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the blue line is the accurate one in other words i m assuming that federal outlays interest includes outlays for interest paid to the social security administration and the other government agencies holding parts of the federal debt the government don t get to not pay the interest just because of who holds the debt i think the lower line on graph 2 the blue line shows the same peak as the vertical bar graph i showed a few days back a peak around 7½ in the early 1980s graph 3 the proxy average interest rate pair so the interest rate i have figured is a lowball estimate also federal debt has always been considered less risky than anybody else s debt so the federal government has typically paid lower interest rates than anybody else so again when i use that rate to estimate the total interest cost of the private sector that number is a lowball estimate posted by the arthurian at 4 00 am 0 comments labels fcm friday february 24 2012 friedman did it with strawberries the fallacy of composition composition is the notion that what s good for the goose is good for the whole damn flock the fallacy is that it s not always true sometimes what applies to the individual does not apply to society as a whole from the epilogue of money mischief by milton friedman the contrast between the way things appear to the individual and the way they are to the community if you go to the market to buy some strawberries you will be able to buy as many as you wish at the posted price subject only to the dealer s stock to you the price is fixed the quantity variable but suppose everyone suddenly got a yen for strawberries for the community at large the total amount of strawberries available at a given time is a fixed amount a sudden increase in the quantity demanded at the initial price could be met only by a rise in price sufficient to reduce the quantity demanded to the amount available for the community at large the quantity is fixed the price variable just the opposite of what is true for the individual posted by the arthurian at 4 00 am 2 comments thursday february 23 2012 private debt 2012 8 smoke n mirror smokin gun based on total credit market debt owed tcmdo from fred the federal government s share of debt in red and everybody else s share in blue graph 1 the federal debt is a wisp of smoke the blue line is our share private sector mostly the red line is the federal share the federal government s share really can t get much lower oh it could drop from 20 of the total back down to 10 but that s where it was when our recent troubles started so maybe that s not such a good idea as a matter of fact the federal debt was at its lowest on this graph for pretty much the whole first decade of the 21st century and that was the time of the weakest economic boom we ever had oh to be sure the federal government had a lot of debt at the time but not compared to the rest of us some things cannot be said often enough excessive private debt is the problem posted by the arthurian at 4 00 am 1 comments wednesday february 22 2012 microbes from the money illusion back in late 2008 and early 2009 most people focused on the debt crisis as being the problem but debt is a problem only to the extent that it exceeds one s ability to repay the loans which depends on one s income microbes i say i say again micro bs one s income is micro the relation of one s debt to one s income is micro the sum of all debts relative to the sum of all incomes is still micro ours is a macro problem the fly in sumner s ointment is the pretense that income can exist without debt he says debt is only a problem if it is too heavy for your income but he forgets that in our economy almost all income comes from somebody using debt we do not increase income without increasing debt at the macro level this is the problem income can exist without debt of course but only if we change the way we do things we have to increase the quantity of money relative to output and at the same time decrease the amount of credit generated from every newly printed dollar but as long as people continue to think money and credit are the same that will never happen sumner does not call for the necessary change he says a few of us market monetarists argued that you also needed to look at the denominator of the debt income ratio not just the numerator by looking at the denominator of the debt income ratio he means look at income well yeah income is too low income is gdp and gdp is too low so income is too low if you don t get a headache because this is such basic stuff well you should gdp growth has been too slow since the mid 1970s what s that going on forty years now gdp growth has been too slow for 40 years for the most part getting worse all the while the money illusionist waves his hand and pretends that the whole gdp problem never existed until late 2008 or something and with that magical analysis sumner declares that the problem is not excessive debt but insufficient income does it matter well yes excessive debt is the reason income has been lagging for forty years the solution that calls for more income is likely to be nothing but an inflationary solution that s because we re not getting growth if we don t get growth all we get from an expanding ngdp is more n and don t forget it s debt that hinders growth sumner ignores the numerator he ignores debt the hinderer of growth debt relative to income is high sumner says we can solve the problem by increasing income via inflation did that work say in the 1970s graph 1 debt to income blue and debt to cpi red not really here s a close up through 1980 graph 2 debt to income and debt to cpi up to 1980 maybe it did work for the latter half of the 1960s inflation pushed ngdp up and at the same time inflation reduced the burden of existing debt inflation increased sumner s denominator and decreased his numerator simultaneously and all it took was a 23 increase in prices in the five years between 1965 and 1970 meanwhile total debt increased 44 6 almost twice the rate that prices went up prices couldn t go up fast enough to keep up with the growth of debt after 1970 inflation got worse but sumner s debt to income ratio went up anyway as long as debt continues to increase inflation cannot solve the problem of excessive debt and debt hinders growth dwell on it posted by the arthurian at 4 00 am 2 comments labels sumner tuesday february 21 2012 estimating the factor cost of money 2 picking up where i left off yesterday so i worked out some average interest rate numbers uploaded the file to google docs and cleaned it up a bit i m calling this interest rate the proxy average interest rate or pair graph 1 pair the proxy average interest rate now i want to look at total debt and use my average interest rate to figure a total interest cost for each year then i m gonna want to compare that number the factor cost of money compare it to wages and profits see how things changed over the years and see how those changes fit in with good times and with hard times got annual tcmdo debt numbers from fred added them to my docs file and figured the interest owed each year at the pair rate i just multiplied tcmdo debt times the pair rate this series i m calling the factor cost of money or fcm graph 2 fcm the factor cost of money next i got annual gdp numbers from fred and added them to the file and i took a quick look at the factor cost of money as a percent of gdp graph 3 fcm as a share of total income then because it looked interesting i compared fcm per gdp to the fedfunds rate graph 4 fcm as a share of income and the fedfunds rate you can see a similarity between the two data series sure because the interest rate is one of the determinants of the factor cost of money but there is also a difference between the two series and this is due to the other determinant the level of total debt which continued increasing from the early 1980s to the late 2000s while interest rates were falling so the fcm has been more than the fedfunds rate ever since interest rates started falling in the early 1980s as you can see recently the fedfunds rate has been down almost to zero but the factor cost of money has not dropped below 5 because there is so much debt public and private and 5 is well above what the factor cost of money was at the start of the graph when our economy was having its golden age you might object saying yes yes it s true the factor cost of money started out well below 5 but it reached 5 before 1970 and the golden age continued on to 1973 right it was the increase in the factor cost of money that killed off the golden age in the early years the factor cost of money was less that five percent of gdp and was growing only slowly in other words the drain of income from the productive sector to the financial sector was at a minimum never again has that cost been so low and never again have we had a golden age posted by the arthurian at 4 00 am 2 comments labels fcm monday february 20 2012 estimating the factor cost of money 1 if you google interest cost or interest cost data or stuff like that it s pretty easy to find how to figure the cost of a loan and pretty easy to find info on everybody s favorite fall guy the federal government but it is hard to find info on interest costs in the private sector so i had a thought why don t i use the total interest cost on government debt to figure an average interest rate for government debt each year and then use that number as a proxy for the average interest rate of private sector debt i don t know how totally valid this approach might be but it is representative it will give me something to look at assuming i can find the relevant data for the federal government got it the omb site has a historical tables link with a good handful of excel files available for download table 6 1 shows the composition of federal outlays for 1940 2016 including net interest table 7 1 shows federal debt at the end of the year for the same period i took the ratio to get an average interest rate for the whole federal debt it s got the same 1982 peak that you might see in the federal funds rate no surprise there i guess see that odd short bar in the middle around 1977 that s an accounting adjustment labeled tq third quarter in the file it s in both tables if i use these numbers as a proxy for the average private sector interest rate i m just gonna delete the tq line posted by the arthurian at 4 00 am 0 comments labels fcm sunday february 19 2012 everyday you probably won t be able to tell from my post here but i actually liked josh hendrickson s post and also the one marcus nunes links in his comment there so you know from nominal income and the great moderation at the everyday economist the period from 1984 through 2007 was one that exhibited a marked decline in macroeconomic volatility as such it is commonly referred to as the great moderation this period has potentially important implications for policy if for example the reduction in volatility was the result of smaller exogenous shocks to the economy then we can largely view the period as one of good luck however if the reduction in volatility can be linked to a change in policy then this period can potentially provide guidance as to how policy should be conducted in the future not too much macroeconomic volatility in the dark age either sometimes i don t understand where people are coming from it s not just this guy josh hendrickson who wrote the post it s the whole notion that moderation is great no it s bigger than that or smaller probably first there was the golden age the economists of the time had basically nothing to do with that but that didn t stop them from saying things like president lyndon baines johnson s budget director charles l schultze said we can t prevent every little wiggle in the economic cycle but we now can prevent a major slide reported in time magazine 31 dec 1965 later came the great moderation economists really had little to do with this either except possibly by accident as is suggested by josh hendrickson s ambivalence regarding luck versus policy as the source of the moderation but that didn t stop them from saying things like my thesis in this lecture is that macroeconomics in this original sense has succeeded its central problem of depression prevention has been solved for all practical purposes and has in fact been solved for many decades robert e lucas jr pdf january 10 2003 history is written by the victors and economic history is written by people claiming to be right reminds me of what i wrote in christina at 50 the paper presents the myopic and egotistical view that 50s policy was right because it is comparable to modern policy the authors write we show that policy in the 1950 s was actually quite sophisticated they do not say actually quite sophisticated by present standards but that is clearly what they mean they do not say the policy of the 1950s was surprisingly sophisticated which would have expressed surprise they say policy was actually quite sophisticated the words actually quite seem to suggest arrogance rather than surprise as if coming from a position of modern superiority see i m doing it too posted by the arthurian at 4 00 am 2 comments my wife bakes for the dogs i have nothing else to say about that posted by the arthurian at 3 18 am 4 comments saturday february 18 2012 jw mason 4 see it s micro my continuing saga of reading jw mason s fisher dynamics in household debt pdf 31 pages from page 6 discussions of leverage typically focus on the saving decisions of individual units posted by the arthurian at 12 00 pm 0 comments jw mason 3 because debt is a stock my continuing saga of reading jw mason s fisher dynamics in household debt pdf 31 pages page 5 because debt is a stock its adjustment must take place over time an economic unit targeting a substantially lower level of leverage will typically seek to reduce its consumption relative to its income over a number of periods producing an ongoing drag on aggregate demand i was gonna let that stand by itself because it is beautiful but i kept reading and i had a thought this is the next sentence after the one quoted above unlike other factors depressing output whose effects should not be expected to persist once the initial cause is removed a crisis that results in many units finding themselves with leverage levels that are seen to be too high may lead to a long period of depressed output even after the initial crisis is resolved well sure debt is not just a stock debt is an accumulation over time that s what a stock is i guess it took sixty years from the start of the golden age in 1947 to the start of the crisis in 2007 to accumulate enough debt that we couldn t deal with it so it should come as no surprise that we cannot solve the debt problem in the blink of an eye the solution is to reduce by half or more the debt it took a lifetime to accumulate posted by the arthurian at 8 00 am 6 comments jw mason 2 what contex...
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