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is to reduce our reliance on credit people often react negatively when i say that as if it would be impossible to fix the economy by using less credit and more money as we did in the golden age posted by the arthurian at 4 00 am 0 comments monday june 25 2012 ellipsis i ve been trying for a while to find stats that show whether the economy since reagan was as good or better or worse than other periods convincing stats at last it occurred to me to take advantage of the time periods economists use the postwar golden age the great inflation and the great moderation i decided to look at economic performance in these three periods meltzer identifies the great inflation as the years 1965 1984 annual data from fred show us economic performance since the late 1940s for this post i divide the fred data into three periods before 1965 1965 1984 and after 1984 growth graph 1 growth was best in the first period worst in the last unemployment graph 2 unemployment was lowest in the first period highest in the second not very good in the last inflation graph 3 inflation was lowest in the first period not quite as good in the last the first period was best in every category the claim to fame of period three is its victory over period two inflation fair enough however control of inflation in period three was not as good as during period one meanwhile period three performance in the growth and the unemployment categories just plain stinks notes fred s unemployment data came as annual percentages the deflator and real gdp numbers did not this allowed me for the latter two to calculate compound growth rates by period for the unemployment graph i simply averaged the given numbers compounding is not figured in to figure the compound annual growth rates i wrote a function in the visual basic that comes with excel this function is in this excel file along with the graphs and data posted by the arthurian at 4 00 am 1 comments sunday june 24 2012 shove it i use firefox rarely when i want to test something i use msie i don t like msie because microsoft tries to shove it down my throat makes me want to abandon windows and adopt linux or something twice now in msie i got messages like this the other one was for blogger your browser does not support all features of google docs if you are having problems try google chrome so now google is trying to shove it down my throat now i m looking for an alternative to google that s sweet like google used to be posted by the arthurian at 10 47 am 0 comments a pretty massive inflation following up on the two previous posts it took a pretty massive inflation to keep debt gdp running flat the mountain shown here from the mid 1960s to the early 1980s that s what did it graph 1 gdp deflator rate of change posted by the arthurian at 4 00 am 1 comments saturday june 23 2012 by the numbers 2 history is different debt relative to gdp nonny s graph from yesterday graph 1 total debt as a percent of gdp nonny s graph is duplicated as the red line in graph 2 below in blue graph 2 shows inflation adjusted debt relative to inflation adjusted gdp graph 2 tcmdo gdp and real debt real gdp the first thing to notice is that the red and blue lines are not identical inflation does not come out in the wash this is because there are two different calculations for the inflation adjustment that is because total debt at any given point includes debt from previous years when the price level was lower gdp does not include production from previous years the second thing to notice is that most of the separation between the red and blue lines occurs during the great inflation of 1965 1984 so intuitively the graph makes sense third the two lines start at the same level this is because we don t have information on earlier years so no inflation adjustment can be done on prior debt finally note that the blue region above the red is a measure of the erosion of debt by inflation observe the period from 1966 to 1991 during this period the blue growth of debt was very nearly as rapid as in the years after 2000 and for twice as long or more this rapid blue period includes basically the entire great inflation when the red debt was flat plus the rising red debt of the reagan years plus part of the slowdown in debt growth after 1986 when we take the erosion of debt into account there is no flat spot during the great inflation when we take erosion into account there is no unusual increase between 1980 and 1986 when we take erosion into account history is different the google docs spreadsheet see also debt and inflation 4 recalculating posted by the arthurian at 4 00 am 0 comments friday june 22 2012 by the numbers here s how to take inflation out of gdp divide each year s gdp number by the same year s price level number that s it that s the whole calculation when you ve done all the years a graph of your numbers takes on a different shape that s because you have removed the inflation from the numbers usually we do a second step we multiply all the values by 100 or we pick a base year and multiply all the values by the base year price level the second step scales the numbers up so you can visually compare your results to the numbers you started with but this scaling up really has nothing to do with removing inflation from the numbers that all happens in step one to make an inflation adjustment of debt we should do exactly the same thing divide each year s debt by the same year s price number the trouble is that when you take any one year s total debt it is not the debt of just one year it is the debt of many years if we take the gdp number for 1980 and divide it by the price number for 1980 that s fine but if we take total debt for 1980 and divide it by the price number our answer is wrong total debt for 1980 includes debt from 1979 and 1978 and 1977 and even some left over debt from 1965 when prices were much lower our calculation does not allow for that so our answer is wrong if you are taking the price level out of debt the 1980 price level only applies to 1980 s additions to debt to remove the price level from the debt that still remains from 1965 you have to divide it by the 1965 price level for all the years you have to do this but nobody does this if you re looking at debt for 1980 and you divide the total debt by the price level for 1980 the adjustment of left over debt from 1965 is understated this understatement changes the shape of the graph when you make the graph the old debt is shown falsely low and then the erosion of debt by inflation appears to be less than is actually the case every year s debt has to be figured separately just as every year s gdp is figured separately what you have to do is start at the beginning adjust each year s addition to debt separately and total up the adjusted numbers as you go a few days back nonny presented this graph which is not adjusted for inflation graph 1 total debt as a percent of gdp nonny said one can use the graph to pinpoint the timing of the big changes jazz responded yep reagan and bush jr jazz refers to the big increase from 1980 to 1986 and the big increase after the year 2000 there is nothing wrong with the graph except that it includes the effects of inflation if inflation was always the same it wouldn t matter but inflation is not always the same therefore inflation changes the shape of the graph so we don t really know if the big increase from 1980 to 1986 was due to a big increase in debt or if it was due to the ending of the great inflation what s missing from nonny s graph or not missing but hidden within it is inflation when we look at this graph we are not so much seeing the relation between debt and output as we are seeing the different effects of inflation on debt and output nonny says the plots of debt gdp or debt income are all time plots of the nominal measures of both components combined into a ratio at the time of collection that is inflation or deflation comes out in the wash yes it is true there is inflation in the numerator and denominator both so you would think the inflation gets divided out of the picture or comes out in the wash as nonny says but the the size of the effect of inflation is greater for debt than it is for output because today s total debt includes debt from a time when prices were lower for any given year there must be two different inflation adjustments one for gdp and another for debt because the two calculations differ inflation does not simply come out in the wash when you look at debt relative to gdp posted by the arthurian at 4 00 am 3 comments thursday june 21 2012 on the meaning of two goals persistent attempts to expand the economy beyond its long run growth path will press capacity constraints and lead to higher and higher inflation without producing lower unemployment or higher output in the long run in other words not only are there no long term gains from persistently pursuing expansionary policies but there s also a price higher inflation the federal reserve bank of san francisco what strikes me immediately is the absolute assurance of that statement it is by no means offered as an economic theory but as certain beyond doubt what strikes me next is that i don t like the statement i still want to get the economy growing i want to get around the obstacle that frbsf puts in my way but you know it has to be true persistent attempts to expand the economy beyond its long run growth path will press capacity constraints even if we don t know what the long run growth path is actually i m thinking they meant the long run potential growth path yeah that s what i was thinking i m going with it if i m putting words in frbsf s mouth so be it persistent attempts to expand the economy beyond its potential will press capacity constraints and lead to higher inflation tautology isn t it repeating the same thought in different words no the quote sets up potential output as a standard by which perfection is measured sorta like the model hollie witchey or the phrase don t mess with mother nature you can t do anything about inflation the quote tells us you can t do anything about unemployment and you can t do anything about capacity constraints except of course you can make demand side sacrifices to a supply side god but you know we ve been pressing capacity limits and getting inflation at lower and lower levels for two generations now so frbsf s analysis is iffy and you know we don t really know the true path of potential output yes without doubt there is one and that fact adds strength to frbsf s claim but don t let them fool you just because there is a true path of potential output doesn t mean we re on that path and it doesn t mean if we re not on it that we know why we re not on it from the same article monetary policy has two basic goals to promote maximum sustainable output and employment and to promote stable prices are the two goals ever in conflict yes sometimes they are one kind of conflict involves deciding which goal should take precedence at any point in time another kind of conflict involves the potential for pressure from the political arena wrong answer hey i know they dumb this stuff down so that people like me can get it but the second kind of conflict they describe has nothing to do with economic analysis and the first one is just a bad answer if you have two goals you re supposed to have two goals you re not supposed to have one goal for a while and then switch off and have the other goal for a while if that is your strategy you failed from the start despite what everyone says though the federal reserve is not a complete and utter failure there was a time there after the second world war when inflation and unemployment were both pretty low for a spell two goals to control inflation by limiting demand and to control unemployment by unleashing demand are the two goals ever in conflict the two goals are always in conflict it is a beautiful day there is a magnificent wide boulevard with fields of flowers left and right we put the top down we drive when there is inflation there is too much spending the road is too wide on the right policy makes a correction and the pavement narrows a bit when there is unemployment we need more spending the road is too wide on the left policy makes a correction and the road narrows a bit we drive the road occasionally narrows a bit we drive the road narrows we find ourselves coursing a mountain with solid rock on the one side and sheer drop on the other we drive the road narrows there is inflation and the rock face comes closer to us there is unemployment and the sheer drop comes closer to us we drive suddenly we realize there is no guarantee that the road will always be as wide as our vehicle then it starts to snow the economy of the 1950s provided a wide boulevard for policy actions but the road narrowed substantially by the 1970s and it has continued to narrow while both the terrain and the weather became less accommodating our own policy choices narrow the options left open to us and put us on a path we cannot navigate going to a place we do not want to be the problem is not the federal reserve the problem is that we do not know how to deal with the fact that our goals are always in conflict we want to be moving full speed ahead but policy has created a narrow washed out dangerous dirt road that leads up a mountain to nowhere we know there is a true path of potential output just as there is a median family income and just as there is a best case in any set of options there is some dispute over what that true path is so policymakers work backwards believing that if there is too much inflation we are pressing the limits of capacity and the road must be narrowed further but it is our make the road narrow policy that undermines and reduces the long run potential growth of output when their concern is inflation policymakers raise interest rates and take money out of circulation when their concern is unemployment they reduce interest rates and encourage the use of credit but our concern really is always inflation and unemployment two goals to honor these goals policymakers raise and lower interest rates and they take away money but encourage the use of credit they take away money but encourage the use of credit they make using money more costly and they leave us with nothing but debt making money more costly is an unintended consequence of policy it arises from the effort to meet goals that are always in conflict and debt debt is not the consequence of government spending or prodigal consumers or bad business practice not the massive debt we have our debt is an unintended consequence of policies that remove money from circulation and encourage the use of credit it is all just one big mistake posted by the arthurian at 4 00 am 8 comments wednesday june 20 2012 second thoughts from gene hayward whose posts have the best long titles on the web a quick reference visual of federal govt spending another reminder of the...
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