Monday, October 20, 2014

One dumb SOB

Excerpts from What Really Ended the Great Depression by Stephen Moore:
In a previous column I unmasked the historical lie that Franklin Roosevelt’s New Deal programs ended the Great Depression. After seven years of New Deal-era explosions in federal debt and spending, the U.S. economy was still flat on its back, and misery could be seen on the street corners. By 1940, unemployment still averaged a sky-high 14.6 percent. That’s some recovery.

However, I’ve been deluged with the same question from readers: Ok, what did end the Great Depression? Again, the history books get this chapter of history wrong. Most history books tell us that it was government spending on steroids to mobilize for World War II after the Japanese attacks on Pearl Harbor on Dec. 7, 1941.

In the 1940s, government spending did indeed surge. The federal share of gross domestic product (GDP) rose from less than 12 percent in 1941 to more than 40 percent in 1943-45. In other words, almost half of everything that was produced in the nation was to fight the war. Domestic spending on many FDR New Deal programs in education, training and social services dropped more than 90 percent.

The real issue is what caused the economy to surge after the war was over.

Here’s what happened. Government spending collapsed from 41 percent of GDP in 1945 to 24 percent in 1946 to less than 15 percent by 1947. And there was no “new” New Deal. This was by far the biggest cut in government spending in U.S. history. Tax rates were cut and wartime price controls were lifted. There was a very short, eight-month recession, but then the private economy surged.

Here are the numbers on the private economy. Personal consumption grew by 6.2 percent in 1945 and 12.4 percent in 1946 even as government spending crashed. At the same time, private investment spending grew by 28.6 percent and 139.6 percent.

The less the feds spent, the more people spent and invested. Keynesianism was turned on its head. Milton Friedman’s free markets were validated.

In sum, it wasn’t government spending, but the shrinkage of government that finally ended the Great Depression. That’s what should be in every history book — but isn’t.

Yeah, there was a lot of government spending during World War Two. Just like there is a lot of government spending now, okay, fine, sure.

Yeah, the government spending fell like crazy in the transition to a peacetime economy. Just like Stephen Moore wants government spending to fall like crazy now.

Stephen Moore would have us believe that the fall of government spending is what really ended the Great Depression. Stephen Moore is an ass. Do you want to know what happened, that prepared the economy for a generation of vigorous growth? It's very simple. Let me show you:

Sunday, October 19, 2014

It must be true...

I read it on the internet: How to calculate the growth rate for a series of numbers, like a FRED series.

I can do it with my VBA code. But that only works in Excel, and that's not always convenient. So I've been doing it by guessing a rate and tweaking it, and watching the numbers change in Excel, and getting close that way. It's easy enough. But recently I noticed an error in that. A discrepancy. So I wanted to find the right way to do it and write it down somewhere.

Looking for that, I found How to Calculate Growth Rate at wikihow. It figures a couple different scenarios, including the one I needed:

Part 2 of 2: Calculating Average Growth Rate Over Regular Time Intervals

It's got a sample dataset:

It explains everything, and then it's got this great graphic:

It shows the formula a couple different ways, and it even gives an example based on the sample dataset. What more could you want?

Well, you could want it to be right, I guess.

In their graphic, where they use "n" as an exponent, they should be using "n-1". And where they use "1/n" as an exponent they should be using "1/(n-1)".

Now maybe I can remember the formula.

Wednesday, October 15, 2014

Thin Ice and Asset Swaps

Oilfield Trash wrote:

QE is nothing more than an asset swaps between the Fed and the Private Sector. With the FED merely swapping assets they are not actually "printing" any new money.

Auburn Parks wrote:

I'm confused, why would shifting already existing bank balances between different types of Govt bank accounts (reserves and securities) lead to inflation...?

I don't know. I don't know if "Quantitative Easing" is anything more than "asset swaps" or not. But I'm leery of statements that explain things I don't understand in terms of things I don't know about.

I would rather not know things, than know things that are wrong. If you have one wrong thing in your chain of argument, your conclusions are questionable. I prefer to keep my chains short.

I was driving home from work the other day, and something just popped into my head about "reserves and securities". Let's see if I can capture that thought.

A "security" is for example a Treasury Bond issued by the government. Maybe I buy the bond. I get the "security" and the government gets my money. For me it's like saving. For the government it's like borrowing.

The "security" is an "asset". It earns me income. And I can sell it if I want, so it has "liquidity".

If the central bank buys my security it does so using newly created money. The Fed gets the security and I get the new money. This is the exchange that is denigrated as "just an asset swap"

Cullen Roche, 9 August 2010:

The Fed simply electronically swaps an asset with the private sector.  In most cases it swaps deposits with an interest bearing asset.  They’re not “printing money” or dropping money from helicopters as many economists and pundits would have you believe.  It is merely an asset swap.

"Electronically"? Does that clarify things?

Here's the thought I had driving home: The Fed is buying up securities, and the former security-holders are seeing increases in the bank accounts that we call "reserves".

Do I have that right? I'm going with it.

So this "swap" leaves assetholders (the Fed aside) with a lot less securities and a lot more reserves. That seems to be the way it has worked.

There are two kinds of debt.

Oh, I know, three kinds of debt, Minsky types. I know. But I'm not talking about that. I'm talking about something else. Two ways to create debt: the kind created by direct borrowing, and the kind created by fractional-reserve borrowing.

Direct borrowing: You have a dollar and I want a candy bar. I borrow your dollar. No new money is created.

Fractional-reserve borrowing: You are a bank. I borrow a dollar. New money is created.

This was my thought:

When assetholders hold securities, the assets may support direct borrowing but they do not support fractional-reserve borrowing. But when assetholders hold reserves, the assets do support fractional reserve borrowing.

I know I'm on thin ice here. I'm just trying to figure this out.

When assetholders hold securities, the assets cannot generally be used to create new money. But when assetholders hold reserves, they hold assets you are required to have as part of the process of new-money creation. (Please don't explain to me that the reserves are not required until after the new money is created.)

The "swap" is an exchange of assets that cannot be used to create new bank money, for assets that can be used for that purpose. So I think the "it's just an asset swap" idea misses something very important.

Tuesday, October 14, 2014

I don't like that second reading

The first part of yesterday's graph:

The first two readings are zero. Then it jumps up. But by the second reading, the Great Depression was already a year old. It doesn't seem right that the lag was still zero -- not if the lag was a result of the Depression, surely.

Here's the thing. I can only measure lags by looking for similar changes that occur in both the data series I'm looking at. I look for turning points, highs and lows, peaks and dips. And I look for relative size. Big peaks in one series go with big peaks in the other, small peaks go with small ones. It's not rocket science.

In the opening years of the "Tedium" graph we've got a big dip that bottoms out around 1921. The red and black versions of that dip start together, bottom out together, and end together. Oh, maybe the turning points are a year apart. But that's nothing.

Graph #1: No Lag
Okay, well, it was my first look at those turning points. It might be interesting to look at monthly data and see if we can finesse the analysis a bit. But that's for later, or for you to do. The turning points are close enough, I can call it zero lag for now.

But anyway, after that big "vee" that bottoms out and rises again, the red and black lines run downhill together from the early 1920s to the separation that occurs in 1930. There are some small ups-and-downs in that downhill run. And I suppose you could argue that the first two small black peaks lead the first two small red peaks by a year or so. I guess you could say the lag is a year at that point, then.

Even so, follow the downhill run until the yellow highlighting runs out, and there's not much else to go on. There's not much else to be said about what's leading, or what's lagging, or by how much. So at that point, at the end of the yellow highlight, I called the lag zero. And that's what shows up second vertical bar on my bar graph.

Then we get into the 1930s and the red line falls while the black line rises. Only after a delay of more than two years does the red line rise, finally mimicking the black. By that point, a lag has definitely opened up.

You know, when I thought to write this post, I wanted to say the lag was probably developing during that downhill run in the 1920s. But looking at the graph, I just don't see it.

I still don't like that second reading, but I stand by it.

Monday, October 13, 2014

A Look at a Lag

I gathered up dates and lags from yesterday's post and put them into a Zoho:

The dates are not properly spaced, but that's for another day. What's important here is that the lag arose, increased in size, and then decreased in size. The lag was like a response to some kind of disturbance. Of course -- to the Great Depression... But causes also have causes, and I might be tempted to argue that the Great Depression was a disturbance created by excessive financialization of the economy of the time.


Sunday, October 12, 2014


I want to look at each of the images used for yesterday's animation sequence. Each of the similarities, I mean. But I'm having a hell of a time getting started with the writing. So I'm gonna just start.

Image #1: No lag... Similarity: January 1919 - November 1930

Graph #1: No Lag
I'm using another FRED graph, monthly data, same two series shown in the animation sequence, to see the dates of similarity. Maybe that'll move the writing along.

I will describe a "lag" in terms of how many months I have to offset the Base Money (black) graph to the right to obtain a highlightable period of similarity. I will describe a "similarity" using the dates of the Inflation (red) graph, the one that doesn't move back and forth thru time.

The similarity highlighted in Graph #1 ends suddenly in late 1930, when it appears the Federal Reserve suddenly decided to do something about the Great Depression. Just after the yellow highlight ends, base money (black) shoots up while the rate of inflation falls for six months more (till June 1931) and then drags bottom at -10% till March 1933.

That separation of the lines shows the lag developing.

Image #2: Lag 29 months... Similarity March 1933 - March 1934

Graph #2: Base Money Lagged Two Years
During the similarity highlighted on Graph #2, base money (black) increased from November 1930 to October 1931 -- a period of eleven months. The rate of inflation (red) increased from March 1933 to March 1934 -- twelve months. So the lag itself was a month longer at the end of the similarity than it was at the start.

At the start of that similarity the lag (November 1930 to March 1933) was 28 months. By the end of that similarity, it was 29 months. I'll call it 29 months.

Image #3: Lag 50 months... Similarity March 1934 - May 1937

Graph #3: Base Money Lagged Four Years
On Graph #3 the similarity starts with the peaks that end Similarity #2. The lag this time is clearly visible as a downtrend that's twice as long for the red as for the black, followed, then, by a more hesitant red uptrend. The similarity ends with rather modest peaks in both the red and black lines.

Note -- This image has been revised. Originally I showed one yellow stripe of highlight, running through those modest peaks. (You can see that version in yesterday's post.)

Incidentally, the peaks that end Similarity #2 no longer appear aligned because on Graph #3, base money (black) is shifted two additional years to the right. (If that doesn't make sense, go fiddle with the interactive experiment graph again.)

The end of this similarity is the highlighted peak of the black line in March 1933. And for the red line, in May 1937. The difference -- the time the black line is lagged -- is 50 months.

Image #4: Lag 63 months... Similarity May 1937 - October 1938

Graph #4: Base Money Lagged Five Years
Number four is a brief similarity. I'm figuring that it runs from the end of Similarity #3 to the start of the highlighted jiggles just before the black line skyrockets.

For the black line it starts with the end of Sim #3 (March 1933) and ends in July 1933.

For the red line it starts with the end of Sim #3 (May 1937) and ends in October 1938.

It's a challenge to get the dates right on these graphs, what with these images lagged (but not providing pop-up info windows) and the FRED graph providing the info windows (with nothing lagged). It's making my head spin. Hey, if you see anything that looks like a mistake, let me know.

Image #5: Lag 92 months... Similarity October 1938 - March 1951

Graph #5: Base Money Lagged Seven Years
For this one the similarity will start with the jiggles where the previous similarity ended. So July 1933 for the black line, and October 1938 for the red, these dates mark the start.

Where to end this similarity? For the black line I'm gonna go with the high point in the third tall spike in the group of three, so July 1943

For the red line I'm gonna stop it at the top of the third red spike of three, March 1951.

The highlighting is a bit off from these dates that I'm choosing now. It's a little bit arbitrary, choosing the dates. If you know a better way to figure it, do let me know.

(It's completely arbitrary.)

Image #6: Lag 74 months... Similarity March 1951 - March 1955

Graph #6: Base Money Lagged Six Years
We reached a maximum lag of 92 months (between 7 and 8 years) with Graph #5. On graph #6 the lag begins to recede. I'm calling the dates for this similarity as follows: For the black line, start at November 1944 and end at September 1949.

For the red line, start at March 1951. And end at, I'll say March 1955

For the red line, I start Similarity #6 where #5 ended. For the black line I'm leaving a little gap. Number six starts at the black peak where the yellow highlight starts. But number five ended at the nearby, higher, slightly earlier peak. So there is a brief gap between similarities at that point.

Note that other than this brief gap, and the dis-similarity described under Image #1, there are no gaps where one similarity ends and the next one begins. Granted, this is all by eye, and arbitrary. But these "similarities" are nothing but short sections of the overall graph, short enough that we can compare them and describe them.

But if the similarities connect like railroad cars, then what we're seeing is that the pattern of the red graph and the pattern of the black graph are actually quite strikingly similar. The main difference between the two lines is nothing more than a lag -- a long and variable lag. And I'm thinking that the best way to show similarity would be with an "accordion axis" if I knew how to make such a thing.

I'm also thinking that this accordion axis would essentially be a standard axis modified by a calculation that shortens or lengthens the time units in an irregular pattern. I want to create such an axis, because I want to take that calculation and see what it looks like as a normal graph. If it has a familiar look, if it reminds us of something, then perhaps we will have found a major component of the rise and fall of this lag.

Image #7: Lag 60 months... Similarity March 1955 - May 1960

Graph #7: Base Money Lagged Five Years
On Graph #7 the lag recedes again. I begin Similarity #7 where similarity #6 ended: September 1949 for the black line and March 1955 for the red. I end the red one in May 1960. And I end the black one at May 1955. We end with a five-year lag.

I figured these start- and stop-points by looking for similarities in the patterns. Tomorrow I'll graph the lag lengths.

Saturday, October 11, 2014

The Ridges on the Rocks

Maybe you need an accordion axis. Or maybe the lag amounts mean something.

There is a story I like very much, told by Lionel Ruby in "How the Scientist Thinks":
Darwin and a fellow scientist were searching for fossils in the north of England. They were not aware of the glacial theory at the time. Years later Darwin revisited the area, and he was now astonished to discover how clearly marked were the glacial ridges on the rocks. He had not noticed them on his earlier visit because he was not looking for them.... Darwin was able to appreciate the glacial markings only after he became aware of the glacial theory.

Sure: If the glacial theory was wrong, knowing about it and looking for it would still have led some people to see it in the rocks. But that's the trade-off, isn't it. If the glacial theory is right, and you don't know about it, you may not see it even if it is clearly marked in the rocks. Even if you are Darwin.

Me? I'm just lookin at the economy.

From the interactive experiment I captured some images with different lag values. On each image I highlighted in yellow the the part where I think the two graphs match. Some are obvious. Some may be a stretch. It's all by eye anyway; this is conceptual economics. But hey, it can't be any worse than the stuff that passes for "mainstream".

Slide your mouse back and forth across the Animation Bar below the graph:

Lagged Effects of Base Money: an Animation

Zero Year  Lag Two Year  Lag Four Year  Lag Five Year  Lag Seven Year  Lag Six
Year  Lag 
Five Year  Lag 

Now I want to show you the ridges in the rocks. I want to show you what I see.

First, notice that the red line does not move when you drag the mouse across the Animation Bar. The red line is the same in every frame because inflation is a resultant and because the history of inflation is what it is. As your eyes pass over the red line from left to right, you are simulating the passage of time.

Second, notice that the yellow highlight moves from left to right as you drag your mouse from left to right across the Animation Bar. The yellow highlight directs your focus to "similarities" between the red and black plot lines on the graph. The similarities are highlighted left to right because I tend to read graphs from left to right, again simulating the passage of time.

To my mind, the similarities offer a way to measure lag: Slide the Base Money graph over the Inflation graph until you find similarity. Then observe the distance you moved the graph. On our horizontal axis, that distance is a measure of time. It is the time it takes for the pattern of the one graph to show up on the other. We are measuring lag.

Third, notice that the black plot line, the Base Money plot, moves as you drag your mouse from left to right across the Animation Bar. At each step, the black line is offset a number of years from chronological time; this offset is the lag.

Granted it's all done by eye, and the annual steps are large and ungainly. Still, we are only attempting to observe similarities between two data sets -- and this is no more than common practice. What's odd is that the similarities show themselves separated by "large and variable" lags.

In order to see the similarities we need to develop an "accordion axis". For if you observe the movement of the black line as you move the mouse across the Animation Bar, you will notice that the black line moves first from left to right and then from right to left. The "similarities" depend at the start on an increasing lag, and, by the end, on a decreasing lag.

I am arguing that an increasing lag is associated with a slowing economy and that a decreasing lag is associated with a recovering economy. I am preparing to argue that the size of the lag is proportional to the severity of the economic slowdown.

Friday, October 10, 2014

I'm gonna agree with Milton Friedman on this...

From JSTOR's Friedman on the Lag in Effect of Monetary Policy by J. M. Culbertson:

I'm thinkin', like when you make the water hotter, in the shower, and nothing happens, so you turn it up more, and all of a sudden it's too hot. But whether it gets too hot or not depends on other things, too: Did the water heater just finish a duty cycle, or is it almost ready to start?

I think we can relate the size of the lag to the pace of new credit use, or in particular, to the size of new credit use relative to the size of something -- GDP, or base money, or base plus Federal deficit spending, something. I don't need to resolve this immediately.

I do think we can predict can calculate approximately the relative lag between a change in base-money growth and a corresponding change in inflation. Look, I'm not making any promises. But this is what I want to explore.

Wouldn't it be nice to have a better idea how "lags" work?

Thursday, October 9, 2014

An Interactive Inflation Experiment

If you're worried (or not) about inflation resulting from the Quantitative Easing of Base Money since the crisis, you might want to be looking at the rate of inflation:

Graph #1: The Rate of Inflation since 1913
and at the rate of Base Money growth:

Graph #2: The Rate of Base Money Growth since 1918
The money numbers go back to 1918 -- the year my father was born, God rest his soul -- and the price numbers go back even farther, to 1913. The numbers for both are monthly (so there's a lot of data) but for today's graphs I'm using quarterly values and showing "percent change from year ago". Maybe that's more than you wanted to know. If not, you can click either of the above graphs to go to its FRED source page.

Graph #3: Rate of Inflation, 1918-1960, #MQp

Graph #4: Base Money Growth, 1918-1960, #MQo
I reduced the range of dates on both graphs so they start on 1 January 1918 and end on 1 July 1960. These dates center the Depression-era Quantitative Easing on Graph #4, and allow ten years or more before and after that QE, where cause or consequence might show up on the graph of inflation. Oh, and I erased the background and border of the Base Money graph to make it see-through. So now we can put the base-money graph on top of the Inflation graph and see the two plots together.

Plus, I figured out how to use buttons to move the one graph relative to the other.

You can use the buttons to look for patterns in inflation that match or don't match patterns in base money growth. The "zero year" button aligns the dates of the two graphs, 1930 atop 1930, 1940 atop 1940, and so on. The "1 year" button shows money growth lagged one year; the "2 year" button shows money growth lagged two years; and so on.

The "10 year" button aligns 1930 on the base money graph (black) with 1940 on the inflation (red) graph. You can check the x-axis dates to see what the buttons do.

Even before you click a button, notice that the two lines match pretty well in the early years (up to 1930). After that it's a jumble. So, click some buttons and look for pattern similarities, and have some fun with this thing.

bottom image
top image
Graph #5: Base Money Growth (black) Overlaid on the Inflation Rate (red)
Click a Button to Lag the Base Money Graph by the Number of Years Indicated.

Here's what I see: When base money is lagged seven years, the three major increases in base money (1934-1946, black) align remarkably well with three inflationary peaks (1940-1953, red). With a seven year lag.

As I observed yesterday, it is now just six years since quantitative easing began, in September 2008.

During the Great Depression, it took seven years for the unusual pattern of base money growth to be echoed in the inflation pattern. It took seven years, in other words, for inflation to arise as a result of base money growth in the 1930s.

In this post I offer one conclusion: It is still too early to say no inflation will arise from the quantitative easing of our time.