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as not the answer posted by the arthurian at 4 00 am 1 comments tuesday february 14 2012 encumbered money from does expanding the amount of debt free money reduce indebtedness at ralphonomics money can be split into numerous different categories but one type of categorisation is to split money into so called debt free money and in contrast money which consists of a debt which is passed from hand to hand central bank created money monetary base is essentially debt free in theory this money is a debt owed by the central bank to the holder of such money but central banks make absolutely no promise to give anyone anything e g gold in exchange for this money thus it is essentially debt free in contrast commercial bank created money is essentially a debt which is passed from hand to hand i ll call this debt encumbered money yeah money that comes from the central bank is not debt in the days when you could turn in your paper and get a fixed amount of gold for it yes the paper was a promise to pay gold it was an iou for gold it was a debt not any more today the dollar has taken the place of gold you don t get something for the dollar you get the dollar there is no more promise to pay something for central bank money for government issue money it s different with bank issue money to be sure it s a heavy word encumbered but that is somehow appropriate given the burden of private debt today taking a second look at this i like ralph s word encumbered i like that he defines two types of money encumbered and debt free i really like ralph s view that central bank money is not debt because there is absolutely no promise to give anyone anything in exchange for this money i would add that the central bank creates this money from nothing which means it doesn t ever have to be paid back i have just a touch of trouble with the notion that commercial bank created money is essentially a debt which is passed from hand to hand it isn t if money was a debt an obligation passed hand to hand nobody would want it when you take out a loan you and the bank create new money and new debt that twin creation is a new use of credit then you spend the money you borrowed and you are left with the debt the debt does not circulate the debt stays with the borrower and the new money well once separated from the debt it becomes indistinguishable from money created by the central bank the reason it is important to define two types of money has to do with debt when you or i create money we also create debt but when the central bank creates money no debt is created our money is created by creating debt central bank money is not when you take these two types of money or practical versions of them like spending money and total debt and make a ratio of them the ratio is an indicator of the cost of credit use which must be compared to other costs in the economy excessive cost inhibits growth the excessive cost of credit use is an unnecessary cost rather than letting people create money and debt at the same time central banks should provide enough debt free money to accomplish to same amount of economic activity this way there is no change at all except interest costs are reduced so cost push inflation is reduced so that profits and wages and living standards improve posted by the arthurian at 4 00 am 14 comments monday february 13 2012 productive argument with a touch of irony in their 2007 article the real economic crisis dean baker and john schmitt attempted to shift attention from the bursting of the us housing bubble to the sharp deceleration in productivity growth since the middle of 2004 from the article between 1947 and 1973 the golden age of postwar capitalism productivity growth averaged about 2 8 per year in the united states from 1973 through 1995 however productivity growth took a nosedive with the average rate dropping to just 1 4 from the mid 1990s on however official productivity growth again accelerated rapidly returning to a 2 9 rate reminiscent of the golden age quite suddenly though in the second half of 2004 productivity growth dropped sharply again summarizing those dates we observe 1947 1973 1973 1995 1995 2004 2004 2007 good no good good no good andolfatto links to the productivity slowdown reaffirmed by james kahn and robert rich and offers a snippet from their opening paragraph economists generally agree that productivity is the primary ingredient for sustainable growth in gdp and wages the august productivity data release provided some clarification regarding trend or long run gdp growth but the news was not good following a resurgence of strong productivity growth in the late 1990s and early 2000s after nearly a quarter century of slow growth beginning in 1973 the latest reading from a trend tracking model now indicates that slow productivity growth returned in 2004 kahn and rich do indeed reaffirm the termination dates 1973 and 2004 noted by baker and schmitt and reaffirm the goldenness of the 1947 73 period david andolfatto s post is a follow up to his what output gap on james bullard s wealth shock theory thus in the new post andolfatto expands on the consequences of overestimating potential gdp or trend growth he refers again to kahn and rich it is widely believed that the difficulty of detecting a change in trend growth contributed significantly to the economic instability of the 1970 s as policymakers were unaware of the slowdown in productivity growth for many years and only much later were able to date the slowdown at approximately 1973 this resulted in overestimating potential gdp at least so the conventional wisdom goes and setting interest rates too low and double digit inflation followed not long after if the fed permits money growth commensurate with an over estimate of potential output the result will be inflation the argument for slower money growth today gains strength by comparison with the 1970s because we know what happened then but this does not mean the argument is correct we don t know that the circumstances are similar we cannot measure potential output it is all a guess dismiss the analogy to the 1970s then do what you will with the rest of their argument at the fed they attribute changes in productivity trends to events such as wars changes in government policies or structural change in the economy kahn and rich elsewhere that is anywhere but at the fed i on the other hand attribute changes in productivity trends to changes in the debt per dollar ratio the reliance on credit and the factor cost of money nowhere but at the fed here s the thing at the fed they re wearing blindfolds and swinging sticks trying to hit potential gdp meanwhile i am saying that what they think are changes in potential output are simple results of changes that you can see in the debt per dollar curve part 1 part 2 this is part three posted by the arthurian at 7 04 am 7 comments labels 3 bullard s earthquake wealth shock krugman has an interesting take on james bullard s wealth shock idea maybe the idea is that the burst bubble reduces demand and hence leads to lower production yeah that s how i took it though i had to wait for krugman to make it clear but what else can it be if a wealth shock leads to lower gdp it s not that we re suddenly able to produce less it s that we re suddenly buying less that follows from the wealth effect i don t buy the wealth effect story myself i m with jazz on that given empirical data that closely links consumption to income how can consumption depend primarily on wealth rather than income but falling demand due to a wealth shock and its wealth effects was the only way i could make sense of bullard s rather direct words the negative wealth shock lowers consumption and output krugman again maybe the idea is that the burst bubble reduces demand and hence leads to lower production but at that point you re into a keynesian world of deficient demand and you should be talking about ways to close the gap not accepting it as a fact of life i thought that was clever rubbing bullard s nose in his own keynesian poo you should be talking about ways to close the gap not accepting it as a fact of life i m with krugman on that here s mine if andolfatto was trying to explain why gdp was slumping and why potential gdp was slumping because of excessive private debt for example i would have some use for his analysis but like bullard he brushes aside any concern with special factors and headwinds david andolfatto seems to be saying only that things are bleak and we ought not expect anything better we do expect better however krugman tells only one side of a story yes demand is inadequate the other side of the story is that demand must be excessive according to bullard remember inflation is already above our new explicit 2 target level he wouldn t tell us that unless he thought it time to start pushing interest rates up again to curtail demand so demand must be excessive in bullard s view only two percent yeah and if i thought bullard s wealth shock analysis was right i d support him at two percent other people think we ought to push the inflation target higher up to four percent maybe if i thought that would solve the problem i would support it but the problem is certainly not that prices are going up too slowly that s not the problem at all the problem as krugman said is that we re in a world of deficient demand but it s an inflationary world of deficient demand so wait let s not talk about ways to close the gap let s talk about how we got into this mess because this world of simultaneously insufficient and excessive demand is a result of the problem that needs to be fixed we got into this mess when everybody started deleveraging paying down debt rather than borrowing more and spending more we started borrowing less and paying off more so the reduced borrowing is spending that we re not doing and the paying off is more spending that we re not doing a double whammy on spending so paying down debt is the problem no paying down debt is our solution to the problem the problem is that we had so much debt in the first place private debt i left bullard hanging bullard is concerned about inflation now i know a lot of people just want to dismiss that concern because we have bigger problems but you can t just dismiss arguments you don t like you have to deal with them and show them wrong or accept them or bide your time and don t jump to any conclusions that s always a good rule so the inflation i don t think inflation is a crisis but i don t like a two percent target i like a zero target even if i can only fail to achieve my target and i really don t like the doublespeak that says a constant price level when it means a constant inflation rate bill mitchell recently pointed out an example of that in that press release the ecb said it main role was to achieve price stability that is stable inflation anyway bullard he says if we over estimate potential output and set policy by it we will encourage excessive demand and we will get inflation like we got in the 1970s and he says inflation is already above target everybody else says the economy is not growing enough and we don t have jobs enough and unemployment is too high and demand is insufficient not excessive how can there be such a difference in views i think the trouble arises from the way we explain inflation here s mitchell again inflation is driven by nominal aggregate demand growth that exceeds the capacity of the economy to respond in real terms that is to increase output too much money chasing too few goods for billy as for milton and anna inflation is caused by excessive demand by demand that exceeds the capacity of the economy to respond demand being excessive relative to potential output is the cause of inflation they say exactly what jim bullard says if you think of inflation along those lines and you admit we re getting inflation already then you end up thinking that the capacity of the economy to respond must somehow have been crippled you end up thinking that there must have been a sudden drop in potential output exactly what jim bullard says but all we need if we wish to undermine jim bullard s argument is to realize that demand pull isn t the only inflation story there is there is also a cost push inflation economists seem always to pooh pooh and ha ha the concept of cost push inflation but it makes perfect sense to me there is a nice short wikipedia article on cost push inflation and if i take two parts of it and put them in reverse order i get what seems to me an excellent explanation of cost push inflation monetarist economists such as milton friedman argue against the concept of cost push inflation because increases in the cost of goods and services do not lead to inflation without the government and its central bank cooperating in increasing the money supply keynesians argue that in a modern industrial economy a supply shock would cause a recession i e rising unemployment and falling gross domestic product it is the costs of such a recession that likely causes governments and central banks to allow a supply shock to result in inflation i accept both sides of that disagreement it doesn t even seem to be a disagreement with the order reversed like that here s what i see yeah it is demand that affects prices more demand pulls prices up more less demand pulls prices up less and demand expresses itself as spending and spending is done for the most part with money money and credit with things that work like money so the quantity of money has to have an influence on prices the quantity of stuff that works like money i accept that i accept it even though i do not accept the graphs milton friedman offered to convince us of the truth of it but if something happens a shock call it pathetic as that explanation is and it drives costs up then the existing quantity of money has to stretch to cover the higher prices that accompany increasing costs and if the money doesn t stretch enough then the spending has to shrink and if the spending shrinks enough you get a recession and if the central bank has a dual mandate to keep prices stable and to keep the economy growing getting a recession means it has failed to meet its mandate and if the central bank decides to take a safe middle of the road position it ends up compromising between recession and inflation and getting some of each and the inflation we get in such circumstances arises as monetarists argue because the quantity of money was allowed to expand but actually the prices had to go up anyway because the costs were going up and the central bank opted to allow some of that cost push inflation to continue rather than creating another recession that s what it was like in the 1970s that s the future jim bullard sees the alternative is to figure out why we have cost push and to fix that problem at the root of cost push you will find the ever increasing cost of accumulating debt part 1 this is part two part 3 posted by the arthu...