Monday, October 5, 2015

Calling a halt

If memory serves, late in The Bourne Ultimatum -- not the best movie in the trilogy -- David Strathairn's character Noah Vosen (not the most interesting character in the movie) calls a halt to everything so that his team can follow a new lead in pursuit of Jason Bourne. I have to do that too, sometimes, drop everything in order to pursue some new nit. This is one of those times.

Not that Jason Bourne was a nit.

According to my Blogger stats, there was a recent visit to my old post Marcus Nunes: A last ditch defense of Inflation Targeting. That induced me to go read it again.

It's pretty long, but I still like it. Anyway, in that old post I had quoted Marcus Nunes, and Marcus had quoted Roger Farmer, and I had followed Marcus's link and used some of Farmer's stuff. I quoted this from Farmer:

Volcker followed a policy of strict control of the money supply, as opposed to control of the interest rate. This policy rapidly reduced inflation at the cost of a period of high interest rates and a big spike in unemployment.

That strikes me now as a key piece of Federal Reserve history. Not the result-of-policy part, no. The how-policy-was-implemented part: "strict control of the money supply, as opposed to control of the interest rate." I've known about that for a long time, but it is usually just mentioned without any specifics that I could grab and put into a graph.

I tried to track it down. But the link to Farmer's PDF is broken. So I parsed the link and went looking for a PDF named "Monetary Policy Rules" and the name Roger Farmer. First thing I found was NBER Working Paper 18007, THE EFFECT OF CONVENTIONAL AND UNCONVENTIONAL MONETARY POLICY RULES ON INFLATION EXPECTATIONS: THEORY AND EVIDENCE by Roger E.A. Farmer. PDF, 23 pages. It's not the one I was looking for. But I figure maybe Farmer repeats some of the things he said elsewhere, as Milton Friedman did in his books. Worth a shot.

I found some useful specific details on the history of Fed policy, and I was pretty happy about that. But I also found this statement:

The period from 1960 through 1979 was characterized by a slow buildup of inflation and unemployment, accompanied by volatile and high inflation and volatile growth (Clarida et. al. 2000).

The period from 1960? That stuck in my craw. I always thought of the early 1960s as good years. Inflation was not going up in those years, the JFK years. Camelot, it has been called. Whatever. Still, good years are good years, even if there are but few.

And that was that. I had to stop gathering facts on the history of Federal Reserve policy. I had to call a halt, and put the team on the inflation of the early 1960s.

Yeah. Yeah, I'm the team. I'm it.

Farmer included a reference in his problematic sentence. He included a goddam reference. As if one needs the wisdom of some authority in order to find inflation on a graph. And, don't you know, the thing wouldn't get out of my head. So I had to track down the reference. (Clarida et. al. 2000).

Farmer's list of references includes two for the name Clarida, one of them from the year 2000. I Googled "Monetary Policy Rules and Macroeconomic Stability: Evidence And Some Theory", and found it right away.

And right at the start of that PDF I found this, the first sentence of the Introduction:

"From the late 1960s through the early 1980s, the United States economy experienced high and volatile inflation along with several severe recessions."

That neither contradicts nor supports the statement Roger Farmer attributes to Clarida et al, that

The period from 1960 through 1979 was characterized by a slow buildup of inflation and unemployment, accompanied by volatile and high inflation and volatile growth.

Okay, the volatility -- in the late 1960s -- agrees with Farmer's version, sure. But there's nothing about including the early 1960s in that hot mess. Nothing. No slow buildup of inflation beginning in 1960. No. And let me say again, I think it is pretty odd that Farmer chooses to support his statement with a reference. If you don't follow up, you end up thinking Clarida et al did a study that showed inflation increasing since 1960. I'm not finding that study in Clarida et al.

I really don't want to read all 34 pages just to see if Clarida et al actually *DO* make reference to rising inflation in "the period from 1960". Eh, I'll just search for 1960.

Here's something, on page 167 (page 21 of 34, the PDF reader says):

As De Long argues, the initial build-up of inflation in the late 1960s and early 1970s occurs prior to the first oil shock.

Yeah, forget the oil shock. I'll get back to that later. Clarida et al are happy to work with "the initial build-up of inflation in the late 1960s" -- not 1960, nor the early 1960s.

This is twice, so far, that the Clarida PDF refers to a period beginning in the late 1960s. Not one that begins in 1960.


All told, the character sequence 1960 occurs five times in the paper, as follows:

page 147: "From the late 1960s through the early 1980s, the United States economy experienced high and volatile inflation ..."

page 155: "The data are quarterly time series spanning the period 1960:1–1996:4. With one exception, we obtain the data from CITIBASE ..."

page 167: "The figure shows three-quarter centered moving averages of the real oil price against inflation over the period 1960:1–1997:1. As De Long argues ..."

again page 167: "As De Long argues, the initial build-up of inflation in the late 1960s and early 1970s occurs prior to the first oil shock."

page 168 in a footnote: "... percent of the variation in the GDP deflator over the period 1960:1 to 1984:4."

and that's it. I hope it was good for you.


The character sequence 1961 does not occur in the PDF (or at least, a Firefox search didn't find it).
Nor 1962.
Nor 1963.
Nor 1964.
Nor even 1965.

Farmer's got some nerve attributing the rising inflation since 1960 idea to Clarida et al. If you know the guy, tell him I need a clarification.


I went to FRED:

Graph #1: Three Measures of Inflation (annual rates)
The earliest date I can begrudgingly admit to is 1962. Or, for the GDP Deflator, 1964. If you look, you can see a bounce between 1954Q4 and 1959Q2, a smaller bounce between 1959Q2 and 1961Q3 maybe, and a still smaller bounce between 1961Q3 and 1963Q2. The bounces get smaller and smaller, suggesting that inflation was still on a downtrend as of 1963Q2 -- and even after 1963Q2, as the series of bounces has fizzled out completely by 1964!

Granted, if you look at the underside of those lines on the graph, you can see an upward trend beginning in 1962. Possibly, the earlier lows in 1959Q2 and in 1955 are related -- they do suggest a trend of increase -- but those lows are sparse and intermittent; the evidence is surely weak. On this graph, at least.

Hmm. I have already explained both the dying trend of falling inflation and the awakening trend of rising inflation. The odd thing is that, like Roger Farmer, I used 1960 as the turning point.

Don't be too hard on me for that.

Sunday, October 4, 2015

Levels and Growth Rates of Debt and Income

Yesterday we looked at the growth rates of household debt and disposable income:

Graph #1: Household Debt Growth less Disposable Income Growth

We looked also at the level of household debt relative to the level of disposable income:

Graph #2: Household Debt (in billions) relative to Disposable Income (in billions)

Both looks are important. But each graph leaves out half the important stuff. So I took the calculations for the two graphs and just multiplied them together:

Graph #3: (Debt Growth/Income Growth)*(Debt Level/Income Level)

The early years' activity on Graph #1 is reduced on Graph #3 because the level on Graph #2 is low. The late years' activity on #1 is exaggerated on #3 because the level on #2 is high.

Between 2000 and 2010 the graph now runs higher than the mid-1980s peak, not lower. That seems right. And in the years before 1966 the decline no longer starts immediately, but is delayed until perhaps 1963.

Saturday, October 3, 2015


The Way We Were:
"The Way We Were, and Should Be Again"
by Jude Wanniski
The Wall Street Journal, November 11, 1994

"Why do you think President Clinton isn't getting credit for the good economy?" a producer of CNBC's "Business Insiders" asked me as we prepared for the show.

I asked the young man how old he was, and when he replied "29," I told him bluntly that he was too young to know what a good economy looked like — that you have to have lived in the 1950s and 1960s to have experienced a good economy.

By a good economy I mean one that is not only expanding, but is also employing the nation's human and physical resources at a relatively high degree of efficiency. In my experience, in these terms the U.S. economy has been contracting since the late '60s, and is now nowhere near the levels reached earlier.

You have to have lived in the 1950s and 1960s to have experienced a good economy, Wanniski says. And In my experience, in these terms the U.S. economy has been contracting since the late '60s.

The good economy came to an end in the late 1960s, he says.


Steve Keen on the level of private debt:
On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when America had already exited what Minsky described as the "robust financial society" that underpinned the Golden Age that ended in 1966.

According to Minsky, Keen says, the Golden Age ended in 1966.


Suppose we take FRED's numbers for Household Debt and for Disposable Personal Income, look at the growth rates of these two series, and subtract income growth from debt growth. Where the result is greater than zero, debt is growing faster than income. Where it is less than zero, income is growing faster than debt:

Graph #1: Household Debt Growth less Disposable Income Growth
The plot first goes below zero in 1966. Coincidence?

Probably not.

Look at the same two datasets another way. Consider household debt in billions, relative to disposable personal income in billions. Where the line is going up, debt is growing faster. Where the line is going down, income is growing faster:

Graph #2: Household Debt (in billions) relative to Disposable Income (in billions)
The ratio reaches a turning point in 1966. At the same moment Graph #1 shows the number moving from above zero to below zero, Graph #2 shows a change from uptrend to downtrend.

You should be comfortable with the thought that both graphs show the same change in 1966: Debt growth was faster than income growth before 1966, and slower than income growth for some years after 1966.

But perhaps Graph #2 brings something to mind that Graph #1 didn't: inflation. It was just around 1966 that inflation started pushing prices and incomes significantly higher. Income went up, prices went up, and new borrowing to pay for new purchases on credit went up, but existing debt was unaffected.

Inflation drove income up, but it did not drive existing debt up. Income grew faster than debt as a result, and both graphs show it.


Minsky pegs 1966 as the end of a golden age. Wanniski pegs the late 1960s.

How 'bout that.

Friday, October 2, 2015

Success changes the circumstances that led to success, leading to failure

Greenewable’s Weblog links to This Sociological Theory Explains Why Wall Street Is Rigged for Crisis at The Atlantic. It opens with a great story:
On October 25, 1962, a bear tried to climb the perimeter fence at the Duluth Sector Direction Center, a sensitive U.S. military installation in Minnesota, setting off an alarm during a DEFCON 3 alert. The alarm signal was connected to a mis-wired klaxon at Volk Field in Wisconsin, and the blaring klaxon led to an immediate order to launch aircraft. Pilots of nuclear equipped F-106A’s were taxiing down the runway to respond to the start of nuclear war when the error was discovered. A car flashing its lights raced from the command post to the tarmac and stopped the jets.

This near brush with nuclear catastrophe, brought on by a single foraging bear, is an example of what sociologist Charles Perrow calls a “normal accident.” These frightening incidents are “normal” not because they happen often, but because they are almost certain to occur in any tightly connected complex system....

Further back, in a harbinger of what was to come in the financial crisis of 2008, we can look to the 1998 failure of Long Term Capital Management. The hedge fund had made a bad bet on derivatives tied to the Russian market, and its collapse threatened to cause a chain reaction throughout the world financial system. The traders at Long Term Capital were no rookies. Among their advisors were Myron Scholes and Robert Merton, 1997 winners of the Nobel Prize in Economics for their path-breaking work on a "new method to determine the value of derivatives."

Normal accidents, like these, occur because two or more independent failures happen and interact in unpredictable ways.

I don't know. Maybe. Sure, why not. But I don't like it already by the second paragraph: "These frightening incidents ... are almost certain to occur in any tightly connected complex system".

So, we can stop looking at the economy and we can stop trying to figure out what went wrong? That's what it sounds like they are saying. But no, we didn't get the financial crisis of 2008 because the economy is a "tightly connected complex system" and we happened to have a coincidence of "independent failures". No, we didn't.

There is some good stuff in the article, though. That part about two things interacting to produce unpredictable results, I like that. Doesn't have to be two failures, though. It could be two successes. And they don't have to be independent. They could be related.

And the problem may end in failure not because the results were unpredictable, but because when we started seeing the results, we didn't stop to wonder if they might be related to our successes.

Thursday, October 1, 2015

How much of that was interest?

If we take "Household Debt Service Payments as a Percent of Disposable Personal Income" (TDSP) and multiply it by "Disposable Personal Income" (DPI) ((and divide it by 100)) we get Household Debt Service Payments in billions of dollars. Those debt service payments include both interest and principal.

What portion of those debt service payments is attributable to interest costs? And what portion to principal?

Take "Monetary interest paid: Households" (W292RC1A027NBEA) and divide it by Household Debt Service Payments in billions ((and multiply it by 100)) to get interest costs as a percent of debt service payments:

Graph #1: Interest as a Percent of Household Debt Service Payments
Eh, kinda boring.

Okay, let me add a line showing the other part, principal as a percent of household debt service payments:

Graph #2: Interest (blue) and Principal (red) as Shares of Household Debt Service
Now it is pretty easy to see a decline in interest and an increase in principal since the early 1980s. Many factors must have contributed to these trends.

Wednesday, September 30, 2015

The Emergence of the State

I thought this was fascinating.

Via Reddit, at Vox

Cereals, appropriability, and hierarchy

Joram Mayshar, Omer Moav, Zvika Neeman, Luigi Pascali 11 September 2015

Conventional theory suggests that hierarchy and state institutions emerged due to increased productivity following the Neolithic transition to farming. This column argues that these social developments were a result of an increase in the ability of both robbers and the emergent elite to appropriate crops. Hierarchy and state institutions developed, therefore, only in regions where appropriable cereal crops had sufficient productivity advantage over non-appropriable roots and tubers.

To understand why surplus is neither necessary nor sufficient for the emergence of hierarchy, consider a hypothetical community of farmers who cultivate cassava (a major source of calories in sub-Saharan Africa, and the main crop cultivated in Nigeria), and assume that the annual output is well above subsistence. Cassava is a perennial root that is highly perishable upon harvest. Since this crop rots shortly after harvest, it isn't stored and it is thus difficult to steal or confiscate. As a result, the assumed available surplus would not facilitate the emergence of a non-food producing elite, and may be expected to lead to a population increase.

Consider now another hypothetical farming community that grows a cereal grain – such as wheat, rice or maize – yet with an annual produce that just meets each family's subsistence needs, without any surplus. Since the grain has to be harvested within a short period and then stored until the next harvest, a visiting robber or tax collector could readily confiscate part of the stored produce. Such ongoing confiscation may be expected to lead to a downward adjustment in population density, but it will nevertheless facilitate the emergence of non-producing elite, even though there was no surplus.

This simple scenario shows that surplus isn't a precondition for taxation. It also illustrates our alternative theory that the transition to agriculture enabled hierarchy to emerge only where the cultivated crops were vulnerable to appropriation.

  •  In particular, we contend that the Neolithic emergence of fiscal capacity and hierarchy was conditioned on the cultivation of appropriable cereals as the staple crops, in contrast to less appropriable staples such as roots and tubers.

According to this theory, complex hierarchy did not emerge among hunter-gatherers because hunter-gatherers essentially live from hand-to-mouth, with little that can be expropriated from them to feed a would-be elite.

  •  Thus, rather than surplus facilitating the emergence of the elite, we argue that the elite only emerged when and where it was possible to expropriate crops.

Due to increasing returns to scale in the provision of protection from theft, early farmers had to aggregate and to cooperate to defend their stored grains. Food storage and the demand for protection thus led to population agglomeration in villages and to the creation of a non-food producing elite that oversaw the provision of protection. Once a group became larger than a few dozen immediate kin, it is unlikely that those who sought protection services were as forthcoming in financing the security they desired. This public-good nature of protection was resolved by the ability of those in charge of protecting the stored food to appropriate the necessary means.

  •  That is, we argue that it was this transformation of the appropriation technology, due to the transition to cereals, which created both the demand for protection and the means for its provision.

This is how we explain the emergence of complex and hereditary social hierarchy, and eventually the state.

Tuesday, September 29, 2015

Not setting the interest rate

From the FRED Blog:
The traditional policy tool of the Fed is to target the federal funds rate. Note the term target. Indeed, the Fed does not set this interest rate; rather, it sets the target and then conducts open market operations so that the overnight interest rate on funds deposited by banks at the Fed reaches that target.

The Fed does not set the interest rate. It sets the target and conducts open market operations so that the interest rate reaches this target.

Monday, September 28, 2015

The lower the number, the faster debt accumulates.

Not sure I have this graph right. I'm taking "Household Debt Service Payments as a Percent of Disposable Personal Income", dividing by 100 to eliminate "percent" and multiplying by "Disposable Personal Income" (FRED's DPI) to get Household Debt Service Payments in Billions. But the DPI numbers are quarterly at an annual rate and the debt service numbers are just "quarterly". My numbers might be mismatched.

Don't let that stop me.

After I get Household Debt Service Payments in Billions, I multiply by 100 to get percent and divide by Household Debt (FRED's CMDEBT) to see Household Debt Service Payments as a Percent of Household Debt:

Graph #1: Household Debt Service Payments as a Percent of Household Debt
I'm going ahead with this graph despite my doubts, because the results are reasonable. At max, debt service amounted to between 16 and 17 percent of debt. At present. debt service amounts to between nine and ten percent. Those numbers feel right. Were I to multiply (or divide) them by 4 to correct for a "quarterly" discrepancy, the revised numbers would be too high (or too low). So I'm happy with this graph.

Not happy with the downward trend. The lower the number, the faster debt accumulates.


FRED doesn't offer Household Debt Service Payments data for the years before 1980. So I don't know what the graph of those years would look like. But I expect it would be pretty much a mirror image, increasing irregularly from the 1950s to the 1985 peak.

Sunday, September 27, 2015

New Borrowing minus Payback = Change in Debt

We were looking, a few days back, at cost-of-debt graphs. Geerussell linked to How much income is used for debt payments? A new database for debt service ratios by Mathias Drehmann, Anamaria Illes, Mikael Juselius and Marjorie Santos.

I re-read that article this morning and made sense of it this time. Some things it says should be obvious:
Debt service ratios (DSRs) provide important information about the interactions between debt and the real economy, as they measure the amount of income used for interest payments and amortisations...

These debt-related flows are a direct result of previous borrowing decisions and often move slowly as they depend on the duration and other terms of credit contracts. They have a direct impact on borrowers' budget constraints and thus affect spending.

Since the DSR captures the link between debt-related payments and spending, it is a crucial variable for understanding the interactions between debt and the real economy.

(By "amortisations" they mean repayment of principal. So they are looking at more than just the cost of interest. Interest and principal, both. Debt service.)

Some of what they wrote was plain interesting:
... during financial booms, increases in asset prices boost the value of collateral, making borrowing easier. But more debt means higher debt service ratios, especially if interest rates rise. This constrains spending, which offsets the boost from new lending, and the boom runs out of steam at some point. After a financial bust, it takes time for debt service ratios, and thus spending, to normalise even if interest rates fall, as principal still needs to be paid down.

After a financial bust, it takes time for debt service ratios, and thus spending, to normalise even if interest rates fall, as principal still needs to be paid down.

But Jim has pointed out that "The amount of debt for households hasn't changed much in the last 8 years." He's right:

Graph #1: Household Debt. The circled point on the graph is Third Quarter 2007, eight years back
Principal still needs to be paid down.

The change in household debt was that it stopped going up so fast. That seems to agree with Dr. Econ's graph showing a sudden, screeching halt in Household Net Borrowing:

Graph #2: Household Net Borrowing is "the difference between borrowing and saving during a period"
When new borrowing drops to nothing, debt stops increasing.

But look at Household Debt in comparison to "Debt Service Payments as a Percent of Income":

Graph #3: Household Debt Continued to Grow Faster Than Debt Service Payments
You wouldn't know by Graph #3 that there had ever been a financial crisis. There's barely a wiggle on the graph. And debt continues to increase faster than we can manage to pay it off.


  •  Debt will always increase unless we pay it off faster than we take it on.
  •  If debt always increases, you must eventually have a crisis.
  •  The longer debt reduction is postponed, the bigger the crisis.