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em starting well before 1980 in the mid or late 1960s posted by the arthurian at 12 00 pm 2 comments the economics of the past 40 years driving to work i stop at the tee and make the left but there is a pothole right there that s hard to miss so i got in the habit of looking for the edge of the pothole and staying to the left of it every morning and then one morning i didn t see the edge i thought it odd that i missed it the next day i noticed they patched the pothole so the odd thing was not that i didn t see the pothole but that it was gone and i didn t even notice but i wasn t looking for the pothole you know i was looking for the edge that minor event reminded me of the darwin story related by lionel ruby in how the scientist thinks i wrote of it before darwin and a fellow scientist were searching for fossils in the north of england they were not aware of the glacial theory at the time years later darwin revisited the area and he was now astonished to discover how clearly marked were the glacial ridges on the rocks he had not noticed them on his earlier visit because he was not looking for them darwin was able to appreciate the glacial markings only after he became aware of the glacial theory we see or maybe don t see what we re looking for but we can easily overlook things we re not looking for we know there is a relation between money and inflation so that s what we see that s what we see even when it isn t money that is causing inflation that s what we see even if we have to jigger the numbers like friedman did to see it but if for example there is also a relation between credit use and inflation and we are not looking for that relation then we are very likely to overlook it posted by the arthurian at 4 00 am 7 comments monday october 24 2011 big v velocity velocity is the miles per hour of the economy it is spendings per dollar or how many times the average dollar was spent easy right but which money and what spending let s start with mzm money fred says velocity is a ratio of nominal gdp to a measure of the money supply and for mzm they figure it as gdp divided by mzmsl the ratio of quarterly nominal gdp http research stlouisfed org fred2 series gdp to the quarterly average of mzm money stock http research stlouisfed org fred2 series mzmsl graph 1 shows percent change from year ago for the velocity of mzm money for the quantity of mzm money and for gdp in other words for the velocity ratio and the two components of that ratio graph 1 mzm velocity and components graph 1 shows a big red spike in the quantity of mzm money immediately after the 1982 recession which pretty well mirrors a major down spike in the velocity of mzm money why s that because velocity is how many times the average dollar is spent and if the spending is relatively constant as the green line is then an increase in the number of dollars will calculate out as a decrease in the number of times each of those dollars is spent after the tall red spike there are five more significant peaks by my count each red line peak is matched by a sag in the blue line as the quantity of money rose the velocity of money fell this graph shows the pace of those changes the same mathematical fact the quantity of money is the denominator of the velocity ratio holds true before the 1982 recession though it is less clear from the graph but you can see between the 1974 and 1980 recessions an up and down in the red line corresponding to a down and up in the blue same thing between the 1970 and 1974 recessions and again though smaller one can see the same thing between the near recession of 1966 and the recession of 1970 before 1966 we seem to lose it but those numbers are all made up anyway mzm is a fairly recent invention still for a brief span in the 1960s mzm growth appears as a flat red line so the velocity of money the blue line varies in proportion to spending the green line during those years the blue line and the green line move in parallel graph 2 is just like graph 1 except based on m1 money rather than mzm graph 2 m1 velocity and components in the years after 1980 it is again very clear that the red and blue lines tend in opposite directions there is no magic to it only simple arithmetic the money number is the denominator of the ratio so the money number and the ratio value tend to move in opposite directions i should point out that if there is any difference between the red uptrends and the blue downtrends that difference must be because of the changes in gdp the green line note that in the years before 1980 the green line is the highest of the three on graph 2 that was not so obvious on graph 1 thus before 1980 the green line plays a larger role on 2 creating greater differences between the red and blue lines to finish the exercise a look at m2 velocity and its components graph 3 m2 velocity and components here everything is much less clear nonetheless the same arithmetic applies the red and green lines trend together though they vary differently so both contribute more or less equally to the variations in the blue line velocity if you change the elapsed time of your drive to work and there is no change in the distance traveled then as the driving time increases your average speed must decrease it cannot be helped that is the way the ratio works if you increase the quantity of money and assume no change in spending then as the quantity of money increases the velocity of money must decrease it cannot be helped that is the way the ratio works if quantitative easing increases the quantity of money we should expect to see a slowdown of velocity unless spending increases faster than the money posted by the arthurian at 4 00 am 3 comments sunday october 23 2011 free bird below find a few excerpts from the unambiguously titled independence accountability why the fed is a well designed central bank pdf by christopher j waller i liked the paper i have rearranged the excerpts to provide continuity in the shortened form presented here i used the paper s conclusion as an intro and the abstract as a conclusion i have removed footnotes and references to sources and i have broken up long paragraphs in to shorter ones to better fit my attention span hover over the first few words of each paragraph and a note will pop up identifying the page number where it can be found in the pdf which runs from page 293 to 301 note the original pdf provides a balanced view that may be lacking from my post don t blame the fed if my presentation is one sided the pdf itself is 8 or 9 pages long not too much to read even for me if you were not already studying the economy before robert lucas got famous i suggest that you read it to get some perspective used with permission of the st louis fed to the uninformed observer the fed s structure is in many ways mind boggling in particular it seems counterintuitive that in a democracy the central bank should have independence from congress yet this independence is the result of congress trying to avoid making monetary policy mistakes for political gain of course accountability of public policymakers is a fundamental principle in a democracy it is the tension between independence and accountability that led to the design of the federal reserve and it has been an everpresent force in u s monetary policy for the past century the willingness of governments to force their central banks to print excessive amounts of money or put in place policies that lead to higher inflation rates over time has been termed the inflation bias of discretionary monetary policymaking to minimize this bias many governments have decided to give their central bank legal independence cbi but do countries with independent central banks also have lower inflation to answer this question properly it s necessary to calculate country specific measures of central bank independence many economists have constructed measures of cbi from a variety of legal indicators many of which are discussed in this article in a now famous article that was published in 1993 alesina and summers 1993 found that developed countries with high levels of central bank independence also experienced lower average levels of inflation for the period 1955 88 figure 1 is derived from a figure in their paper which clearly shows this negative relationship it has always been important that central bankers be independent of the political process to ensure that they cannot be manipulated by elected officials however having such great power means that central bankers have to be accountable to the electorate in some fashion and accountability requires the central bank to behave in a transparent manner over the years there have been changes in the fed s structure to improve its independence credibility accountability and transparency the tricky issue is that accountability means being subject to some political oversight which weakens the perception that the central bank is independent the recent recession and financial crisis were in many respects the worst since the 1930s in response some economists and policymakers have begun to examine the fed s policies prior to and during the financial crisis to see whether its goals responsibilities or institutional structure should be changed to help prevent another financial calamity in response to the financial crisis and recession some people argue that power should be further consolidated in washington d c to avoid another financial calamity however as st louis fed president james bullard and other federal reserve officials and private sector economists have pointed out moving the levers of monetary policy even closer to the hub of politics could lead to an erosion of the fed s independence in 1913 congress purposefully created the federal reserve as an independent central bank which created a fundamental tension how to ensure the fed remains accountable to the electorate without losing its independence over the years there have been changes in the fed s structure to improve its independence credibility accountability and transparency these changes have led to a better institutional design that makes u s policy credible and based on sound economic reasoning as opposed to politics in times of financial and economic crisis there is an understandable tendency to reexamine the structure of the federal reserve system a central bank s independence however is the key tool to ensure a government will not misuse monetary policy for short term political reasons excerpts from independence accountability why the fed is a well designed central bank by christopher j waller federal reserve bank of st louis review september october 2011 posted by the arthurian at 4 00 am 2 comments saturday october 22 2011 a brief kind word for shiller so i thought i ought to google the phrase irrational exuberance having used it a couple hours ago turns out robert shiller has a book of that title shiller also has a web page on the origin of the term and his use of it interesting stuff posted by the arthurian at 11 03 am 0 comments i have no clever title for this post no words either source history commons source today s paper updates from google news nanute this is why i usually ignore politics guess i had a moment of irrational exuberance when i saw today s paper posted by the arthurian at 8 15 am 2 comments a shower of gold from anything but arm s length bailouts at bread and butter ohm writes when a company screws up on its finances and business model throwing a lifeline at it with additional tax breaks or government purchases most of all bailout dollars does not imply the company will add employment it adds employees when there is additional money that its target customers have that it can win by selling more of its products and services getting a money shower from above makes it unnecessary for the company to fight more in the market with more employment posted by the arthurian at 4 00 am 0 comments friday october 21 2011 like cracker jack i was looking for something on the history of china back when they first had paper money to find out whether the business cycle arose in china at that time somehow i found the futurecasts journal of august 2011 i m providing the link but you don t have to use it the futurecast thing starts out with an attack on keynesian policy it is a broad sweeping attack rather than a pointed one so it s not too painful to read a little of it and i found a prize in there the 8 price inflation that afflicted the depression ravaged economy through the first six months of 1937 after four years of new deal monetary inflation occurred despite unemployment rates in excess of 14 those who criticize the monetary and budget policies that caused the 1937 relapse and its 19 unemployment rate somehow never seem to mention the 8 price inflation that forced those moves i don t recall ever seeing a discussion of inflation during the great depression well i ve seen one now posted by the arthurian at 4 00 am 11 comments thursday october 20 2011 a second glance from yesterday base money during the quantitative easings graph 1 base money well you d think something must have happened because of all that qe money right something did happen the money got added to excess reserves graph 2 shows base money in blue as above and excess reserves in red graph 2 base money and excess reserves or again base money in blue and in red base money with excess reserves removed graph 3 base money less excess reserves in red base money less excess reserves shows a gradual uptrend almost like normal growth finally for the same period excess reserves as a portion of base money graph 4 excess reserves relative to base money the more they expand base money the more it sits idle posted by the arthurian at 4 00 am 2 comments wednesday october 19 2011 just a glimpse from mine of the 10th with comments about the blue line on the graph in the u s since 2008 base money has tripled graph 4 source paul krugman actually ben it looks like you thought you could double the money and be done with it in 2008 but then you waited and it didn t work so you tried another 50 in 2009 and waited to see if that worked and when it didn t you tried another 50 boost in 2011 that s sure how it looks to me from john c williams the dates of quantitative easing from late 2008 through march 2010 the fed bought 1 7 trillion in such instruments then in november 2010 we announced we would purchase an additional 600 billion in longer term treasury securities by the end of june 2011 from fred three graphs i ve added the qe dates from john williams graph 1 base money graph 2 prices graph 3 interest rate posted by the arthurian at 4 00 am 2 comments tuesday october 18 2011 capital gains coherence loses i love it the first sentence of the following excerpt says that capital gains are taxed just like other forms of income the rest of the excerpt then shows that capital gains are taxed but not just like other forms of income the second sentence says that sh...
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