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which monetary policy works by bringing forward consumption from the future into the present is unlikely to be successful there will still be a shortage of demand when the future comes around bringing forward consumption from the future into the present is accomplished by spending future income in the present in other words by the use of credit we have policies to encourage the use of credit indeed as gavyn davies says that is the normal route through which monetary policy works tax policy also encourages credit use through tax deductions these policies accelerate the use of credit we have policies to accelerate the use of credit but we have no policy to accelerate the repayment of debt therefore debt accumulates to unnatural and excessive levels the cost of that debt hinders economic growth fosters the growth of finance and drives the inequality of wealth and income yadda yadda yadda and rather than raising interest rates to fight inflation policy must accelerate the repayment of debt to fight inflation posted by the arthurian at 4 00 am 5 comments tuesday august 25 2015 where s the explosion the blue line shows the rate of change in the federal debt the red lines are calculated trends for the periods 1948 1965 1965 1984 and 1984 2000 in which period did the explosion of debt occur posted by the arthurian at 6 43 am 10 comments monday august 24 2015 the federal debt graph with a constant growth rate denominator i was saying noah s picture of debt growth is distorted by a wandering denominator by a gdp that suffers from a variable and inconsistent rate of increase it occurs to me that we could get a better picture of debt growth by faking the gdp numbers rather than using actual values we can calculate a set of values that approximate the gdp numbers but are based on a constant rate of growth i didn t do any of that least squares crap or anything like i just picked 1947 for a startpoint and 2000 for an endpoint and figured out a constant growth rate that would get me from the 1947 gdp number to the 2000 gdp number it is completely subjective or arbitrary really and if you know how you could probably come up with a better series of constant growth rate values meanwhile i got what i got and i m going with it graph 1 graph 1 shows actual often called nominal gdp in red and my constant growth rate numbers in blue you can see that the lines cross some time around the year 2000 exactly in the year 2000 actually as that year was one of the defining points of the blue curve by design the lines also cross in 1947 though we would have to zoom in to see it clearly the lines also cross around 1977 but this is not because i pinned them together at that point actually that is information the graph gives us that is the reason for making the graph now looking at those three crossing points we can say the red line runs below the blue for some years before 1977 then above the blue until the year 2000 then again below the blue in more familiar terms we might say gdp growth was less than average before 1977 above average from 1977 to 2000 then again below average obviously this is not correct it is the result of picking 1947 and 2000 as my arbitrary start and end dates if i had picked 1966 or 1973 as an end date the whole rest of the blue line after that date might have been above the red that would have been a better look at economic growth but the purpose of this exercise is not to find the point that economic growth began slowing the purpose is to approximate the gdp we actually got using a constant rate of growth for that purpose the blue line looks about right to me up to 2007 anyway you with me do not imagine that graph 1 shows periods of better than average and worse than average growth it does not saturday s post showed this comparison of growth rates for actual gdp red and the federal debt blue graph 2 click graph for fred source page it is pretty easy to see that the federal debt jumps up above gdp growth just after the 1982 recession but if you take a second look you might notice that the red line wanders upward until the late 1970s which makes the simultaneous increase in the blue line appear less significant and then the red line wanders downward for 20 years or so making the increase in the blue line look more significant the changes in actual gdp contribute to making the change in federal debt seem like a sudden increase that occurs after 1982 like noah we are deceived the growth rate of actual gdp varies as the red line on graph 2 shows the growth rate of my constant growth gdp does not this approximate measure the blue line on graph 1 has a constant annual growth of about 7 25 plotted on a graph the growth rate is a flat horizontal line i took the numbers i used for graph 1 worked out the annual growth rate values for them and made a new graph graph 3 the proportions of graph 3 differ from those of graph 2 but that difference aside the blue lines on the two graphs are the same both blue lines represent the growth of federal debt but on graph 3 i show the growth rate of the constant growth rate gdp approximation a flat red line near the 7 25 level for the full period shown on the graph on graph 3 it is pretty easy to see that the federal debt jumps up above gdp growth just after the 1974 recession that s the 1974 recession not the 1982 recession it is now quite obvious that a sudden increase in federal debt growth occurs some eight years earlier than we thought the difference is not due to any changes i made to the blue line i made no such changes i only changed the red line from a wiggly worm to a constant average growth rate value so that the red line does not obstruct our view of the blue line almost done we ve been looking off and on lately at a picture of the federal debt relative to gdp this fred graph from noah graph 4 the federal debt relative to gdp it shows the federal debt relative to a wiggly worm according to our graph 1 above the wiggly worm ran low in the years before 1977 and then high till the year 2000 running low before 1977 it makes the federal debt look falsely high low as it is in those years on graph 4 it is falsely high running high between 1977 and 2000 it makes the federal debt look falsely low i m saying that the growth of federal debt was less than we think in the years before 1977 and more than we think in the years after we are deceived why are we deceived because we think of the federal debt in comparison to the wiggly path of actual gdp but now we can fix that we can use the constant growth rate approximation of gdp in place of actual gdp this will give us a version of federal debt relative to gdp that is similar to graph 4 without the distortions arising from variations in gdp growth graph 5 below shows in red the same relative to actual gdp data that we see on graph 4 in particular the red line shows the increase beginning around 1982 the increase noah calls the explosion in u s government debt the blue line on 5 which shows the same federal debt but shows it relative to the constant growth rate approximation of gdp shows that increase beginning around 1975 that is the same difference we noticed above comparing graphs 2 and 3 the federal debt relative to actual gdp red and relative to a constant growth approximation of gdp blue graph 5 the two lines are very similar that says the two measures of gdp are very similar and we would want that to be true so we can have confidence in the approximation but the two lines also differ in the years before 1977 the blue line is lower in the years between 1977 and 2000 the blue line is higher but look also at the transition from downtrend in the 1960s to uptrend in the 1980s the red line using actual gdp hits bottom around 1974 and runs flat until 1982 and then suddenly starts on its upward journey we know that of course noah pointed it out the transition from downtrend to uptrend is different for the blue line it is earlier instead of going suddenly flat in 1974 like the red line the blue line begins its uptrend there that uptrend is definitely stronger after 1982 so if you were wanting to blame reagan for the big increase in federal debt i guess you can still do that but 1982 is not where the uptrend starts not for the blue line not for the federal debt and the only difference between the red and blue lines is that the red line is shaped by vagaries in both debt growth and gdp growth the blue line is not the blue line is the better measure of federal debt growth and the postwar increase in federal debt growth started before 1982 the excel file at google drive posted by the arthurian at 4 00 am 1 comments sunday august 23 2015 and you thought milton friedman wasn t funny milton friedman the price system is the mechanism that performs this task without central direction without requiring people to speak to one another or to like one another free to choose chapter one posted by the arthurian at 6 51 am 0 comments saturday august 22 2015 oh no this again if you look at noah s graph of debt relative to gdp it certainly looks like the big increase started around 1982 graph 1 noah s graph noah s graph shows the federal debt as a percent of gdp i called up gdp red and the federal debt blue as two separate series and looked at the growth rates for those two series sure enough the blue line is way up high in the 1980s graph 2 click graph for fred source page but that s not the only thing i see the blue line is way up high in the 1980s and it is way down low in the 1950s and into the mid 1960s it was low before the mid 1960s and high after the early 1980s from the mid 1960s to the early 1980s the blue line debt growth changes from very low to very high between the mid 60s and the early 80s the growth of debt went from low to high so it doesn t make sense to me that noah says a deficit explosion began after the early 1980s the explosion started in the mid 1960s and ended in the early 1980s noah has it wrong and if you look at the blue line on graph 2 yes debt growth reaches a high point in the early 1980s but the trend was downhill from that moment to the year 2000 why does noah s graph show increase beginning arount 1982 why does it show the debt essentially flat all through the 1970s while graph 2 shows increasing debt since the mid 1960s well because noah s graph does not show debt it shows debt divided by gdp that s not the same thing graph 2 shows the growth rates separately so that we can better evaluate what we see on noah s graph on 2 the blue line runs below the red for almost all the years before 1982 then the blue line runs above the red for almost all the years since 1982 so the federal debt was growing more slowly than gdp before 1982 and faster than gdp after 1982 this transition this change that happened around 1982 affects the appearance of graph 1 it pushes the debt to gdp ratio lower before 1982 and higher afterwards this is one of the reasons noah thinks he sees an explosion of deficits beginning in the early 1980s there was a decrease in the growth of gdp noah has it wrong posted by the arthurian at 9 05 am 3 comments friday august 21 2015 def inflation i was going to find milton friedman s definition of inflation i thought that would be a good place to go next but before i even got started i got email from greg if you leave a comment on the blog i get it as email so i don t miss it and greg left a comment on the blog actually art inflation is most commonly defined as a sustained rise in the general price level over time so there ya go that s pretty much word for word what i was attributing to friedman i m still looking for that one but meanwhile i found this from investopedia inflation is defined as a sustained increase in the general level of prices for goods and services it is measured as an annual percentage increase as inflation rises every dollar you own buys a smaller percentage of a good or service the value of a dollar does not stay constant when there is inflation the value of a dollar is observed in terms of purchasing power when inflation goes up there is a decline in the purchasing power of money for example if the inflation rate is 2 annually then theoretically a 1 pack of gum will cost 1 02 in a year okay except a pack of gum is still a nickel right the company did not raise the original five cent price of a five stick package of wrigley s spearmint juicy fruit and doublemint gums until 1971 management reluctantly did so by creating a seven stick package and charging a dime for it oh never mind come to think of it i probably haven t bought gum since the 1960s posted by the arthurian at 4 00 am 9 comments labels def inflation thursday august 20 2015 four measures of inflation and five interest rates the inflation measures are blue the interest rates are red the one causes the other they move together they don t what do you see i ll tell you what i see i m not nit pickin it just a quick look on the way up in the 1960s and 1970s rising inflation snuck up on inflation expectations and closed the gap with interest rates we didn t expect the inflation we were getting on the way down in the 1980s and 1990s falling inflation again surprised inflation expectations and the gap with interest rates grew we didn t expect the disinflation we were getting doesn t say much about the relation between interest and inflation does it says a lot about expectations though posted by the arthurian at 4 00 am 1 comments wednesday august 19 2015 three make that four there it is mid june of this year i thought it was recent but not that recent three measures of inflation graph 1 three measures of inflation cpi the gdp deflator and the pce index i knew about the consumer price index and the gdp deflator for a long time i still have photocopies of statistical abstract tables from the early 1980s they cost 25 cents apiece at the library but i never heard of the pce price index till just a few years ago now the other day i read brian romanchuk s response to nathan tankus romanchuk writes yes economists who argue that inflation reduces the burden of debt are using consumer price inflation as a proxy for generalised inflation which i describe below this is technically incorrect but as the chart below shows there s a fairly strong correlation between cpi inflation and wage inflation for very good reasons what follows is most interesting a divergence between the two has implications for the wage and profit shares of national income he writes i won t quote any more of that if you missed it you should definitely go there and read it so anyway brian romanchuk s chart compares consumer price inflation to u s wage inflation for wage inflation he uses average hourly earnings something i never thought of to be sure but i like it so i picked two series out of the 267 000 fred offers and managed to satisfy myself that i had duplicated romanchuk s graph graph 2 after romanchuk earnings fred ahetpi and cpi fred cpilfesl he didn t identify his data but i got a good...
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