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he obama administration to let the companies forgive some of the mortgage debt owed by stressed homeowners while half a million homeowners could be helped with a principal writedown the regulator edward j demarco argued we believe incorrectly that helping some homeowners might cause others who are paying on their loans to stop so that they also could get their mortgages reduced first of all so what if others also want their mortgages reduced that is exactly the thing that must be done we should prevent this thing that needs to be done because it is something people want that probably gets us into the arena of moral hazard that s fine let s look at the problem again the problem is debt excessive private sector debt the solution must be to reduce private sector debt if you have some excuse for not allowing the reduction of private sector debt then you are delaying or preventing economic recovery edward j demarco you are delaying and preventing economic recovery get off your damned high horse edward you holier than thou son of a bitch and for the record the right time to be a moralistic prick would have been the 1990s when you were instead encouraging the excessive use of credit and the excessive accumulation of debt or the 1980s when you were encouraging the excessive use of credit and the excessive accumulation of debt or the 1970s when you were encouraging the excessive use of credit and the excessive accumulation of debt or even in the 1960s then it would have been a heroic stance to take now it is a horrific stance posted by the arthurian at 4 00 am 2 comments tuesday august 21 2012 jackson pollock it ain t but interesting it is fred graph 5do found by random eyes click for fred source page i can t say who it was that created this graph nor what they were trying to see but the graph does show that if you have an inventive mind you can do some clever things with fred posted by the arthurian at 4 00 am 1 comments monday august 20 2012 useless as a fire hose against a tsunami from a guest post by benjamin cole at historinhas the conventional central bank weapon for economic stimulus lower interest rates is as useless as a fire hose against a tsunami yet western economies are badly in need of a boost accepted now the usual boost is to substitute fiscal boost for monetary by increased government spending or perhaps by tax cuts that cause the increased spending to arise in the private sector but why does the chatter move from specifics reducing interest rates to generalities monetary policy to alternatives fiscal policy and then back to specifics changes in taxes and or spending why the diversionary tactic why the loss of focus let s start over the conventional weapon is to lower interest rates when a boost is needed stick with that thought don t let your mind wander now why does it work or more accurately why did it work the cause is that interest rates go down the effect is that the economy picks up spending picks up economic growth picks up how did that work two ways either the lower cost of borrowing induces more borrowing by supply and demand or the lower cost of borrowing induces more refinancing which frees up some income to be spent on other things or both either way the reduction of interest rates lowers financial costs and the effect of the lower financial costs is that economic growth improves or is supposed to improve it used to work now it doesn t don t lose the focus we re looking at monetary policy here we re looking at reducing financial costs and supposedly we cannot reduce financial costs any more because interest rates are already at zero supposedly but we can reduce financial costs we can reduce them a lot interest costs are not the only financial cost there is in our economy there are also principal costs if we need to reduce financial costs and we can no longer reduce interest rates or if interest rate reduction has become ineffective then we can try principal cost reduction we can try debt forgiveness and debt writedowns and policies along those lines posted by the arthurian at 4 00 am 2 comments sunday august 19 2012 flatland tim duy quotes joe gagnon of the peterson institute for international economics for more than two years the fed has dragged its feet and resisted the obvious need for more aggressive action a large majority of the committee projects that inflation will be below target over the next two and a half years if they assign any weight to their employment objective they should be willing to accept inflation at least modestly above target in order to get a better outcome on employment duy s initial reaction considering that more aggressive action has not been taken monetary policymakers appear to disagree my initial reaction the idea of relying on this trade off accepting higher inflation to get lower unemployment is shudderingly simplistic oh i know it s just the phillips curve and yes i embrace the phillips curve but hey don t think of it as a curve think of it this way one of the arrows is more unemployment less inflation the other arrow is less unemployment more inflation and that circle in the middle that s us policy slides us a little more to the left or a little more to the right and policy discussions like joe gagnon s and tim duy s talk about where the circle ought to be if we were flatlanders living in that circle or if we were living somewhere on the actual phillips curve we could not tell the difference that was the point of the book flatland so what i m saying here is that really the phillips curve is two dimensional the phillips trade off is two dimensional and the argument about whether we should favor more inflation or more unemployment is two dimensional one dimensional maybe posted by the arthurian at 10 33 am 0 comments delong and the history of economic thought from brad delong s why history of economic thought is important i only took the first part of his post title because i m only looking at the first part of his post i m leaving out arthur laffer and the wall street journal allow me to do a little secretarial work also on this excerpt from delong s post as every even casual student of the history of economic thought knows back before 1829 whether it was sensible to talk about increases in economic agents planned spending raising and decreases lowering economic activity in the short run was an active research question in economic theory back then say s law ruled since nobody produces for sale without intending to purchase by metaphysical necessity planned spending must be equal to and could not be raised above or lowered below production thomas malthus complained that this say ricardo doctrine seemed sound in theory but did not appear to fit the world in practice but he had no theoretical resolution to the problem as every even casual student of the history of economic thought knows the question was definitively resolved by john stuart mill in 1829 mill observed that people plan to spend their incomes not just on currently produced goods and services but also on financial assets when economic agents in total plan to leverage up planned spending in the short run is in excess of production and then production rises and the economy booms when economic agents in total plan to deleverage planned spending in the short run is below production and then production falls and the economy slumps that s a nice summary fits with what i believe reminds me of a mill quote milton friedman used in free to choose there cannot in short be intrinsically a more insignificant thing in the economy of society than money and it only exerts a distinct and independent influence of its own when it gets out of order unfortunately i m not even a casual student of the history of economic thought i think it s hugely important far more than the history of say physics i just don t have the time nick rowe says read a textbook dammit it ll only take a day or two but economics texts are 900 pages it would take the rest of my life to read that much i m a student of the economy i look at graphs anyway i liked this part back then say s law ruled since nobody produces for sale without intending to purchase planned spending must be equal to and could not be raised above or lowered below production i liked it because it is so obviously wrong and i liked this part mill observed that people plan to spend their incomes not just on currently produced goods and services but also on financial assets because it is so obviously right one hundred and seven years later keynes shot down say s law again in the midst of the great depression when it was pretty clear to everyone except economists that the demand for money and the demand for output are not always precisely coordinated people do sometimes produce for sale without intending to purchase everybody wants a bigger nest egg but now again the message has been forgotten how often must this correction be made if you want the five digit years if you want the hari seldon thing you re gonna have to treat a few rules like facts this is one of them it doesn t hurt the economy if everybody saves a little so your nest egg is safe but it hurts the economy plenty when there is too much savings or too much spending on financial assets to put it mill s way i know everybody wants a bigger nest egg that s why the problem recurs but if we want to fix the economy we have to establish serious rules limiting the growth of finance relative to the productive economy savings and all that then the only choice is whether we want everybody to be able to have a decent nest egg or whether we allow some few people to have all of it those are the options posted by the arthurian at 4 00 am 0 comments saturday august 18 2012 on erosion 4 erosion and de rosion now a look at real debt relative to real gdp where each year s addition to debt is inflation adjusted separately based on that year s price level graph 1 incrementally adjusted real debt makes erosion visible the blue line is the same as krugman presented from earlier in this series you can still see the face in it the nose the chin the forehead cmdebt relative to gdp expressed as a percent straight out of st louis nominal divided by nominal the red line is real cmdebt divided by real gdp where each year s addition to debt is adjusted for inflation incrementally as opposed to the way real gdp is figured the red line runs higher than the blue because inflation erodes debt this graph shows it it is a simple matter now to visualize the erosion of debt one can see it by looking at the nominal value relative to the incremental real value or the blue line as a percent of the red line from the above graph graph 2 the erosion of debt by inflation the 1965 1983 decline is striking that decline occurred during the great inflation the post 1983 increase suggests that either we used too much debt or prices didn t go up enough in the past 30 years only one of those possibilities makes sense to me it cannot be that prices did not go up enough it must be that we used too much debt the google docs spreadsheet posted by the arthurian at 4 00 am 0 comments labels erosion of debt friday august 17 2012 on erosion 3 the simple things next we need to look again at cmdebt relative to gdp the relation on the graph we started with krugman s graph but i want to look at it three different ways i want to see nominal cmdebt divided by nominal gdp this will look just like krugman s i want to see real cmdebt divided by real gdp where the inflation adjustment is applied to aggregate numbers just as real gdp is figured and i want to see real cmdebt divided by real gdp where real debt is figured by incremental adjustment as described above the first two i can do in fred graph 1 two lines in the same location click graph for fred source page blue nominal debt divided by nominal gdp red real debt divided by real gdp the blue line on graph 1 here is almost entirely hidden by the red line i started the red line just a bit late and stopped it just a bit early so you can see there actually is a blue line on the graph the two lines are identical the blue line shows cmdebt relative to gdp using nominal values exactly as krugman has it on his graph i even multiplied by 100 as krugman did to convert the ratio values to percent values the 99 993 in the second formula is the price number for 2005 the base year for fred s gdpdef series the red line shows cmdebt relative to gdp using real values numbers with the price level divided out of them debt is adjusted on this graph by the same inflation adjustment calculation that is used all the time for gdp in other words gdp and cmdebt are adjusted the same way and for the same amount of inflation as a result the debt gdp ratio after adjustment is equal to the ratio before adjustment and the red line ends up in exactly the same location as the blue line the graph shows absolutely no erosion of debt resulting from inflation but this is absurd the inflation adjustment of debt on this graph is most certainly wrong what the above graph shows is that anything divided by itself equals one real real 1 nominal nominal perhaps this is the relation sumner had in mind when he ignored the effect of inflation on debt for the 1964 1984 period scott sumner s analysis of krugman s graph seemingly accurate on its face is deeply flawed the analysis ignores the effect of inflation on debt it pretends there is no such thing as erosion of debt it misinterprets the effect of inflation reading it as a significant reduction in new borrowing marcus nunes builds upon sumner s error creating a plausible story about optimism to explain the reduction in borrowing during the great inflation but the reduction in borrowing is something that never actually happened if the simple things are not laid out correctly then everything built upon the simple things is at risk of being wrong the error is to be found not in the superstructure which has been erected with great care for logical consistency but in a lack of clearness and of generality in the premisses j m keynes posted by the arthurian at 4 00 am 0 comments labels erosion of debt thursday august 16 2012 on erosion 2 ada and ida the first thing i want to do is duplicate krugman s graph from yesterday s post his graph 1 krugman s graph mine graph 2 my version of krugman s graph not bad if you see differences it is because i downloaded annual data from fred and krugman probably used the default quarterly data both graphs show the same face a nose in the 1980s a chin before that a neck in the early 1960s even indications of eyes and hair can be seen in the graph next i want to graph the raw debt numbers not divided by gdp along with real debt numbers figured the way real gdp is figured graph 3 the raw numbers and real debt figured by aggregate debt adjustment the relation between the two lines shown on graph 3 is similar to the relation between nominal gdp and real gdp which you have probably seen many times the two...
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