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nue to disregard the economics of milton friedman the excerpt is a bit long but i wanted to provide context for the bit of it that interests me lars christensen misinterprets cochrane and then says cochrane is not consistent cochrane compares the price level to the meter and the kilo and says it is wrong to devalue any of them cochrane does not say 2 inflation is okay cochrane wants prices as stable as the meter and the kilo myself i m impressed by cochrane s clarity but christensen doesn t see it strikes me as convenient obtuseness on christensen s part christensen wants easier money if i have it right there is a gap between the euro zone deflator and the 2 trend line and christensen wants to fill that gap with money that s a simplistic solution cochrane doesn t want the deflator to hug the 2 line he wants it horizontal i respect that cochrane has clear preferences in myths and facts about the gold standard he said the fed currently interprets price stability to mean 2 inflation forever a cpi standard could enforce 2 inflation but why not establish a price level target instead the cpi could be the same 30 years from now as it is today and long term contracts could carry no inflation risk the cpi could be the same 30 years from now as it is today cochrane says you know what that is it s a horizontal deflator it s not a 2 line christensen misinterprets yes if we don t fill the graph with money like christensen wants if we stabilize prices at zero inflation then we have to do something else we have to do something other than printing more money to fix the economy that s what this blog is about posted by the arthurian at 4 00 am 0 comments thursday august 9 2012 anthony migchels it matters what we pay for the money anthony migchels at real currencies it matters not what we use as money it matters not what backs the money it matters what we pay for the money exactly i think maybe at some point on the long wave or at some point on the cycle of civilization it does matter what backs the money or maybe even just when the economy is running really well it matters what backs the money but now now the trouble is the excessive reliance on credit and it is a problem because of the cost of it cost and repayment so what we pay for the money is most definitely the key thing today today and during the entire great financialization posted by the arthurian at 4 00 am 0 comments wednesday august 8 2012 the libertarian dilemma again from cochrane s january post i m almost as pessimistic as dan sure raising tax rates can generate more revenue for a few years but most economic analyses don t look at the long run growth effects of tax distortions the full disincentive effects don t show up for years if taxes just lower growth a few fractions of a percent that soon compounds to drastic reductions in income and tax revenue raising tax rates lowers growth over the long term sounds right right well here s u s economic growth since the end of world war ii graph 1 a 21 year moving compound annual growth rate growth has been consistently downhill so we can assume this has something to do with tax rates going up graph 2 top and bottom individual income tax rates source national taxpayers union hard to say posted by the arthurian at 4 00 am 2 comments tuesday august 7 2012 cochrane the vat a libertarian dilemma from january an efficient tax code can also raise a lot more revenue dan opposes the vat and similar consumption taxes on that grounds yes it looks good to start but politicians will soon raise the rate to the sky and spend the results it s a strking dilemma should we keep an atrocious tax system to limit the size of government is there no way to get an efficient tax system and a limited government catches the eye no no my eye is on the prior paragraphs the opening of cochrane s post dan mitchell wrote an interesting op ed in the wall street journal highlighting a great libertarian dilemma is a consumption tax vat or similar a good thing every bit of economic analysis says yes economists hate distortions taxes that lead to bad economic behavior our tax system is full of them broaden the base lower the rate tax consumption not savings dramatically simplify the code and you can get the same revenue with much less economic damage dan and cochrane both apparently think it would be good to broaden the base lower the rate tax consumption not savings dramatically simplify the tax code tax consumption not savings no read more posted by the arthurian at 4 00 am 2 comments monday august 6 2012 on a log scale the quantity of base money and the cpi run fairly parallel from wwii to 1982 then veer apart graph 1 prices and base money you could have just now landed from outer space and you could still see that there was a significant change a significant policy change probably around 1982 as staniford said it s hard to read changes in small growth rates on a log graph still i think i see a gradual separation of the red and blue lines before 1982 in particular the gap in the 1970s is twice as wide as in the 1950s and there is even more of a widening after 2007 if you could pick up the blue line intact and move it until its little 1921 peak sat squarely atop the 1921 peak of the red line you would see a similar gradual but accelerating separation of the lines from 1921 to 1945 now base money and the rate of inflation graph 2 base money and the inflation rate there is pretty much a straight line increase from 1970 to 1990 on the blue line if not longer and right in the middle of that invariant increase inflation dropped away it s almost like before 1982 the blue line served as a bottom for the red line and then after 1982 not this one is mostly just all visual effects and mathematical coincidences i think posted by the arthurian at 4 00 am 0 comments sunday august 5 2012 anatole kaletsky how about quantitative easing for the people excellent at reuters kaletsky writes giving away free money may sound too good to be true or wildly irresponsible but it is exactly what the fed and the boe have been doing for bond traders and bankers since 2009 directing qe to the general public would not only be much fairer but also more effective suppose the new money created since 2009 instead of propping up bond prices had simply been added to the bank accounts of all u s and british households in the u s 2 trillion of qe could have financed a cash windfall of 6 500 for every man woman and child or 26 000 for a family of four britain s qe of 375 billion is worth 6 000 per head or 24 000 per family even if only half the new money created were distributed in this way these sums would be easily large enough to transform economic conditions whether the people receiving these windfalls decided to spend them on extra consumption or save them and reduce debts distributing money to the general public was the one response to intractable recessions and liquidity traps that united milton friedman and john maynard keynes their main difference was that friedman proposed dropping dollar bills out of helicopters while keynes suggested burying pound notes in chests that unemployed workers could dig up unfortunately modern economics based as it is on simplistic and misleading assumptions about self stabilizing markets has forgotten the insights of these great students of deep economic slumps in today s world of electronic money we would not even need friedman s helicopters or keynes s ditchdiggers just a few lines of computer code plus some imagination and courage from our central banks or suppose that rather than simply giving money away to people the money was used to pay down debt for those same people this solves the debt deflation problem it helps people do the main thing we want to do deleverage it increases demand by freeing up income that had been used for paying down debt and it solves the problem of private sector debt overhang in other words it is the way to restore vigorous economic growth posted by the arthurian at 4 00 am 2 comments saturday august 4 2012 that fits the pattern the great depression which had been going on in england for about ten years by the time it spread to the rest of the world in 1929 from page 36 of the congruence of weber and keynes pdf 28pp by norbert f wiley 1983 i didn t know that set aside the thought that it spread from england to the rest of the world for milton friedman argued that the great depression started in the u s and that you could know this by looking at international gold flows we are still left with the news that things in england were not good during the roaring 20s that s interesting i think because things were not good for the american farmer in the 1920s either the 20s were roaring because they were good years for finance and little else that fits the pattern posted by the arthurian at 4 00 am 2 comments friday august 3 2012 but why jw why the past 25 years i think of finance as a competitor of the federal reserve when it comes to providing funds to the economy it follows that the growth of finance the relative size of finance and the deregulation of finance play a role in the outcome of that competition at the slack wire jw mason writes textbook macro models including the is lm that krugman is so fond of feature a single interest rate set by the federal reserve the actual existence of many different interest rates in real economies is hand waved away with risk premia market rates are just equal to the interest rate plus a premium for the expected probability of default of that particular borrower since the risk premia depend on real factors they should be reasonably stable or at least independent of monetary policy so when the fed funds rate goes up or down the whole rate structure should go up and down with it in which case speaking of the interest rate as set by the central bank is a reasonable short hand how s that hold up in practice let s see the figure above shows the federal funds rate and various market rates over the past 25 years notice how every time the fed changes its policy rate the heavy black line the market rates move right along with it yeah not so much in the two years after june 2007 the fed lowered its rate by a full five points in this same period the rate on aaa bonds fell by less 0 2 points and rates for baa and state and local bonds actually rose i tried to duplicate mason s graph but i had to guess from a large selection of interest rates here s what i came up with it goes back to the same start date graph 2 collected interest rates since 1987 eh it s a pretty good match note that i am using tb3ms my proxy fedfunds series which goes back 20 years beyond fedfunds fedfunds is still on the graph pretty well hidden by the purple line here s a look at the numbers as far back as they go graph 3 collected interest rates click for fred source page what i want to do is 1 drop fedfunds from the data and use the proxy data series 2 set the proxy series apart and average all the rest together 3 compare the fedfunds proxy to the average of the other rates jw mason says market rates do not move right along with the rate set by the federal reserve that is true if we go by his graph but his graph only goes back to 1987 and our economy was already well financialized by then i think if we look farther back to a time when we were less financialized the graph may show that markets did move with the fed rate anyway that s my guess here s what i did 1 download the data in the graph from fred 2 work on the data using open office calc 3 eliminate the early years where there is no fedfunds proxy for comparison 4 reorganize the fred source columns move data series with later start dates farther to the right this is for my convenience in selecting cell ranges when figuring averages in excel this is a lot of data all monthly it is 12 times what i m comfortable working with note the start dates of the various interest rates differ the corporate aaa and baa begin well before 1934 when the fedfunds proxy begins mslb20 begins in 1953q1 gs10 begins 1953q4 and mortg begins in 1971q4 the number of interest rates in the average increases as each new series begins hm i used open office calc to get the size of the graph then i went into paint and set the size of a new blank picture to the same size then i copied and pasted the vertical bar thickness changed several of the vertical bars from calc did not show up in paint and the colors changed graph 4 wow that s ugly used the windows snipping tool on the calc graph and got this version graph 5 the fedfunds rate versus an average of other rates well that s better i don t know if my expectation holds up it doesn t really look as if market rates moved with the fed rate even before the great financialization actually it looks like market rates are sticky down the other rates average red is definitely higher than the fedfunds proxy in the two depression times when the fedfunds rate is near zero and it looks to me that the red and blue are much closer on the up swing 1946 1982 than on the downswing since 1982 that could just be because other rates are not immediately responsive to changes in the fedfunds rate long term obviously they rise and fall together but maybe the two are closer on the rise than on the fall because financialization was lower on the rise than at other times you can gage the level of financialization on thomas philippon s graph and mine both presented here the striking fall in financialization shown on those graphs reaches a bottom in the mid 1940s just when the up swing begins on graph 5 i don t have the math skills to evaluate the result any better than that but i can say that this evaluation of interest rates does not contradict my view that private finance competes with the federal reserve and that when finance grows large it circumvents and weakens policy posted by the arthurian at 4 00 am 9 comments thursday august 2 2012 but you know what just look at m2 divided by m1 instead graph 1 m2 divided by m1 click for fred source page the ratio starts out low and rising that was during the golden age when the golden age is over the ratio runs flat until 1990 after 1990 the ratio falls sharply for about three years we ve seen this decline before in the debt per dollar graph mid 90s the ratio takes off like a rocket that was during the macroeconomic miracle after the macroeconomic miracle the ratio runs flat hiccups and breaks when the ratio is low or relatively low the economy grows well but when the ratio is high or relatively high the economy grows poorly and gives us trouble the ratio is an indicator of financialization a lower ratio means less financialization or again the ratio is an indicator of financial slack higher is tighter or again the ratio is a gauge of the factor cost of money assuming that money in savings is put to use a higher the ratio indicates a greater reliance on credit and a greater factor cost of money remember the factor cost of money depends not only o...
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