Monday, April 27, 2015

Finance and the ceteris paribus economy


While reading Kenneth Rogoff's VOX piece on the debt supercycle I noticed in the sidebar a link to A historical look at deflation with Claudio Borio's name attached. I've looked at Borio's work on financial cycles before, so I was interested. Finishing up my response to Rogoff, I dove into the deflation article.

Here are the opening paragraphs:
Concerns about deflation – falling prices of goods and services – have loomed large in recent policy discussions (see e.g. Cochrane 2014, Muellbauer 2014, The Economist 2015). The debate is shaped by the deep-seated view that deflation, regardless of context, is an economic pathology that stands in the way of any sustainable and strong expansion.

However, the almost reflexive association between deflation and economic weakness is not so obvious. Seen as a symptom, deflation need not only arise from an aggregate demand shortfall, but also from greater supply, which would boost output. And seen as a cause, while it may be damaging – by pushing up real wages and unemployment, raising the real value of debt (debt deflation), or inducing consumers to delay spending – it may also be beneficial, by raising real incomes and wealth and making export goods more competitive. The cost of deflation is ultimately an empirical question.

Five words went off in my brain like fireworks: making export goods more competitive. I don't know, really, how that works: If deflation makes the dollar stronger, that affects exchange rates and makes US exports more expensive. I'm sure there are trade-offs, but they use those five words as if there can be no question that deflation makes exports competitive.

But before I confused myself with the exchange-rate consequences of domestic deflation, before that unfinished thought diffused itself like a puff of smoke, there were those five words and the fireworks in my head. When costs are falling, Borio et al. say, that's good for exports. By extension then, when costs are rising that's bad for exports.

The mind goes to Adam Smith, to Of the Component Parts of the Price of Commodities, to Smith's look at factor costs and the principles that regulate them. The mind goes to the cost of finance, a cost that competes with Smith's wages and profits and rent.

Imagine a stable economy, a ceteris paribus economy where nothing changes other than the size and scope of finance. Consider a period of time during which the size and scope of finance begin at a low level, but grow persistently, so that by the end of the period finance has grown very large.

Ceteris paribus, it takes just as many hours after that time period, as many as it took before, to produce an apple, to produce an automobile, to produce a skyscraper. It takes just as much capital consumption, just as much raw material, just as much managerial oversight. The only thing that has changed is the cost of finance.

But because the cost of finance increased among producers, profits fell and prices rose. Because the cost of finance increased among consumers, there is a chronic shortfall of demand. These changes have consequences.

Chronic shortfall aside, when the cost of finance increases as a share of output cost, it drives up the price of output. It makes the "basket of goods" more expensive. It makes exports more expensive.

I make that argument: that the rising cost of finance in the US economy increased the prices of US exports, putting the US at a disadvantage and contributing much to our unfavorable balance of trade. I make that argument.

That was the fireworks in my head, when I read those five words.


The U.S. balance of trade was really pretty stable until after the 1974 recession.

Graph #1: U.S. Balance of Trade since 1950
Some people attribute our trade imbalance to Nixon breaking the link to gold. Could be. Nixon took us off gold in 1971.

But Milton Friedman says it was the economic policy of the 1960s -- "the Kennedy and Johnson administrations" -- that ultimately forced us off gold. Nixon had to do something because "the situation had become very critical in 1971", Friedman says.

According to Friedman, then, even if our trade imbalance was created by breaking the link to gold, the underlying causes go back a decade before the link was broken.

At least a decade, I should say.

Sunday, April 26, 2015

Rogoff, debt cycles, and optimism


The name Ken Rogoff ring a bell? How about Reinhart and Rogoff? Or maybe you remember the notion that once central government debt reaches 90% of GDP, economic growth falls off -- you remember that one, right? And the name Thomas Herndon too, maybe?

Reinhart and Rogoff, Growth in a Time of Debt:

Our main result is that ... median growth rates for countries with public debt over roughly 90 percent of GDP are about one percent lower than otherwise; average (mean) growth rates are several percent lower.

You might expect Ken Rogoff to be a man of principle (not a man of science). You might expect his economic analysis always to come up heads for the right and tails for the left. If so, you might be surprised by his recent article at VOX. Rogoff writes:

... there has been far too much focus on orthodox policy responses and not enough on heterodox responses that might have been better suited to a crisis greatly amplified by financial market breakdown. In particular, policymakers should have more vigorously pursued debt write-downs ...

That's downright Arthurian.


From Rogoff's article:
Has the world sunk into ‘secular stagnation’, with a long future of much lower per capita income growth driven significantly by a chronic deficiency in global demand? Or does weak post-Crisis growth reflect the post-financial crisis phase of a debt supercycle where, after deleveraging and borrowing headwinds subside, expected growth trends might prove higher than simple extrapolations of recent performance might suggest?

I will argue that the financial crisis/debt supercycle view provides a much more accurate and useful framework for understanding what has transpired and what is likely to come next.

All in all, the debt supercycle and secular stagnation view of today’s global economy may be two different views of the same phenomenon, but they are not equal. The debt supercycle model matches up with a couple of hundred years of experience of similar financial crises. The secular stagnation view does not capture the heart attack the global economy experienced; slow-moving demographics do not explain sharp housing price bubbles and collapses.

It's an important topic. And because I think in terms of debt-as-cause-of-problem and problem-that-fits-a-cycle-of-civilization, Rogoff's "debt supercycle" catches my eye.


In the introductory paragraph above Rogoff's VOX article, we read:

Unlike secular stagnation, a debt supercycle is not forever.

I like the clarity in that. "Secular stagnation" is long term stagnation. By contrast, we expect a "cycle" to have its ups and downs.

The introductory continues:

After deleveraging and borrowing headwinds subside, expected growth trends might prove higher than simple extrapolations of recent performance might suggest.

So if we think in terms of a cycle, or no, but if the economy actually moves in a cyclic pattern of sorts, then we have reason for optimism, Rogoff says, simply because of the cyclical pattern: Good times are bound to return.

Secular (unexplained) stagnation offers no reason for optimism. Unexplained? Yes. Rogoff observes "the view that the world is suffering from long-term secular stagnation due to a chronic shortfall of demand." Well that's circular, for sure. A shortfall of demand *IS* stagnation.

But if the problem is a debt supercycle it's the pattern that's circular, not the argument. And if it is a debt supercycle, then we can be pretty sure the problem arose with debt -- with "overall economy-wide debt", to use Rogoff's phrase. He's knocking at my door.

But one doesn't adopt cyclical thoughts because they allow for optimism. Good grief!


Have we reason for optimism? "Again," Rogoff writes,

the US appears to be near the tail end of its leverage cycle

Near the end of the leverage cycle? I don't think so. Look at the start- and end-levels for the previous (blue) and current (red) depression-scale peaks of private debt on this graph:

Graph #1: Comparison of Debt Growth around the 1929 and 2008 Debt Peaks
See my Decline from Peak Debt (2015 Update) spreadsheet on Google Drive.
Previous version of this graph: 17 December 2012
Private debt rose much more quickly in the 2000s than in the 1920s. But the deleverage was much less in the recent period. This time, private debt has been reduced almost not at all.

It's not that the period of deleveraging is almost over. It's that the deleveraging never really got under way. That leaves little room for baseless optimism.

Wednesday, April 22, 2015

An interesting detail


I quoted from some of the notes on FRED series for yesterday's post. I didn't need this part from the Small Time Deposits - Total series yesterday, but it is too significant to pass up:

The small-denomination time deposit component of M2 excludes individual retirement account (IRA) and Keogh balances at depository institutions because heavy penalties for pre-retirement withdrawals make them too illiquid to be included in the monetary aggregates.

They are "too illiquid to be included" in the M2 measure of money.

Tuesday, April 21, 2015

The Components of M2 Money


One more time.

I just want to be comfortable with the FRED datasets on savings, so I feel like I know what they show. If one is a stock and I think it's a flow, obviously I have something wrong. I want to be able to talk about these datasets without wondering what I have wrong. So I look.

I Googled total savings. The first hit was Total Savings Deposits at all Depository Institutions - FRED .... FRED's Notes on that graph say

The savings deposits component of M2 consists of passbook-type savings deposits as well as MMDAs at banks and thrifts.

That got my attention. I started looking at economic data in the late 1970s. I started with the Bicentennial Edition of the Historical Statistics. That was before a lot of the financial innnovation. So they didn't have the money measure MZM and other, newer measures, and they didn't have retail money funds and other, newer things to do with money. At least, I don't think they had those things yet.

But I don't know, maybe they did. Maybe I was just trying to simplify things enough to understand the economy. I know they had the M1 and M2 money measures. M1 counted money people spend. M2 counted money people have whether they spend it or save it. The distinction was between money people ordinarily spend and money people ordinarily don't spend. It still is. FRED's Notes on M1 say "M1 includes funds that are readily accessible for spending." M2 starts with M1 and adds things like "Total Savings Deposits at all Depository Institutions".

Anyway, when I read the notes on that savings series and saw them describe it as "The savings deposits component of M2" I had a thought: If I can find this component of M2 money, maybe I can find the others also. So I went to FRED for the Notes on M2:

M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs).

Here are the FRED series I came up with:

  •  M2SL for M2 Money;
  •  M1SL for M1 Money;
  •  SAVINGSL for savings deposits;
  •  STDSL for small-denomination time deposits; and
  •  RMFSL for retail money market mutual funds.

(I started with FRED's SAVINGS series but switched to SAVINGSL when I noticed the other four end with the letters "SL".)

For the record, the STDSL series notes say

The small-denomination time deposits component of M2 includes time deposits at banks and thrifts with balances less than $100,000.

and the RMFSL series notes say

The retail money funds component of M2 is constructed from weekly data collected by the Investment Company Institute...

So both these series are at least in the ballpark if we're looking for components of M2 money.

Here are those series all shown separately:

Graph #1: M2 Money (dark blue) and Components
A bit messy.

Same data series, shown as percent of M2:

Graph #2: Components as Percent of M2
Oh, that's not any better.

Get rid of the M2SL series, and look at the components-as-percent on a stacked area graph:

Graph #3: Components of M2 Money
A little easier to see now.

Monday, April 20, 2015

How much money is in savings?


Sunday, April 19, 2015

Historical Federal Workforce


Googling payroll of the Federal government turned up a link to a table of Total Government Employment Since 1962 from the U.S. Office of Personnel Management. Shows Executive branch civilians, Uniformed military personnel, Legislative and Judicial branch personnel, and a Totals column.

That Google search also turned up this hit


which I didn't bother to click. The era of big government has returned with a vengeance, in the form of the largest federal work force in modern history, it says. I had already seen the table of Federal employment numbers: 5.4 million employees in 1962, 4.2 million in 2013.

So I grabbed the Federal employment numbers and stuck 'em in a spreadsheet. Then I went to FRED and got the numbers for Total US Population, and stuck that in there too. Then I made a graph of Total Federal Employment as a percent of Total US Population:

Graph #1: Federal Employment, Trending Down since before the VietNam War, is now below 1.5%

Saturday, April 18, 2015

Still looking for Savings


The other day I wrote:

Do we have a vast quantity of savings stored up? You know we do.

I don't like that. I don't like pretending innuendo is evidence. Maybe it bothered you, too. (I hope so!) I wanted to show vast savings on a graph. But that wasn't as easy to find as I thought. That day, I skipped the graph.

I looked on Friday, but did not find. I'm looking again today, and today I will take a different approach to the problem. I will wander from FRED. I will see what other people have to say.

I remember Steve Roth a while back offering a definition of "money":
I’ve bruited the notion in the past that “money” should be technically defined, as a term of art, as “the exchange value embodied in financial assets.”

In this definition, counterintuitively relative to the vernacular, dollar bills aren’t money. They’re embodiments of money, as are checking-account balances, stocks, bonds, etc. etc...

If this definition is safe, then the stock of money (I hate the term “money supply,” which suggests a flow) equals the total value of financial assets. Forget the endless wrangling about monetary base, M1, M2, divisias, and all that. Add up the value of all financial assets, and that’s the money stock.

I wasn't happy with that definition of money, then. But maybe I can use it now. It's a very very "broad" definition of money -- and when you're pondering savings, a broad measure is the right one to use.

Roth shows graphs of Total Assets as a proxy for the stock of broad money. I like that approach. It gives me numbers to work with.

It's also the biggest money measure that comes to mind. That's why I want to use it here. From it I want to subtract the portion of money that is commonly used for transactions -- the part that I see as "money" -- and consider the rest to be savings. By this method I may arrive at a measure of savings, the biggest measure of savings that I can come up with. You know: vast savings.


I found a few links to estimates of total accumulated savings. Most of 'em, unfortunately, are like this:


Gross savings (plural) figured as the part of Gross Domestic Income that we don't spend. That's a flow, dammit. STF might call it Gross saving [singular]. We were looking at Gross savings in yesterday's post, trying to trust that it is a stock, without success. Maybe now we know why.

Here's a World Bank link on Gross Savings. Shows the same definition as the indexmundi clip. Their Gross Savings numbers for the U.S. are $2.38 Trillion (2010), $2.45 Trillion (2011), $2.7 Trillion (2012), and $2.91 Trillion (2013).


The useful "Total Assets" links I found are shown next, in date order:

Rutledge Capital - May 24, 2009: Total Assets = $188 Trillion as of 2008Q4.

Yahoo Finance - October 22, 2013: Total Assets = $225 Trillion as of 2012Q3.

Wikipedia - April 17, 2015: Total Assets = $269.6 Trillion as of 2014Q1.

That's about it, really. Maybe you can find more?

Hey, since we can now draw lines on FRED graphs, I'm gonna show GDP and add this Total Asset data to the graph!

Graph #1: GDP (blue) and Total US Assets (red)


HEY!!!

Friggin Wikipedia!

At the Financial position of the United States page that I linked above, among the graphs on the right side is a green one, Assets of the United States as a fraction of GDP 1960-2008. Clicking that brings up a bigger image along with related data.

The graph is by Equilibrium007, who would get the Arthurian Prize of the Day, if there was one.

I clicked More Details. Below the graph is a Summary section, where the Description includes a link to the source data. Clicking that brings up a page of the Fed's Data Download Program -- somewhere I've never been before. There is a package of 16 data series there, for download or review.

See how easy it was, to find all that data!!!


But, you know, I'm not so sure now that I want to take Total Assets, or even Total Financial Assets, and say that it's a good proxy for vast accumulated savings.

A lot of financial assets, most of 'em maybe, were not created by saving. They were created by borrowers and lenders reaching agreements that create money from nothing.

It doesn't worry me that they create money from nothing. But we surely cannot then turn around and say the assets were created by acts of saving.

If I go to the bank and borrow $1000, and the bank creates the money by depositing it in my account, there was certainly no saving that accumulated to $1000 so that I could borrow it. Maybe it's true, I think it is quite definitely true, that after I borrow the money and spend it, it soon finds its way into savings. So there is going to be a relation between savings and assets like loans, anyway. And that might be a useful relation to look at. But I don't think it's correct to look at assets and say there was that much accumulated savings -- nor even that there is going to be that much accumulated savings. It just doesn't sit right.

My attempt to use Total Assets as a measure of accumulated savings was wrong-headed.

Friday, April 17, 2015

Looking for something definite


STF left a concise statement a while back at Winterspeak:


I thought that was great. "Saving" is a verb. It is something we can do. "Savings" is a noun. It is something we might have.

"Saving" (singular) is the act of putting money away for later. "Savings" (plural) is the accumulation of money you have put away. "Saving" (singular) is the flow of money into a stockpile of "Savings". This all works. I adopted STF's terminology right away.

And now ... four and one-half years later ... I'm still trying to figure out if FRED adheres to the clear and simple standard that STF laid out in that brief comment.


Here is FRED's Savings [plural] Deposits, Total:

Graph #1
Savings, plural, the noun, something we might have . This graph shows the accumulated stock of savings. Maybe. So then if I were to show Change, Billions of Dollars -- or if I make it annual and show Change from Year Ago, Billions of Dollars -- that would be the flow variable, or "saving" in the singular form. If I'm looking at what I think I'm looking at.

How can I tell if I'm looking at what I think I am?

For this dataset at FRED, the Notes say in part

The savings deposits component of M2 consists of passbook-type savings deposits as well as MMDAs at banks and thrifts.

So. The graph shows a portion of M2 money, and M2 is a stock of money (not a flow of money). If the graph shows a portion of a stock, the portion it shows is a stock also (not a flow); I'm confident of that. So that corresponds to "Savings [plural]". And now I think I'm on the right track if I show the blue line as Change from Year Ago and compare it to some measure of "Saving [singular]".

Ah! I found Gross saving [singular] as a percentage of gross national income. And I found Gross National Income for United States, in Current Dollars. This will work. I can figure Gross saving from it.

If "Gross Saving" is "GS" and "Gross National Income" is "GNI" then FRED's  "Gross Saving as a Percent of Gross National Income" looks like this:


To get the Gross Saving number from what FRED gives me, I only have to multiply by GNI and divide by 100:


Working backward from FRED's number, I get GS, Gross Saving, singular.

I want to compare these GS numbers to the Change from Year Ago, Billions of Dollars version of Graph #1. If they are the same, or similar even, then I will be confident that the series shown in Graph #1 is the stock variable and is correctly plural. I will also be confident that the GS numbers I calculated from the "Gross saving [singular]" series is correctly singular. I will have learned something.

I looked into this a few times before (at least twice on the blog, as I recall) without ever making this much progress. So I'm doing good today. Here's the result:

Graph #2
Not even close.

We have not learned that Graph #1's blue savings (plural) shows a stock and Graph #2's red saving (singular) shows a flow. We have not learned that FRED follows STF's singular/plural rule.

Have we learned anything? Nothing definite. But now I want to think that Graph #1 (since it doesn't show a stock) shows a flow of deposits into savings. But I don't see how that can be, given FRED's Note that we looked at above.

Maybe we learned that the singular/plural rule does not apply to the words "deposit" and "deposits". And maybe we learned that Gross and Total don't mean the same thing.

Oh, well here is something. Dividing by 1000000000 (on Graph #2) converts the red line from "current dollars" to "billions". Now you can't say you've never seen anybody do that!

Thursday, April 16, 2015

He thinks he's grumpy?


In a recent post, Cochrane says all money should be interest-bearing. His view is a concession to the world as it is today, when most (but not quite all) money is interest-bearing.

The cost of interest is the central, underlying problem in the world today. But not because interest rates are so low. No, that was a solution, remember? The cost of interest -- the accumulated cost of interest -- is a problem because there are so many dollars already that are interest-bearing.

The problem, in other words, is that there is too much debt. There is so much debt that, even at the zero bound, the cost of finance holds the economy down.


Cochrane's opening talks up government debt: "I propose a new structure for U. S. Federal debt. All debt should be perpetual, paying coupons forever with no principal payment..."

Then he gets into it, quoting himself:

Economists have long dreamed of interest-paying money. It fulfills Milton Friedman’s (1969) optimal quantity of money without deflation. Paper money is free to produce, so the economy should be satiated in liquidity...

Mmm. "Economists have long dreamed of interest-paying money." Well, we have that. Every dollar of debt -- public and private -- is a dollar that somebody put into circulation, and is paying interest on, to keep in circulation.

The problem is not that there's not enough interest-bearing money around. The problem is that most of the money we borrowed and spent into circulation and are still paying interest on, most of that money is now sitting in somebody's savings account collecting interest. We are paying interest on money we spent into circulation, but that money has already settled out of circulation and somebody is collecting interest on it. Oh, and the banks are making money at both ends of that arrangement.

Meanwhile, that arrangement does nothing to help the real economy.


Cochrane quoting Cochrane:

Our economy invented inside interest-paying electronic money in the form of money market funds, overnight repurchase agreements, and short-term commercial paper, and found it useful. But that money failed, suffering a run in the 2008 financial crisis.

Yeah, that money failed. It gave us the 2008 financial crisis.