the Fall of the Roman Empire, a transcript of Prof. Joseph Peden's 50-minute lecture. By way of Vincent Cate.

The next emperor who interfered with the coinage in a meaningful way was to be Constantine, the first Christian emperor of Rome. Constantine in the year 312, which is also the year he issued the Edict of Toleration for Christianity, issued a new gold piece which he called by a new name, the solidus — solid gold. This was struck at 72 to the pound, so it was in fact debased over Diocletian's. These were very large issues and historians have puzzled over where he got all the gold; but I think the puzzle is not so much of a real puzzle once you begin to look at the legislation that took place.

First of all, he issued two new taxes: one was taxed on the estates of the senators, and this was rather new because senators generally were free of most taxes on their land. He also issued a tax on the capital of merchants; not their earnings, but their capital.

Sunday, February 7, 2016

"Push Button, Get Mortgage"

And it's 2006 all over again.

Saturday, February 6, 2016

Gravitational Implosion

Long ago, when the economy was universally thought "good" except by cranks like me, I read something about hoarding that made a lot of sense.

The money you have hoarded away under your mattress lies idle, collecting no interest. And, in an inflationary economy, the value of your hoard gradually withers.

However, in a deflationary economy -- the economy created by excessive hoarding -- the value of the hoard grows.

Got it? The simple act of hoarding, in the extreme, is sufficient to collapse the economy like a black hole.

Friday, February 5, 2016

A Repeating Pattern of Money Growth that Repeatedly Ends in Catastrophe

Thursday, February 4, 2016

Durations and Standards of "Tightness"

In Revisiting the Causes of the Great Recession David Beckworth writes

the Fed was doing a decent job responding to the housing bust up until 2008. After that point it tightened monetary policy and catalyzed the reaction that lead to the Great Recession.

Beckworth describes two phases of the tightening:

First, beginning around April 2008 the Fed began signalling it was planning to raise interest rates ...

1. Forward guidance. Second, Beckworth says that in the latter half of 2008,

the natural interest rate is falling fast and the Fed fails to lower its target interest rate until October 2008. This is a passive tightening of monetary policy

2. The Fed did nothing.

First, in April the Fed still expected inflation; second, the bottom fell out and the Fed did nothing until October. That's Beckworth's story of how the Fed got tight in the second and third quarters of 2008, causing the Great Recession.

Commenting on Beckworth's post, Philip disagrees with Beckworth's tightening timetable:

The monetary tightening that caused both the housing crash and the Great Recession began in 2006 ...

Philip offers a graph in evidence; I'll offer one of my own in support of Philip's view. It shows two years of slow base growth before Beckworth's mid-2008 moment:

Graph #1: Percent Change from Month Ago, Base Money, Jan 2002 thru Aug 2008

Beckworth's post is a re-statement of an op-ed he wrote with Ramesh Ponnuru. David Glasner evaluates the views expressed in that op-ed on his blog, in How not to Win Friends and Influence People. Glasner:

Beckworth and Ponnuru themselves overlook the fact that tightening by the Fed did not begin in the third quarter – or even the second quarter – of 2008. The tightening may have already begun in as early as the middle of 2006. The chart below ...

In 2006? That's what Philip said. Here's Glasner's chart:

Base Money Growth 2004-2008.  Source: David Glasner
Here's how Glasner describes the chart:

From 2004 through the middle of 2006, the biweekly rate of expansion of the monetary base was consistently at an annual rate exceeding 4% with the exception of a six-month interval at the end of 2005 when the rate fell to the 3-4% range. But from the middle of 2006 through September 2008, the bi-weekly rate of expansion was consistently below 3%, and was well below 2% for most of 2008.

I don't read the chart as Glasner does. He sees base growth consistently above 4% for two and a half years (except for six months in 2005). I see base growth varying about a persistent downtrend:

Graph #3: Base Money Growth 2004-2008. Duplicates Glasner's Graph, Adds a Trend Line by Eye
I see persistent tightening.

Oh, and maybe I'm reading things into it, but David Glasner seems to think 4% is a good number, 4% to maybe 6%. He seems to think 4% is not "tight". As opposed to two or three percent. Do you get that from what he says? I do.

On what basis is 4% a good number? Perhaps because it is in the neighborhood of the nominal GDP growth we want? Perhaps. But I reject the thought. We don't only need base money growth commensurate with GDP growth. We also need base money growth commensurate with the growth of financial obligations: If accumulated debt grows three times faster than base money between 1960 and 2007, then base money is tight.

Glasner implies base money was not tight in 2004 and 2005 because its growth rate was a little above 4%. If that is the case, then 6% to 8% growth (or more) would likely be loose, no?  Too loose, maybe.

The next graph is the same as Graph #3: same data, same units, same trend line. Graph #4 only shows more years. It begins in January, 2000.

Graph #4: Base Money Growth 2000-2008. Expands Glasner's Graph. Same Trend Line as Graph #3
The tightening trend I see in David Glasner's graph of base growth 2004-2008, that same trend extends back to 2003, maybe 2002, maybe earlier. Tightening all the while. I recall something Glasner wrote a while back, in Why Fed Inflation-Phobia Mattered:

To promote recovery, the Fed increased the monetary base in 2001 (partly accommodating the increased demand for money characteristic of recessions) by 8.5%. The monetary base subsequently grew by 7% in 2002, 5.2% in 2003, 4.4% in 2004, 3.2% in 2005, 2.6% in 2006, and a mere 1.2% in 2007.

From 2001 to the crisis, base money growth fell. By David Glasner's numbers, base growth was higher in 2001 and 2002 and 2003 than the acceptable 4% level of 2004 and 2005. Was inflation a threat because of it? It was. But inflation remained low, despite rapid base growth.

Then, when base money growth was slow enough that inflation was not a concern, base money growth was no longer fast enough to keep up with the growth of financial obligations. It became crisis-inducing.

There are two separate standards for "tight" money. It is possible for base money growth to be at the same time fast enough to raise inflation concerns and slow enough to undermine the financial system.

There is more to the story of tight money than Glasner tells. There is more to the story than Beckworth tells. As Graph #4 shows, there was persistent decline in base money growth for near a decade before the Great Recession. A decade.

The next graph shows a long view of base money growth, with the years from Graph #4 circled in red:

Graph #5: Percent Change from Year Ago, Base Money (Long Term) and a Repeating Decline

Kevin Erdmann at Glasner's:

I think the very slow monetary base growth in the 2000s is important and widely overlooked... I’m very pleased to see you advance the idea that Fed tightening was a much earlier issue than most people think is plausible.

Go, Kevin!

Wednesday, February 3, 2016

A New High in Non-Federal Debt

Graph #1
The third quarter 2008 peak was 47,754.4 billion. The new peak is 47,923.13 billion.

Tuesday, February 2, 2016

TCMDO is no longer discontinued

My favorite FRED data series, TCMDO, is no longer discontinued:

I noticed when I went back and looked at the last graph here. My screen capture from back in October shows TCMDO (red) running slightly below the sum of the two replacement series. But when I followed the link below that graph to get back to FRED, the red line now runs right atop the blue.

So they revised the TCMDO data and brought it back from the land of the discontinued. Nice.

It also has a new name now.
Old name: All sectors; Credit Market Instruments; Liability, Level
New name: All Sectors; Debt Securities and Loans; Liability, Level

The new name makes sense. The two series that I had to add together back in October were Total Debt Securities and Total Loans.

It's like finding a four leaf clover.