Friday, July 15, 2016

The promise of vigor

(Not investment advice. Policy advice.)

In March I wrote

We are at the bottom now, ready to go up.

The way to read the debt-per-dollar ratio is ... that when the downtrend ends and the uptrend begins, the economy for a while is very, very good.
I think the economy is going to be very good, pretty soon.
We're right there right now. DPD is ready to go up right now.
This is not going to be your typical anemic recovery. This is going to be the full tilt, rapid output growth, rapid productivity growth, high performance boom.

I can't promise you it'll last long, because the level of debt is already very high. But it'll be a good one while it lasts.

In April I wrote

I predict a boom of "golden age" vigor, beginning in 2016 and lasting eight to ten years. It has already begun. In two years everyone will be predicting it.

Tom Hickey observed: "Art goes out on the limb."

How's Things?

It is now July. Marcus Nunes on the 14th of this month quoted The Wall Street Journal of the same date:
Could the cause of the next U.S. recession be too much growth? That is one risk of an unprecedented environment in which investors are betting heavily on a perpetually weak economic expansion.

If markets are wrong–and the economy surges instead of sputters–the bad bets could roil the financial system, some economists are increasingly warning.

“Ironically, one can think of a scenario where a stronger-than-expected expansion leads to financial trouble, which in turn puts into question the expansion itself,” said former International Monetary Fund chief economist Olivier Blanchard.

Mr. Blanchard is the latest prominent economist to warn that a surprise upturn in growth may force the Federal Reserve to raise rates faster than investors expect.

It looks like Olivier Blanchard is "the latest prominent economist" to follow me out on the limb :)

But I can't figure out what Blanchard sees, to make him expect an upturn in growth. All I get from the WSJ article is hokum:

The IMF’s former top economic counselor [Blanchard] said, in an interview even before last Friday’s job numbers, the American economy was looking strong. Wage inflation data suggests the unemployment rate—at 4.9% in June—is running at near full capacity, or the “natural rate,” and growth is slightly higher than the long-run ability of the economy to expand, he argued.

All I get from the WSJ article is that the economy is "looking strong" because rising wages suggest the economy is "near full capacity". Our economy is pushing the limits of growth, they say, and we need to do something about it: We need to raise interest rates.

Near full capacity? RGDP growth can't see five percent! Capacity Utilization is down to 75%. Unemployment is low only because the numbers have been doctored. To claim that we are pushing the limits of growth is to show that you are out of touch with the economy.

I'm being polite, Olivier.

Oh, and then this:

"if employment, wages and inflation rise at a speedier clip than many investors currently forecast, it could cause an economic hiccup"

Well, "hiccup" is cute, but that remark is class war stuff. Which reminds me of the archaic definition of the word investment: "the surrounding of a place by a hostile force in order to besiege or blockade it."

I'm not sure why Blanchard expects to see improved economic growth. Myself, I called vigor because financial costs are down:

Graph #4: The Fall and Rise of Household Debt Service Payments
Financial costs have fallen from 13% to 10% of Disposable Personal Income. And now consumers have 3% of DPI to play with. Look at the extreme right end of the blue line on the graph: The line is starting to go up again. Already.

That's an unmistakable sign of growth.

What's more, the big downtrend (highlighted in red) is at least twice the size of the early-1990s downtrend. And that one is what made the good years of the latter 1990s possible.

You remember those good years, right? Do you remember Allan Greenspan talking about anecdotal evidence?

Here's Izabella Kaminska:

At the time, the data didn’t seem to fit the prevailing reality. The incredible and seemingly unstoppable growth Greenspan was seeing on the ground was at odds with his economic models, which instead were signalling an imminent rebalancing on the back of wage pressures and implied inflation.

Greenspan held off on raising rates because of anecdotal evidence, and it paid off. We must consider doing something like that again. Household debt service is now at a low point, and ready to go up. Just like in the 1990s.

One can see the sharp fall to a bottom, the beginning of an upturn, and the promise of vigor over and over in the data:

  •  Total (Public and Private) Debt per Circulating Dollar
  •  NonFederal debt to Circulating Money
  •  Total Debt to Base Money
  •  Private non-financial debt to base money and to Federal debt

and in the one you really need to consider, Private Debt relative to Public Debt. The promise of vigor is everywhere, if you look.

Dealing with Inflation

All the asset inflation we got for the past eight years, that was okay I guess. But at the slightest hint that wages are going up, Blanchard wants to bring the hammer down.

Blanchard is right, though: Sooner or later, we'll have to do something about inflation. The trouble is, it makes no sense to wait eight years for stronger economic growth, and then raise interest rates to prevent that stronger growth from happening.

Blanchard says we cannot wait:

“When the Brexit smoke clears, if, as I expect, it clears, then the Fed should tighten,” said Mr. Blanchard. And given that it takes roughly a year for interest rates to have a substantial effect on the economy, that means the Fed can’t wait too long to raise the cost of borrowing to temper inflation.

Smoke clears quickly. Blanchard wants to raise rates soon.

It's nice that he and I agree on Brexit: The panic was uncalled for. But you can see Blanchard is just itching to raise rates. He wants to raise rates to constrain growth even before there is inflation. A year before there is inflation, the WSJ suggests. Therefore I must say to Mr. Blanchard the same that I said to Mr. Summers:
We need interest rates low to get economic growth so that we can raise interest rates and undermine that growth. This is your plan for the economy.

That's what we do all the time, I know. That doesn't mean it makes sense. And if you stop to think about it, you'll see it doesn't make sense. But you might have to think about it. And you definitely have to stop.

What I'm saying is that some of the fundamental thinking that underlies economic policy is wrong. It has become wrong. It used to be right, but it isn't right any more, because the economy is different now.

What I'm saying is that we have to find a new and better way to fight inflation. We can no longer rely on ready-made solutions that we implement without a thought. We have to develop new solutions that we will one day implement without a thought.

What I'm saying is that we have to stop using interest rates to fight inflation. We have to fight inflation a different way.

Remember back when the crisis was news? One of the things they worried about at the Federal Reserve was deflation. People had cut back their borrowing. People were paying down debt. So the Federal Reserve was worried about deflation.

I shouldn't have to write another sentence. You should know what I'm thinking.

Paying down debt is a way to fight inflation. Policymakers don't have to raise interest rates and choke off growth to fight inflation. We just need policies that encourage people to pay down debt rather than accumulating it.

We can fight inflation by paying down debt. We can keep interest rates low to encourage growth, and pay down debt to fight inflation. We can put it in the tax code. It could be punitive, but it ought not be.

And if we are willing to create those new policies, we can have a permanently low accumulated debt. We can find ourselves at a good place on the debt-per-dollar curve and at a good place on the private-debt-to-public-debt curve and all the other curves. And then we can achieve the permanent quasi-boom.

Thursday, July 14, 2016

BOE: Broad and Narrow Money

FRED has been busy:

FRED has added 127 series from the Three Centuries of Macroeconomic Data research project published by the Bank of England. These data cover national accounts and other financial and macroeconomic data in the United Kingdom going back to the late 17th century.

Going back to the late 17th century. This I love. A first look:

Graph #1: Broad Money (blue) and Narrow Money (red)
Mostly invisible before the 1970s. And pretty much like the US, narrow money starts going up like crazy just as broad money starts to fall.

Here is the ratio:

Graph #2: The Ratio of Broad to Narrow
Quite a hump there, beginning around 1960.

The ratio runs close to five-to-one for 80 years, suddenly starts going up around 1960, suddenly runs into trouble around 1990, and suddenly starts to drop around 2006.

Remarkably, when it falls, it falls right back to where it was for the 80 years before 1960. I wish we could say everything is back to normal now. But that's probably just what the BOE was thinking when they decided to slow the growth of narrow money. It's probably why they picked the five-to-one level to normalize narrow money growth.

I wonder how the graph looks if we chop off the big increase and look at what's left.

Graph #3: The Ratio of Broad to Narrow, before 1970
At the start, zeroes before 1880. At the end, tight to the "5" line from the end of 1955 to the end of 1961, then suddenly starts the increase that we saw on Graph #2.

Other than that: a high point in 1889 and a low in 1896; a sudden drop in 1914; an increase beginning in 1925 with peaks in 1932 and 1936; and a low point in Q1 1946. The highest point occurs in the 1930s, where the ratio almost reaches 6-to-1.

In 2006 it was more than 32-to-1.

Wednesday, July 13, 2016

A thing we knew in '62

If you want to get productivity up, shoot for full employment.

Hold the presses. The posts I have scheduled for Wednesday and Thursday have to get pushed back 24 hours to make room for this.

There is a PDF floating around, used to be at the Cowles Foundation at Yale but it's not there now...

Got it.

seven pages... Potential GNP: Its Measurement and Significance by Arthur Okun. First published in 1962, it is the original source of Okun's law.

I love these old studies, from back when econ hadn't yet gone bad.

Anyway, Okun has something on page six, something about productivity. Something too important to get lost in the bitstream.

Okun writes:
The record clearly shows that manhour productivity is depressed by low levels of utilization, and that periods of movement toward full employment yield considerably above-average productivity gains.

If you want to get productivity up, shoot for full employment.

Tuesday, July 12, 2016

Splashing on populism like aftershave

At the Financial Times, Voters deserve responsible nationalism not reflex globalism by Larry Summers. The subtitle's a tingler: "Agreements should be judged not by how many barriers are torn down but whether people are empowered". Larry Summers, splashing on populism like aftershave.

The opening gambit:

It is clear after the Brexit vote and Donald Trump’s victory in the Republican presidential primaries that voters are revolting against the relatively open economic policies that have been the norm in the US and Britain since the second world war.

Relatively open, compared to what?

It's not slightly open or reasonable open policies that people find objectionable. Trade policies after the second world war were reasonable and somewhat open. That is no longer the case. What we have now is forced-open policy, policy to delight the global megacorporation. Policy to submerge national sovereignty in a flood of claims that expanding free trade will improve the economy.

Whose economy? The global megacorporation.

Monday, July 11, 2016

Mimesis is the sincerest form of flattery

Excerpts from D.C. Somervell's two-volume abridgement of Arnold J. Toynbee's A Study of History

In a growing civilization a challenge meets with a successful response which proceeds to generate another and a different challenge which meets with another successful response. There is no term to this process of growth unless and until a challenge arises which the civilization in question fails to meet--a tragic event which means a cessation of growth and what we have called a breakdown

In our civilization, the challenge we fail to meet is -- well, one of them was the Great Depression. Before the Great Depression, the Long Depression. More recently, the so-called Great Recession. A repeating (almost rhythmical) economic challenge.

Toynbee continues:
Here the correlative rhythm begins. The challenge has not been met, but it nonetheless continues to present itself. A second convulsive effort is made to meet it, and, if this succeeds, growth will of course be resumed.

The great depressions of the capitalist era are the rhythmical challenge which we have failed to meet.

Rather than dealing with the monetary imbalances arising from extreme inequality, the dominant minority attempts to solve the problem by imposing globalization on the world. This solution fails.

The nature of the breakdown can be summed up in three points: a failure of creative power in the creative minority, which henceforth becomes a merely 'dominant' minority; an answering withdrawal of allegiance and mimesis on the part of the majority; a consequent loss of social unity in the society as a whole.

Mimesis: the deliberate imitation of the behavior of one group of people by another as a factor in social change.

When the U.S. was doing well, our policies were imitated everywhere:

By growing 5% in real terms, the U.S. experienced a sharper expansion than any other major nation. Even the most optimistic forecasts for 1965 turned out to be too low... Figuring that the U.S. had somehow discovered the secret of steady, stable, noninflationary growth, the leaders of many countries on both sides of the Iron Curtain openly tried to emulate its success.
- Time Magazine, 31 December 1965

These days, not so much. These days, it seems terrorist groups inspire the most mimesis. Meanwhile, Britain wants out of the EU, Scotland wants out of Britain, Quebec wants out of Canada, and Texas wants out of the USA.

Withdrawal of allegiance and mimesis.

Sunday, July 10, 2016


You thought it was gibberish didn't you, the title. But it snot.

f = Federal
d = Debt
h = Held
b = By
f = Federal
r = Reserve

Those six letters make up most of the series name for two data series at FRED:

I checked the check boxes for both series and clicked Add to Graph. Result:

I'm in a mood, so you get the default shape of the graph as demented by FRED.

There's that big up-thing on the right there, what with the crisis and all. I don't care about the big up-thing. I'm gonna cut it off like a finger in a gory movie.

Graph #2: FDHBFRB and FDHBFRBN thru 2007
Now there's not so much that's interesting to look at, except what I want you to look at. Bumps. One bump between 1985 and 1990, and one that seems to peak at 1995. Goose bumps: The Fed was goosing the economy.

I'm gonna go in and edit the graph and set the units to "Percent Change from Year Ago" for both series. So we can see the growth of Fed holdings of Federal debt.

Well shit. I did that, the graph changed, and the cut-off-finger years magically re-attached themselves to the graph. (The graph ends at 2016 again, not 2007 like I want.) So I cut them off again:

Graph #3: Percent Change from Year Ago for the Data Shown on Graph #2
There. Maybe you can see a hump centered between 1985 and 1990. And the second hump between 1990 and 1995. Yeah but there's humps all over the place. I have to move the data to Excel.

Odd, isn't it, how "bumps" changed to "humps" when the graph changed from "Billions of Dollars" to "Percent Change from Year Ago".

Number one, I want to take the two data series and average them together. That way I end up with one data series for the period shown.

Next I want to take and put a Hodrick-Prescott on it, to improve the visibility of the trend in the data.

Done. And it came out better than I expected:

Graph #4:Average of the Two FRED Series (blue) and the H-P Trend (red)
An H-P high around 1966, another high in late 1985, one in 1993, and one in 2002.


Okay. This being Saturday, the wife made me breakfast. I came back to the computer an hour or so later, ready to double check the dates of those four highs in the H-P trend line.

Nothing. No Excel file. It's gone. Where the hell is it?

Not on my desktop (where I put everything).
Not in my downloads folder. I didn't download the data from FRED.
Not on the list of recent files in Excel.
Not on the list of recent files in the Windows menu.

Where the hell is it? I know I created the file: I used it to make Graph #4.

Oh you know what? It probably got saved where Excel files go when you choose to open them rather than downloading them.

Like that. So, where does the file go when you "open with" like that? I have to do another one to see. Open it and check the path.

The Temp folder. It goes to the Temp folder in the Local folder in the AppData folder in my folder in Users. If I can remember all that.

So what's in the Temp folder?

Looking for an Excel file... not the first one... the second one I think.

Copy to Desktop.
Yeah that's it. The source for Graph #4 is there. Got it. Okay. I must have forgot to save the thing to the desktop immediately after I opened it, and it went to the default place. Temp.

You thought it was a virus, didn't you.


What I want to do now, I want to look at Real (inflation-adjusted) GDP and RGDP per Capita, percent change of these:

Graph #5: Percent Change from Year Ago for RGDP per Capita (blue) and RGDP (red)
I want to download the data, average the two together (as I did above) and figure the Hodrick-Prescott for it.

Graph #6: Average of the two RGDP Series (blue) and the H-P Trend (red)

Now we're getting to the good stuff. (I have not seen it yet, myself.) I want to take the Hodrick-Prescott from Graph #4 (Fed Holdings of Federal Debt) and put it on a graph with the Hodrick-Prescott from Graph #6 (RGDP). This will let us compare the growth-rate trends.

So this next graph shows the H-P for Fed holdings of Federal government debt, in blue. And it shows the H-P for RGDP growth, in red:

Graph #7: H-P Trend from Graph #4 (blue) and H-P Trend from Graph #6 (red)
I would want to argue that RGDP responds to changes in Fed holdings. Looks like there are some timing issues to deal with. Variable lags. But my day's energy is all used up and I don't want to get into it now. Maybe another day.

I will say only that the blue line shows policy, and the red shows the result of policy.

// (afterthoughts)

The constant used in the H-P calculations is 1600; all data are quarterly.

Here's my Excel file. Note, the file contains Kurt Annen's VBA code for the Hodrick-Prescott.

Saturday, July 9, 2016

Get an Education

Raghuram Rajan:
What is the alternative to creating new mountains of consumer debt? Instead of looking for ways to resuscitate spending by those who can ill afford it, and creating unsustainable bubbles in the process, we need to think creatively about how Americans can acquire the skills they need to enhance their incomes.

Acquire the skills, Rajan says. If your accumulation of debt is too big, he says, get an education. You'll make more income and get out of debt.

Fallacy of composition. It works for the individual. It doesn't work for the economy as a whole. Money comes from somewhere. If we don't borrow it, we have to get it from someone else.

If the stock of circulating money (the money we can get from someone else as income) is insufficient, then the economy does not have the money we need unless we borrow it. This is not a problem that can be solved by education. It can only be solved by economic policy that considers the quantity of circulating money and the level of accumulated debt.

Graph #1: Total Debt per Dollar of M1 Money  1916-2015

Friday, July 8, 2016

In case you didn't read all the way to the end

What I said to Larry Summers last time:
We need to get interest costs down to get economic growth so that we can raise interest rates and undermine that growth. This is your plan for the economy. What's to understand?

Larry, you crack me up. All this focus on interest rates. And no focus at all on the number of dollars on which interest must be paid. You guys cut interest rates, as low as they can go. Now you're trying silly stuff with negative rates -- an act of desperation, to be sure. But you pay no attention to the accumulation of debt. It's the accumulation of debt that created the need for low rates.

Cut debt in half, Larry, and you cut interest costs in half. What's to understand?

Thursday, July 7, 2016

Dear Larry,

Notes on Larry Summers's Interest rates are at inconceivable levels, and we must confront what that means

Larry, you are thinking inside the box.
The U.S. 10- and 30-year interest rates on Wednesday reached all-time lows of 1.32 percent and 2.10 percent...
Such rates would have seemed inconceivable a decade ago ...
[E]xtraordinarily low rates reflect both sub-target expected inflation even over long horizons and very low real interest rates...
Remarkably, the market does not now expect a full Fed tightening until early 2019. This is despite all the Fed speeches expressing optimism about the economy and a desire to normalize interest rates...

There is a growing sense that the world is demand-short — that the real interest rates necessary to equate investment and saving at full employment are very low and often may be unattainable ...
First of all, Larry, you are explaining "demand-short" in terms of interest rates. Don't do that. It gets you to interest rates too soon. Actually, you skipped the explanation altogether and went straight to your conclusion that the interest rates we need are unattainably low.

Let's say you're right. Then the question is: Why? Why are rates so low? And how did rates get that way? In other words, Larry, we still need an explanation. (And then, maybe it is not the need for low rates that is the problem. Maybe it is the thing that created the need for low rates that is the problem. See how that works?)

The situation is different now. Not like before the crisis. The situation is different, but your thinking is no different. You are still relying on concepts and short cuts that you used back in 1991 when you were wrong about the 4.5% mortgage rate being an "antique". In truth, Larry, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry, if you get my drift.

Second: Are you relying on loanable funds theory? Sounds like it. Savings and investment are not made equal by interest rates. They are made equal by accounting convention.

And then, Larry, and then you look at the world around you, you describe what you see, and you call it "the result" of the conclusion that you jumped to.

Look what you wrote, Larry:
There is a growing sense that the world is demand-short — that the real interest rates necessary to equate investment and saving at full employment are very low and often may be unattainable given the bounds on nominal interest rate reductions. The result is very low long-term real rates, sluggish growth expectations, concerns about the ability even over the fairly long term to get inflation to average 2 percent, and a sense that the Fed and the world’s major central banks will not be able to normalize financial conditions in the foreseeable future.

So. Having fitted the post-crisis world to your pre-crisis economics, and having identified the problem by proclamation, you now move on and consider solutions.

Having the right worldview is essential if there is to be a chance of making the right decisions.
Good point, Larry. I agree with that.

Here are the necessary adjustments:

First, with differences between countries, neutral real interest rates are likely close to zero going forward... There is no good reason to think given sluggish investment expectations that the neutral rate will rise to be significantly positive in the foreseeable future... Substantial continued reductions in Fed estimates of the real neutral rate lie ahead.
Larry, you are doing it again. Starting with low interest rates. Fact is, interest rates in the U.S. have been drifting down hill since 1981. Maybe we should think about that. Maybe we should think about why that. Don't start with interest rates being low at the moment. That's what you thought about your parents' mortgage rate. Think instead about why rates went down for 34 years.

Maybe there is more to it than just interest rates. Get my drift, Larry? Having the right worldview is essential. Without it, you end up saying things like "Substantial continued reductions in Fed estimates of the real neutral rate lie ahead."

They've been lowering rates for 34 years, Larry, and now they've reached the zero bound. The only interest rate left for them to lower is their estimate of the real neutral rate. You're not telling me anything useful, Larry. Anyway, you got to your conclusion by jumping.

Second, as counterintuitive as it is to central bankers who came of age when the inflation of the 1970s defined the central banking challenge, our problem today is insufficient inflation.
No, Larry. Our problem is not insufficient inflation.

Third, in a world where interest rates over horizons of more than a generation are far lower than even pessimistic projections of growth, traditional thinking about debt sustainability needs to be discarded. In the U.S., the U.K., the Euro area and Japan, the real cost of even 30-year debt will be negative or negligible if inflation targets are achieved. Indeed, the conditions Brad DeLong and I set out in 2012 for expansionary fiscal policy to pay for itself are much more easily satisfied today than they were at that time.
Thinking inside the box, Larry. The Keynesian box. Keynes said deficit spending, so Larry Summers says deficit spending. Get out of the box, Larry. Think for yourself. We've had 80 years of deficit spending in the public and private sectors. Maybe it is time for something else. Get out of the box.

Want a hint? I'll give you a hint. What happens when you have 80 years of deficit spending in the public and private sectors? You accumulate a lot of debt, that's what happens Larry. (HINT: Maybe the problem is too much debt.)

Anyhow, why are you still talking about public debt? Everybody knows Keynes said increase the public debt. You say that is the solution again, now. Other people say public debt was the problem then, and is the problem now. Nobody says fuckall about private debt. Get out of the box, Larry. This isn't 1936. The facts are different.

When events change, I change my mind. What do you do?

Fourth, the traditional suite of structural policies to promote flexibility are not especially likely to be successful in the current environment, though some structural policy approaches such as removal of restrictions on investment are still desirable. Indeed, in the presence of chronic excess supply, structural reform has the risk of spurring disinflation rather than contributing to a necessary increase in inflation. There is, in fact, a case for strengthening entitlement benefits so as to promote current demand.
IS, Larry. The traditional suite of policies IS not likely to be successful. If you're going to say it, Larry, at least get the grammar right.

Larry, Larry, Larry. First you say "some structural policy approaches such as removal of restrictions on investment are still desirable." Then you say "in the presence of chronic excess supply, structural reform has the risk of spurring disinflation". I know, when the facts change you have to change your mind. But you changed your mind mid-paragraph. The facts didn't have time to change.

And then, oh my: You say "There is, in fact, a case for strengthening entitlement benefits so as to promote current demand."

You're a case, Larry. You get things we need mixed up with policies we should put in place. Instead of doing something about income inequality, you would increase entitlements "to promote current demand". Have you forgotten what an economy is? Do you not know how an economy works?

And that brings us to your concluding paragraph:

There is much more to be said about policy going forward. But treatments without accurate diagnoses have little chance of success. We need to begin with a much clearer diagnosis of our current malaise than policymakers have today. The level of interest rates provides a very strong clue.
I absolutely agree that an accurate diagnosis is required. That's why I'm writing to you today, Larry. But that thing about interest rates, you have to re-think that.

You said it yourself: Interest rates are inconceivably low, and we must figure out what it means.

Here, let me lay it out for you Larry.

Interest rates are at record lows, and still going lower. You told me as much. The Fed wants to "normalize" rates -- wants to get rates back to normal. But markets don't expect a hint of normal till at least 2019.

Of course, if there is any hint of inflation, or any hint of vigor in the economy, rates will rise and cap off the vigor right away. Meanwhile, it's all downhill. You told me so.

We need to get interest costs down to get economic growth so that we can raise interest rates and undermine that growth. This is your plan for the economy. What's to understand?

Larry, you crack me up. All this focus on interest rates. And no focus at all on the number of dollars on which interest must be paid. You guys cut interest rates, as low as they can go. Now you're trying silly stuff with negative rates -- an act of desperation, to be sure. But you pay no attention to the accumulation of debt. It's the accumulation of debt that created the need for low rates.

Cut debt in half, Larry, and you cut interest costs in half. What's to understand?