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money cannot be a relationship the money is a thing wow that was easier than i thought too easy maybe look the act of lending transforms available credit into credit in use in exchange for a promise to repay with interest the transformation of available credit into credit in use is offset by the promise to repay and the repayment will transform the credit again making it again available the money is a by product of these arrangements once the borrower spends the money the money is no longer connected in any way to the borrower yet the borrower s obligation to repay remains and the credit remains in use money is a thing not a relationship posted by the arthurian at 4 00 am 6 comments monday april 23 2012 notes on labor the pimco equity focus post newtonian profits offers analysis of economic conditions designed it seems with investors in mind not that there s anything wrong with that as long as the analysis is good assessing the vulnerability of profit margins the article offers one item in particular that grabs my attention 1 increase in cost of labor i want to split that item into two parts and consider both of them here is the opening labor costs are about 70 of the total cost of production for corporations according to federal reserve research there is no question that if competition for a finite labor pool increased this could put immediate pressure on corporate margins seventy percent yeah but it depends how you do the counting labor costs are nowhere near 70 of total corporate expenditure there is a lot of double counting that has to be not done in order to reach the 70 number but it isn t just counting it is spending that is not counted and spending is significant spending requires a medium of exchange spending creates demand spending helps to create inflation even when it s the spending we don t want to double count here is the balance of the item however in the u s unemployment remains high stuck at 8 2 as of march 2012 with 14 5 of americans either out of work or looking for more work source bureau of labor statistics obviously individual industries and companies may experience wage inflation due to scarcity of workers with specialized skills but until unemployment falls closer to more normal levels corporate margins do not appear vulnerable from a spike in unit labor costs last week s disappointing jobs report highlights labor s slow recovery yeh it s funny there at the end they call the jobs report disappointing but that report is the evidence that suggests profits will remain high so how disappointing is that to pimco really anyway until unemployment falls closer to more normal levels corporate margins do not appear vulnerable from a spike in unit labor costs so if your plan is to solve the debt problem by creating some inflation how are you gonna get wages to go up along with prices it s the key question because if wages don t go up along with prices then rising prices will just make things worse it s not rising prices that make it easier for us to pay down debt it s rising incomes in related matters from yahoo finance inflation outpaces earnings threatens spending washington reuters consumer prices rose modestly in march amid signs a spike in gasoline costs was ebbing but inflation still outpaced workers earnings and threatened to undermine spending yeh but inflation will solve the debt problem right or so they say and this from bill conerly s businomics newsletter of april 2012 posted by the arthurian at 4 00 am 0 comments sunday april 22 2012 excess reserves in japan the dark blue line flat near the 50000 level with a step up in 2007 shows required reserves average outstanding the jiggy green line shows reserves outstanding at end of period the light blue line which tracks the jiggy green line shows reserves average outstanding the graph is from the bank of japan site i started data selection here makes you appreciate fred even more dunno how the excess shown here compares to the excess at the federal reserve but you can see that the excess evaporated quickly at one point probably why bernanke is not too worried about excess reserves posted by the arthurian at 4 00 am 0 comments saturday april 21 2012 joão marcus thanks for writing on the 20th i looked very briefly at ngdp targeting as presented by marcus nunes marcus gracefully responded and now i have much to chew on or choke on maybe i will try to understand and respond by 4am on the 21st good thing i don t sleep much marcus sir first i think you are very good with graphs i looked at your examples and was almost convinced by them even before i understood what you were saying but i find i must put you in the third person in your his first link change the tune marcus quotes christina romer the finding that monetary developments were crucial to the recovery implies that self correction played little role in the growth of real output between 1933 and 1942 and responds this shows she s a true believer in the power of monetary policy i like that there is more both more from romer and more reaction from marcus i m quoting the parts i like self correcting is not the best phrase for the occasion it implies that the economy might change in ways that correct problems and oh yes i m sure it does but the things we think of as problems are not the same as the things the economy treats as problems mostly the things we think of as problems are the economy s responses to things that are problems for it things like an imbalance in the money an excess of credit use relative to the quantity of money in circulation which leads to stagnation and to inflation and to high unemployment for example and to large federal deficits evaluating romer s article and reactions to it marcus writes phillips curve arguments don t need to be evoked inflation can rise or fall with unemployment what transpires depends on the kind of shocks that are hitting the economy at the particular time and most importantly whether mp is geared explicitly or implicitly to stabilize nominal spending so i want to say marcus relies on shock theory i don t think adam smith did and i don t think keynes did and i don t either i still rely on supply and demand an oil shock ought to boost oil prices and oil profits and lead to an expansion of oil supply if it doesn t and if it doesn t lead to energy diversification then there are probably other problems at root besides shocks but that s just me so when marcus gets more into shocks fretting over the kind of shocks that are hitting the economy i just hear an empty argument marcus drives his train of thought from the phillips curve to a focus on gearing monetary policy mp to stabilize nominal spending i wouldn t do that i would start with his opening thoughts phillips curve arguments don t need to be evoked inflation can rise or fall with unemployment i would make sure you know that the term phillips curve implies a trade off between inflation and unemployment and i would make sure you know that when we say inflation can rise or fall with unemployment we are contradicting the implication of the phillips curve and i would say yes marcus is right events sometimes contradict the hundred years or more of empirical evidence supporting the implications of the phillips curve and i would say the single most important question to be asked is why in the same post marcus writes but only one thing anchors expectations and that is fed credibility he sees expectations as the cause of inflation and credibility as the dampener i m sure there s a lot of support for such ideas arisen in the last 40 years i m not impressed the last 40 years has been all bad show me adam smith focusing on expectations and credibility show me keynes focusing on expectations and credibility yeah keynes wrote of animal spirits but he said of expectations that people generally expect existing conditions to continue as a basis for macroeconomic theory expectations is thin marcus recommends his figures 1 and 2 from the post both figures show more or less that the difference between ngdp and rgdp comes out as inflation figure 1 considers the great inflation figure 2 considers the great moderation marcus concludes if the fed keeps nominal spending growth stable around a trend path inflation will most likely remain low and stable and rgdp growth will evolve close to potential sounds like magic to me what i don t get is what will drive the increase in real growth what prevents the increased quantity of money from generating nothing but inflation the only explanation i see so far is that we should try to mimic what happened during the great moderation and we should expect that inflation and rgdp will respond as they did during the great moderation but what s behind the curtain if marcus is telling me i don t see it yet in his second link the crisis from an ad perspective marcus wants us to look at figures 11 and 12 i was very quick with marcus s first link perhaps he has a really good explanation there and i missed it because i was rushing too much so let me take a different tack with his second link it s a good one to take some time with marcus writes this one sort of lays down my views on ngdp lt ngdp lt is nominal gdp level targeting somewhere in one of the posts he links he points out that level targeting is better than rate targeting because it follows a trend and if you go off trend the trend continues to remind you of where you ought to be and then policymakers should push to get back to the trend dunno about that the bullard s earthquake view is that the trend of potential output has suddenly fallen and there is now a new and much lower trend seems to me bullard would totally disagree with marcus and marcus with bullard but anyway marcus writes figure 11 shows the behavior of ad nominal expenditure growth in the us over the last 50 years it is relatively straightforward to associate this behavior to the periods that became known as the great inflation and the great moderation in the 1960 s and 1970 s the focal variable was the unemployment rate during the kennedy johnson administrations ad shocks from mp and fiscal policy fp parted a positive bias to ad growth in the 1970 s characterized by negative supply shocks notably oil prices increases in ad to compensate for the negative effects of the shocks on unemployment and rgdp growth resulted in high and rising inflation shock theory again y know what let me jump back to one of marcus s comments on mine of the 20th he quotes me i think other factors are involved in the rise of inflation and the decline of gdp and he responds if you are thinking that the first and second oil shocks are among those other factors involved think again the oil rise was a consequence of the previous rise in inflation oh yeah i know marcus is saying that there were inflation troubles before the oil shocks of the 1970s but if we jump back to the whitebox excerpt above marcus seems to say that inflation was a result of the policy response to oil shocks is there some contradiction here one more point from marcus s second and that s it for tonight i ll leave out the figures and just quote the text as indicated in figure 3 in mid 2006 house prices began to fall from this moment the delinquency rate began to grow affecting the health of important financial institutions a few new century financial for example went broke already at the beginning of 2007 notable however is the fact that between 2006 and mid 2008 ad growth was kept relatively stable and close to the trend path therefore in spite of the crisis the adjustments in the economy were able to proceed in an orderly fashion nother words when aggregate demand growth is kept fairly stable as under ngdp targeting the economy can weather severe financial troubles that s interesting not sure it s safe to generalize from one example but it s interesting okay it s almost midnight and my eyes are starting to cross marcus linked to another post but maybe i ll look at that one separately i m out posted by the arthurian at 4 00 am 1 comments friday april 20 2012 gimmick of the week ngdp targeting the interesting marcus nunes quotes krugman and what this says is that price stability isn t an adequate guideline for monetary policy you can have stable prices and a persistently depressed economy then he juggles the meaning of price stability then he forces his conclusion if the fed has the power to provide a specific definition of price stability it can also establish an alternative nominal target that the fed would pursue in order to provide nominal stability which is the most it can accomplish anyway the pay off is that nominal stability will most likely translate into real stability of both real growth and employment just like during the great moderation probably the best such target would be an ngdp level target nominal stability will most likely translate into real stability says who nunes hey i think he s interesting but i don t think he s psychic ngdp targeting is a plan to assure that gdp increases at a constant rate by providing as much inflation as necessary to achieve that goal remember the krugman quote that nunes started with well if you can have stable prices and a persistently depressed economy then you can have inflating prices and a persistently depressed economy heck we ve had that now for as long as anyone can remember you have to have lived in the 1950s and 1960s to have experienced a good economy there is no guarantee that deliberately inflating gdp will translate into real growth there is no assurance other than marcus nunes prediction it looks to me like inflation started out low in the 1960s when real growth was high but during the great inflation of 1965 1980 real growth trended slightly downhill and inflation climbed a lot and then after 1982 when inflation started coming down real growth went up again graph 1 real gdp growth blue and the rate of inflation red 1960 1990 just how it looks to me for the record i do not think my graph here makes a particularly strong argument i think other factors are involved in the rise of inflation and the decline of gdp however a graph always makes a better argument than does unsupported prediction mine is weak there are other factors involved factors which contribute to both the decline of growth and the upward pressure on prices of course if such factors exist and ngdp targeting ignores them ngdp targeting cannot succeed maybe mine is not so weak after all posted by the arthurian at 4 00 am 6 comments thursday april 19 2012 there must be a better way following up on my 5 am post this graph from the economist as the key shows green represents the lowest levels of debt which countries are in green brazil russia india and china all four are doing well and three of the four are among the world s fastest growing economies according to this map from indexmundi in a world that relies on credit for growth the best growth is achieved when debt is not yet excessive so that debt may gro...
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