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it only exerts a distinct and independent influence of its own when it gets out of order unfortunately i m not even a casual student of the history of economic thought i think it s hugely important far more than the history of say physics i just don t have the time nick rowe says read a textbook dammit it ll only take a day or two but economics texts are 900 pages it would take the rest of my life to read that much i m a student of the economy i look at graphs anyway i liked this part back then say s law ruled since nobody produces for sale without intending to purchase planned spending must be equal to and could not be raised above or lowered below production i liked it because it is so obviously wrong and i liked this part mill observed that people plan to spend their incomes not just on currently produced goods and services but also on financial assets because it is so obviously right one hundred and seven years later keynes shot down say s law again in the midst of the great depression when it was pretty clear to everyone except economists that the demand for money and the demand for output are not always precisely coordinated people do sometimes produce for sale without intending to purchase everybody wants a bigger nest egg but now again the message has been forgotten how often must this correction be made if you want the five digit years if you want the hari seldon thing you re gonna have to treat a few rules like facts this is one of them it doesn t hurt the economy if everybody saves a little so your nest egg is safe but it hurts the economy plenty when there is too much savings or too much spending on financial assets to put it mill s way i know everybody wants a bigger nest egg that s why the problem recurs but if we want to fix the economy we have to establish serious rules limiting the growth of finance relative to the productive economy savings and all that then the only choice is whether we want everybody to be able to have a decent nest egg or whether we allow some few people to have all of it those are the options posted by the arthurian at 4 00 am 0 comments saturday august 18 2012 on erosion 4 erosion and de rosion now a look at real debt relative to real gdp where each year s addition to debt is inflation adjusted separately based on that year s price level graph 1 incrementally adjusted real debt makes erosion visible the blue line is the same as krugman presented from earlier in this series you can still see the face in it the nose the chin the forehead cmdebt relative to gdp expressed as a percent straight out of st louis nominal divided by nominal the red line is real cmdebt divided by real gdp where each year s addition to debt is adjusted for inflation incrementally as opposed to the way real gdp is figured the red line runs higher than the blue because inflation erodes debt this graph shows it it is a simple matter now to visualize the erosion of debt one can see it by looking at the nominal value relative to the incremental real value or the blue line as a percent of the red line from the above graph graph 2 the erosion of debt by inflation the 1965 1983 decline is striking that decline occurred during the great inflation the post 1983 increase suggests that either we used too much debt or prices didn t go up enough in the past 30 years only one of those possibilities makes sense to me it cannot be that prices did not go up enough it must be that we used too much debt the google docs spreadsheet posted by the arthurian at 4 00 am 0 comments labels erosion of debt friday august 17 2012 on erosion 3 the simple things next we need to look again at cmdebt relative to gdp the relation on the graph we started with krugman s graph but i want to look at it three different ways i want to see nominal cmdebt divided by nominal gdp this will look just like krugman s i want to see real cmdebt divided by real gdp where the inflation adjustment is applied to aggregate numbers just as real gdp is figured and i want to see real cmdebt divided by real gdp where real debt is figured by incremental adjustment as described above the first two i can do in fred graph 1 two lines in the same location click graph for fred source page blue nominal debt divided by nominal gdp red real debt divided by real gdp the blue line on graph 1 here is almost entirely hidden by the red line i started the red line just a bit late and stopped it just a bit early so you can see there actually is a blue line on the graph the two lines are identical the blue line shows cmdebt relative to gdp using nominal values exactly as krugman has it on his graph i even multiplied by 100 as krugman did to convert the ratio values to percent values the 99 993 in the second formula is the price number for 2005 the base year for fred s gdpdef series the red line shows cmdebt relative to gdp using real values numbers with the price level divided out of them debt is adjusted on this graph by the same inflation adjustment calculation that is used all the time for gdp in other words gdp and cmdebt are adjusted the same way and for the same amount of inflation as a result the debt gdp ratio after adjustment is equal to the ratio before adjustment and the red line ends up in exactly the same location as the blue line the graph shows absolutely no erosion of debt resulting from inflation but this is absurd the inflation adjustment of debt on this graph is most certainly wrong what the above graph shows is that anything divided by itself equals one real real 1 nominal nominal perhaps this is the relation sumner had in mind when he ignored the effect of inflation on debt for the 1964 1984 period scott sumner s analysis of krugman s graph seemingly accurate on its face is deeply flawed the analysis ignores the effect of inflation on debt it pretends there is no such thing as erosion of debt it misinterprets the effect of inflation reading it as a significant reduction in new borrowing marcus nunes builds upon sumner s error creating a plausible story about optimism to explain the reduction in borrowing during the great inflation but the reduction in borrowing is something that never actually happened if the simple things are not laid out correctly then everything built upon the simple things is at risk of being wrong the error is to be found not in the superstructure which has been erected with great care for logical consistency but in a lack of clearness and of generality in the premisses j m keynes posted by the arthurian at 4 00 am 0 comments labels erosion of debt thursday august 16 2012 on erosion 2 ada and ida the first thing i want to do is duplicate krugman s graph from yesterday s post his graph 1 krugman s graph mine graph 2 my version of krugman s graph not bad if you see differences it is because i downloaded annual data from fred and krugman probably used the default quarterly data both graphs show the same face a nose in the 1980s a chin before that a neck in the early 1960s even indications of eyes and hair can be seen in the graph next i want to graph the raw debt numbers not divided by gdp along with real debt numbers figured the way real gdp is figured graph 3 the raw numbers and real debt figured by aggregate debt adjustment the relation between the two lines shown on graph 3 is similar to the relation between nominal gdp and real gdp which you have probably seen many times the two lines cross in 2005 because the price deflator used for the conversion has 2005 as its base year the red line is higher than the blue in the years before 2005 and the blue line is higher in the years after 2005 suppose you wanted to use this graph to learn something about inflation s ability to erode debt after all some people do call for a higher inflation target increased inflation to help reduce the burden of debt but in 2005 the lines cross the real and nominal values are equal in 2005 in other words in 2005 there was no erosion of debt despite all the inflation we had between 1950 and 2005 that is wrong of course but that is what the graph shows it is the calculation used to figure real debt that is incorrect next i want to do the graph again using the incremental inflation adjustment described in yesterday s post graph 4 the raw numbers and real debt figured by incremental debt adjustment here real debt is significantly higher than nominal debt at every point on the graph the red line is higher than the blue by the amount that debt was eroded by inflation if you are looking to see the erosion of debt this graph shows it incremental data adjustment ida of debt shows it the google docs spreadsheet posted by the arthurian at 4 00 am 6 comments labels erosion of debt wednesday august 15 2012 on erosion 1 calculating real debt the typical inflation adjustment of gdp takes the total dollar value of one year s output and converts it to the dollar value for another year to do this is fairly simple divide the one year s price number out of the gdp and multiply the other year s price into it for example if a basket of goods used to cost 80 but now costs 125 take gdp now divide by the current price number and multiply by the old price number this calculation is used all the time to figure what economists call real gdp but what happens when you want to figure debt as real debt consider any particular year the new debt created that year should be adjusted the same way gdp is adjusted for that year divide it by the price level for that year and multiply by the base year price but when we inflation adjust debt we often get the wrong answer the problem is that the total debt number for any one year includes both the new debt from that year plus a lot of old debt left over from other years the current year s price number is relevant only for the current year s addition to debt for older debt included in the current balance you have to use price numbers from prior years one good technique is to separate the new debt from the old debt then you inflation adjust the new debt for the year just the same way you would inflation adjust the gdp for that year next you look at the old debt that you didn t adjust yet pull out just the most recent year s debt remaining in it and inflation adjust that year s debt using that year s price number and you keep doing that stepping back a year and adjusting just the one year s debt the same way you would figure real gdp for that year then stepping back another year you go back as far as you can go adjusting each year s debt separately and then add them up this method may be thought of as incremental adjustment of debt i don t mean to harp on it but it seems most people think you can adjust debt for inflation the same way you adjust gdp for inflation you cannot it works for gdp because gdp is a measure of one year s stuff it doesn t work for debt because any year s debt is almost always an accumulation of many years deficits recently krugman and sumner and nunes and wojnilower and yours truly considered this graph from paul krugman krugman sees a dramatic rise in household debt which many of us now believe lies at the heart of our continuing depression sumner says i suppose it s in the eye of the beholder but i see three big debt surges 1952 64 1984 91 and 2000 08 nunes writes why does the share of debt rise i believe it reflects peoples optimism about future prospects during the 1950s and first half of the 1960s we observe a rise in household debt people felt good about the future note however that as soon as inflation begins to trend up in the second half of the 60s the future doesn t look so bright anymore households don t increase indebtedness and when sumner reports that the first two debt surges were followed by golden ages and the third by a severe recession and asks what was different with the third case joshua wojnilower responds the difference is the aggregate amount of household debt compared with incomes as the aggregate amount of debt rises an increasing percentage of income and savings becomes necessary to cover interest costs and pay back previous debt these actions reduce the amount of income and savings available for consumption and investment creating a drag on economic growth wojnilower doesn t read anything into the graph he doesn t chop it up into surges and remissions the way sumner does he doesn t attribute the surges to optimism the way nunes does he doesn t even describe the increase as dramatic the way krugman does wojnilower says only that debt was very high by the end then he lays out a scenario explaining some troubles that may arise when debt gets very high by contrast sumner presents a relaxed eye of the beholder evaluation of the graph he points out three big debt surges and the remissions of debt growth following each and yes if you glance at the graph you can see the surges clearly but sumner s evaluation of the graph is too relaxed and he misses an important detail he calls the end of the first surge at 1964 and the start of the second at 1984 as luck would have it allan meltzer calls the start of the great inflation at 1965 and its end at 1984 the great inflation fits very neatly between the first two of sumner s surges could sumner have missed it with all the ruckus these days calling for policymakers to raise the inflation target from 2 to 4 or more simply to help erode debt i don t see how sumner could possibly have overlooked the great inflation the great inflation significantly reduced the burden of debt relative to gdp and that is what you see between sumner s first and second surge on krugman s graph perhaps sumner would say that the inflation in the numerator cmdebt and in the denominator gdp of krugman s ratio simply cancel each other out but if that was true there could be no such thing as the erosion of debt by inflation related post microbes posted by the arthurian at 4 00 am 7 comments labels erosion of debt tuesday august 14 2012 the problem is not the dual mandate reviewing an old article from cnn money republicans to fed forget about jobs by annalyn censky 3 december 2010 for more than 30 years the fed has been tasked with a so called dual mandate which outlines two important goals keep prices stable and maximize u s employment but some critics are sick and tired of the fed prioritizing job creation at the risk of rising prices they say the juggling act of promoting economic growth while staving off inflation has proven ineffective and has led to a policy of too much cheap money with dangerous consequences for the economy a house bill introduced last month by pence seeks to scale the dual mandate back to a single goal of focusing only on prices and leave job creation policy up to congress you know congress never keeps its hands off job creation policy they re always spending more to stimulate the economy or spending less to let the private sector blossom it s all hokum and hogwash anyway pence is focused on the wrong thing he has not identified the problem he has identified a problem b...
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