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and inflation has disappeared this failure on the graph this loss of trend similarity has a real world counterpart the inflationary peaks of the 1970s occurred while the quantity of money was being suppressed and then inflation quieted down when they stopped suppressing the money that s evidence of an astonishing loss of policy effectiveness a lot of people feel that inflation is proof that they must have been printing too much money but the graph shows that they were not printing too much money the graph shows that since 1960 m1 money was severely suppressed but the suppression did not restrain inflation there was a loss of trend similarity the thing that used to work to fight inflation stopped working that is what graph 3 shows why did inflation policy stop working what caused the loss of trend similarity what changed we increased our reliance on credit to fight inflation the fed suppressed circulating money to stimulate growth congress encouraged credit use they suppressed the money and encouraged credit use and our reliance on credit increased essentially our economy did not change except that money was suppressed and credit use was encouraged and we found ourselves using less money and more credit the thing that changed was the thing we use for money the difference between money and credit is that credit is more costly to use an economy that shifts from a low reliance on credit to a high reliance on credit will find itself with financial costs rising relative to other costs it will find itself with interest costs rising relative to wages and profits it will find itself with living standards squeezed business growth below par and financial activity as its growth industry an economy that shifts from a low reliance on credit to a high reliance on credit will see rising costs that are associated with the cost of interest i got interest rate numbers from fred i picked their moody s seasoned aaa corporate bond yield aaa because the numbers go all the way back to 1919 graph 4 adding moody s aaa corporate bond yield to graph 3 again i tried to make the lines similar by scaling the green line and shifting it up a bit after 1960 the green and yellow lines are a very good match inflation and interest rates show similar patterns before 1960 there is little similarity before 1960 money was dominant after 1960 credit was dominant graph 4 shows the change from reliance on money to reliance on credit graph 5 shows a close up of the transition graph 5 x marks the spot don t forget the yellow line shows inflation inflation was at its lowest and stable for a few years in the early 1960s just at the balance point between excessive money and excessive credit use posted by the arthurian at 4 00 am 1 comments sunday november 20 2011 on your mark get set decline and if it matters and it matters more than anything the decline in the quantity of circulating money was the cause of the economic problem and the decline of income was a result 18 november 2011 graph 1 showing the decline in the quantity of circulating money since 1946 graph 2 showing a slowdown in real income growth since about 1970 graph 2 from krugman from a post somehow linking the reagan non miracle to the slowdown of inflation adjusted income growth krugman s graph shows a slowdown starting somewhere around 1970 the decline of circulating money began in 1946 a generation before that slowdown the slowdown of income cannot have been the cause of the decline of money posted by the arthurian at 4 00 am 7 comments saturday november 19 2011 phase shift earlier this month jim offered some technical knowledge regarding the use of moving averages in digital signal processing dsp the moving average is classified as a low pass filter tends to attenuate high frequency components in the data the moving average is sometimes called a boxcar filter in dsp the issue of where you reference the input and output time stamp is referred to as causality if you only use the most recent past input data points to create the current output data point the filter is causal if you use data points ahead of the current output it is not causal if the output current sample point is the middle of the input sample points the frequency response of the filter is said to be zero phase so if the moving average is plotted at the last year of the years averaged the result is causal if the moving average is plotted at the middle year of the years averaged the result is zero phase the difference is significant enough that people invented names for the different versions graph 1 shows the federal funds rate monthly numbers in blue and annual numbers in red from the st louis fed graph 1 for graphs 2 and 3 below i m using annual numbers because it s easier the vertical blue bars on the graphs below show the federal funds rate the thin red line shows the moving average you can make the moving average move by sliding your mouse back and forth across the number bar below the graph graph 2 is a causal representation each point on the red line shows the average of the previous n years graph 2 a causal moving average 1 year data 2 year avg 3 year avg 4 year avg 5 year avg 6 year avg 7 year avg 8 year avg 9 year avg 10 year avg you can see the peaks mellow and drift to the right as you move the mouse rightward over the number bar they mellow because they get averaged down blended in with lower numbers they drift to the right because each point on the red line is plotted at the last year of the years averaged you can see the same rightward drift in the start point the left end of the red line as you wave the mouse back and forth it is as if the mouse pulls the red line rightward then allows it to spring back to its original shape graph 3 is a zero phase representation each point on the red line is plotted in the middle of the period averaged the average value plotted at the average year so to speak graph 3 a zero phase moving average 1 year data 3 year avg 5 year avg 7 year avg 9 year avg 11 year avg 13 year avg 15 year avg move your mouse back and forth across the number bar below graph 3 again you can see the peaks mellow as you move to the right but this time the mellowing peaks remain centered on the rigid peaks of the blue bar graph the zero phase version of the moving average makes more sense to me for the things that i look at it puts high points where the high points are rather than dragging them off to the side both versions are useful no doubt but the causal version appears to be more common it s the way excel does moving averages for example and the dragging off to the side thing is an important thing to know if you plan to work with moving averages the red line itself is the same in both versions compare the 7 year causal to the 7 year zero phase or the 5 year causal to the 5 year zero phase for example the red lines on the two graphs are identical only the location of that line against the background graph is different posted by the arthurian at 4 00 am 1 comments labels hover craft moving average friday november 18 2011 money and income 2 a fallacy of composition income is money income is circulating money that passes into your hands that s why people often say money when they mean income and it s why some people when you ask them where money comes from say money comes from work hey i want more income just like everybody else and yes when i say i want more income i sometimes use the words i want more money because income is money boosting income could improve my personal economic situation and yours but if we boost our incomes by boosting each other s debt we have gained nothing boost income by boosting money instead of debt and everyone will be better off insist at this point that money is debt and you will see nothing boosting someone s income is a microeconomic fix boosting everyone s income is still a microeconomic fix the sum of the parts the economic problem is a macro problem excessive accumulation of debt boosting income carelessly does not fix the problem a fallacy of composition it is possible to assert that no individual owes more debt than he can afford in 2006 this was still a popular view and yet find that in the economy as a whole the level of debt has become unsupportable what is true for the individual or even for every individual may not be true for the whole before the crisis people didn t think they had too much debt maybe some did but debt kept growing so the general consensus must have been that we didn t have too much debt and everybody thought they could handle it yet we had the crisis some people say that everybody was wrong that all the microeconomic evaluations were wrong banks made bad decisions i think that s a weak argument i say the macroeconomic evaluation was never made policymakers made bad decisions the macroeconomic evaluation compares debt to the quantity of circulating money out of which debt must be repaid and which is reduced by debt repayment the macroeconomic evaluation looks like my debt per dollar graph what is the source of the money that becomes income the government sure but that s not where i get money i get money as income or as a loan people in general get money as income or as a loan and that is exactly my point sometimes we borrow the money we spend and sometimes we earn it i m saying we need to borrow less and have more unborrowed money that we can earn and spend so really i m saying we need more income see but i m also saying how it must be done others seems not to care where the money comes from the money that becomes income i think it makes all the difference if the money comes from increased debt then the economy as a whole does not benefit from that increased income neither the debt to income ratio nor the debt per dollar ratio is reduced but if the money comes not from increased debt then the extra income does benefit the economy both ratios are reduced and if it matters and it matters more than anything the decline in the quantity of circulating money was the cause of the economic problem and the decline of income was a result posted by the arthurian at 4 00 am 5 comments thursday november 17 2011 sure the extremes are different but the paradox of thrift is sometimes portrayed as a test of the extremes when one person saves versus when everyone saves see for example wikipedia in keynesian macroeconomics the paradox of thrift theory illustrates this fallacy increasing saving or thrift is obviously good for an individual since it provides for retirement or a rainy day but if everyone saves more keynesian economists argue that it may cause a recession by reducing consumer demand see also tom hickey if one person saves instead of spending it is thrift but if everyone saves instead of spending aggregate demand craters and recession ensues see also soojae moon s homework when one person saves that person s wealth is increased meaning that he or she can consume more in the future but when everyone saves everyone s income falls meaning that everyone must consume less today see also krugman in macroeconomics when one person saves that person s wealth is increased meaning that he or she can consume more in the future but when everyone saves everyone s income falls meaning that everyone must consume less today see also krugman in essentials of economics when one person saves that person s wealth is increased meaning that he or she can consume more in the future but when everyone saves everyone s income falls meaning that everyone must consume less today for a lot more of this see google the paradox of thrift is often expressed as when one person saves as against when everyone saves this is an example of testing at the logical extremes considering extreme cases is a useful technique with the paradox of thrift it shows different outcomes at the different extremes but it only shows the outcomes at the periphery it misses the central conclusion in the case of the paradox of thrift it shows different outcomes for one person and everyone it looks away from the fact that there must be a turning point somewhere between those extremes considering the effect of increased saving for only one person and everyone is a simplification there is a vast distance between one person and everyone surely it is not a problem if two people save what if there is one person not saving perhaps 17 is the magic number there is no magic number let me restate the paradox of thrift on a sliding scale of how much is saved there is a point beyond which increased saving reduces income which reduces saving beyond that point saving more becomes self defeating for everyone because it undermines economic growth as tyler durden acknowledged the outcome is different on the low side of the turning point than it is on the high side really the paradox of thrift states that there is a tipping point at which there is a change in outcome even though there is no change in behavior we save a little more and our wealth increases we save a little more and our wealth increases we save a little more and our wealth increases and then suddenly we save a little more and our wealth declines and for the record in the case of extreme income disparity it may be possible to have only one person saving who saves so much that it creates the effect that is said to result when everyone saves some people reject the paradox of thrift okay for them lets consider instead the paradox of taxes on a sliding scale of tax rates there is a point beyond which increased rates reduce tax revenues raising tax rates then becomes self defeating the paradox of taxes may be familiar to you as the laffer curve the laffer curve says that there is a tipping point at which there is a change in outcome even though there is no change in behavior tax rates are raised and revenues increase tax rates are raised and revenues increase then suddenly tax rates are raised and revenues fall the laffer limit has been reached come to think of it the paradox of thrift works on a laffer curve too posted by the arthurian at 4 00 am 8 comments wednesday november 16 2011 the long term growth of savings what is not said is that the long term growth of savings is central to the process by which we arrive at those abnormal times 15 november 2011 i got numbers for m1 and m2 money from the historical statistics bicentennial edition and from fred the hs numbers cover the years 1915 to 1970 the fred numbers cover 1959 2010 some overlap annual numbers m1 is circulating money m2 is circulating money plus money in savings m2 m1 is money in savings i did a graph of m2 m1 relative to gdp graph 1 big discrepancy between the old numbers and the new i didn t look for a reason no matter the reason that discrepancy is disturbing but i figure there may be different standards of measurement for the two number sets but there must be internal consistency within each set i put the numbers on two different graphs the early years graph 2 accumulated savings bottomed out in 1918 rela...
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