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banks under the gold standard no central authority had control over the quantity of money fdr s devaluation of the dollar to 32 ounce was an attempt at centralized control but it came late it worked only temporarily and fdr has still not been forgiven for doing it today the central bank has control over the quantity of money but the solution as with fdr is always to inflate the problem now as then is that the quantity of money be it gold or central bank issue becomes insufficient to support the quantity of private bank credit because of the growth of private bank credit given the option to inflate we inflate when private issues overwhelm central bank money the economy is hindered and the central bank responds by inflating the quantity of money to the extent that it outpaces the growth of private credit issue inflation of the base money can reduce the hindrance but the result is price inflation that is what happened during the 1960s and 70s then in the 1980s a new policy was established which controlled prices by undermining demand while still celebrating finance but it is not wise to mess with the forces of supply and demand and interest rates over the next thirty years worked their way down to zero whence they could fall no more and now the only solution our central banks can see to correct the imbalance between central bank money and private bank credit is to issue more central bank money thus quantitative easing both the problem and the solution today are just as they have always been the growth of private credit use and private debt the federal reserve will ultimately realize that increasing base money does nothing to restore economic vigor but only increases inflation and the threat of inflation at that point they will stop wikipedia a commercial bank that maintains a reserve account with the federal reserve can obtain notes from the federal reserve bank in its district whenever it wishes eventually the fed will refuse to issue greenbacks in exchange for account entry dollars eventually they will fail to honor their obligation to convert reserves into currency on demand eventually they will have no choice at that point the cowboy will be proved wrong and the innocent proved right but by then it will not matter it will be too late posted by the arthurian at 4 00 am 3 comments monday april 16 2012 if you do not look you can not see at wikipedia the u s public debt is the debt of the federal government as opposed to state and local governments it includes both debt held by the public which is included in fred s tcmdo as fgtcmdodns and intragovernment debt which is not part of tcmdo but is included in fygfd and also gfdebtn gfdebtn shows quarterly data but only goes back as far as 1966 fygfd only shows annual data but goes back to 1939 at first i didn t notice the late start of gfdebtn and used that data to produce this graph comparing public debt to other non public debt graph 1 the public debt as a percent of the rest of debt since 1966 wow it s all over the place the total public debt converted to billions relative to all the other debt in our economy and expressed as a percent but this is not the first time i ve looked at these graphs and the picture shown in graph 1 was not the picture i was expecting that s when i looked closer and noticed that the numbers don t start until 1966 btw 1966 is the year i graduated high school and i can still remember that far back heck i remember thinking the 66 pontiac gto was a dream car the price of gasoline back then was i don t know maybe 32 cents a gallon those days are gone pontiac is gone now too interesting thing about graph 1 despite 4 5 years of private sector deleveraging and despite 4 5 years of earth shattering federal deficits the level of public debt today the most recent level shown is no higher than it was in the mid 1990s just before the macroeconomic miracle and it is lower today than it was in 1966 public debt relative to all the other debt in our economy but 1966 has us already into the so called great inflation and approaching the end of the so called golden age graph 1 shows mostly troubled times for our economy so i did the graph over this time using fygfd to see as many years as possible graph 2 the public debt as a percent of the rest of debt this graph shows the same relation as graph 1 it just shows more years but you can see that the high point around 2010 appears on both graphs you can see that the high point of the mid 1990s appears on both graphs and you can see that the high point of 1966 on graph 1 shows up on graph 2 as a point higher than everything else that comes afterwards what graph 2 shows which graph 1 does not is that the decline from the 1966 high is really a decline from the much higher level in 1950 or before so you have to go back to graph 1 and re imagine it to see the blue line falling from way high up falling and falling to its 1966 level and continuing to fall then as the graph shows until 1974 when it takes its first significant bounce if you only look at the graph for 1966 and after a lot of important info is left out the public debt declined until 1974 when it reached a low of 25 of other debt if we take graph 2 and flip it over and look at other debt relative to the public debt we will see other debt rising until 1974 when it reaches four times the level of the public debt graph 3 the rest of the debt as a multiple of the public debt debt other than the public debt increased from approximately equal to the public debt in 1950 to four times the public debt in 1974 since that time it has been variable at a high level that s when things went bad 1974 because of the massive accumulation of debt other than the public debt that was the end of the golden age and the midst of the great inflation since that time the economy s performance has been variable at a low level a lot of people say we must reduce the public debt just about everybody else says yeah but to do that we must first increase the public debt i say hey why don t we just reduce other debt through some kind of massive debt forgiveness a post at economic logic titled increasing public debt is a consequence of financial liberalization and inequality opens with this premise the current debt crisis is the culmination of a long process of public debt accumulation over the last three decades in developed economies i challenge the premise the current debt crisis is the culmination of a long process of private and other non public debt accumulation until 1974 when the economy broke under the burden of that debt since that time both public and other debt have grown more rapidly but this growth has not solved the debt problem related post how the scientist thinks posted by the arthurian at 4 00 am 0 comments sunday april 15 2012 ouroboros and irony to solve a problem in computer programming you break the problem down into smaller parts and solve each part separately that technique works very well to solve the problem of debt it seems to me many people like to break the problem down into small parts and then say look there is no big debt problem that technique doesn t work i m pretty confident that finance grew because productive sector profits were declining making finance relatively more attractive and i am fairly confident that financial costs are the primary contributor to declining productive sector profits ouroboros it becomes necessary to reduce the size of the financial sector so that the productive sector can grow irony but i distrust the notion of putting limits on finance sht runs downhill and soon those limits will be on me the us congress is not wiser than the roman senate nor less self interested if we the nonfinancial sector use half as much credit the financial sector will shrink the easy way to use half as much credit without hindering growth is to pay off old debt continue with the new uses of credit that become spending and create growth but accelerate the repayment of debt to reduce the total demand for credit i keep coming back to the question that if we just need credit for growth then why do we need credit use at 350 of gdp and i keep coming back to the observation that there is nothing natural about the size of the debt accumulation we have achieved it must be a result of policy yes i want to achieve the same thing that can presumably be done by imposing limits on me but my plan of attack is different and my thinking goes all the way back to the rudimentary assumptions that underlie policy i want more fiat money in the economy to make up for the reduction of credit use that s the whole plan but the quantity of fiat money has been reduced see m1 ngdp while our use of the more expensive credit money has increased the quantity of fiat money has been reduced because of our assumption that printing money causes inflation meanwhile our use of credit has increased leading to the bizarre accumulation of debt because of our assumption that credit use is good for growth see irony posted by the arthurian at 4 00 am 13 comments saturday april 14 2012 velocity from asymptosis there s about 10 trillion in mzm right now and gdp annual spending is at about 14 trillion the money stock turns over about 1 4 times per year and this important footnote to the 14 trillion note that this does not include spending on intermediate goods those that are turned into final goods within the accounting period or used stuff adding these into total spending when calculating velocity might yield interesting insights see nick rowe macroeconomics and the celestial emporium of benevolent knowledge gdp counts only final spending basing the velocity calculation on gdp is like figuring your average speed during a cross country trip based on the time and distance of the last mile of the trip if you want a realistic measurement of how often the average dollar is spent you must consider all the spending that occurs in a given period of time i have an acronym for that tea or total economic activity there is no such measurement in the statistics quite frequently in newspaper articles you can find gdp described as total economic activity that is an error posted by the arthurian at 4 00 am 1 comments friday april 13 2012 land labor capital and finance a post by gunnar tomasson of gang8 on the keen krugman dispute most of it escapes me but not all back to samuelson on another occasion in the late 1970s i wrote to him and stated that it was logically impossible to integrate money into a unified general equilibrium framework because no real factors of production were involved in the supply of modern electronic money in other words something which cost nothing to produce could not in principle be placed in an equilibrium setting with something whose production required inputs of real factors of production labor and natural resources forget the context or go read it whatever i need to focus on a detail tomasson says no real factors of production are involved in the supply of modern money and money costs nothing to produce i think he refers to the central bank s ability to create money by pushing a button on a computer by contrast credit or bank money does involve real factors of production those are the factors thomas philippon has in mind when he says the sum of all profits and wages paid to financial intermediaries represents the cost of financial intermediation but wages are wages and profits are profits apart from those payments to labor and capital there is the payment to finance interest and you know if you have a few dollars in savings and earn just a few pennies interest on that money to that extent you are part of finance if we say excessive finance is the problem then you are not part of the problem for your few pennies are not excessive certainly not to worry about that in twon book 1 chapter vi adam smith wrote when those three different sorts of revenue belong to different persons they are readily distinguished but when they belong to the same they are sometimes confounded with one another at least in the common language i think of myself as a workingman my neighbor thinks himself a capitalist both of us to some extent receive interest income the sources of revenue are often confused smith didn t include finance among his sorts of revenue but i do interest is not the same as wages not the same as profit and not the same as rent therefore there must be a separate category into which interest costs resolve themselves at the start of capitalism smith s time finance played a very small role at the end of capitalism our time it plays a very large role the cost smith overlooked was negligible today we can no longer afford to overlook the cost of finance posted by the arthurian at 4 00 am 0 comments thursday april 12 2012 holding that thought just came across this old comment from clonal art you said the burden of debt declines when there is inflation that is true only if i do not take on more debt with time and my income keeps up with inflation absolutely true and extremely important i have come to rely on this thought more and more in the months since i read it posted by the arthurian at 5 45 am 5 comments private debt 2012 15 870b 693b 730b from the conversable economist there are two kinds of news stories about student loans one group of stories emphasize the huge total of student loans calculations from the new york fed for the end of 2011 find the outstanding student loan balance now stands at about 870 billion surpassing the total credit card balance 693 billion and the total auto loan balance 730 billion the student debt loan clock which for illustrative purposes continually updates the total student loan debt outstanding is on the verge of crossing 1 trillion the second group of stories emphasize the problems of particular students who have large loans and great difficulties in paying them back the outstanding student loan balance now stands at about 870 billion surpassing the total credit card balance 693 billion and the total auto loan balance 730 billion some things cannot be said often enough excessive private debt is the problem timothy taylor is the conversable economist and the managing editor of the journal of economic perspectives based at macalester college in st paul minnesota which can be read free on line courtesy of the american economic association in the linked post he writes sometimes student loans pay off sometimes not what facts and concerns should the average student thinking about such loans be keeping in mind christopher avery and sarah turner tackle this question in student loans do college students borrow too much or not enough in the winter 2012 issue of my own journal of economic perspectives taylor considers some of the issues raised in the article most students are borrowing amounts that are within standard loan guidelines my own guess taylor writes is that part of what is happening here is that larger loan burdens are being offset by lower interest rates so t...
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