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12 something s missing a second look at part of bezemer and gardiner s pdf from yesterday from the introduction thus the study of monetary policies is not just the study of tweaking interest rates of deciding on the rate of printing money or of using taxpayers money to bail out banks it is the study of administering financial accounting processes on the macroeconomic level differentiating between types of assets and liabilities look at what bezemer and gardiner want to include in monetary policy tweaking interest rates deciding on the rate of printing money using taxpayers money to bail out banks administering financial accounting processes on the macroeconomic level differentiating between types of assets and liabilities the reason i had to come back to this bit of the pdf is that something is still missing from that list tweaking interest rates that s always what the fed does to get the inflation pressures where we want them wherever that may be deciding on the rate of printing money that s the same thing using taxpayers money to bail out banks this is part of the response to the unusual circumstances and the last one that s beyond my ken bur here s the thing for about as long as anybody has been alive we have been using monetary restriction to fight inflation and credit use to stimulate economic growth the problem is that we never change this application of policy tools we always use tight money to fight inflation and we always use easy credit to stimulate this skews the playing field by reducing the quantity of money while expanding the reliance on credit and it makes the economy s behavior increasingly unusual one of our basic assumptions is that printing money causes inflation from this we come to believe that if there is inflation there must too much money everyone seems to believe this economists and policymakers apparently believe it for they pushed the quantity of money down relentlessly until the crisis even today it is still about as low as it has ever been graph 1 the decline of spending money but fighting inflation is only half the story our policies also encourage credit use because we believe credit use is good for growth again the pressure was relentless and nothing changed until the crisis graph 2 the rise of credit use the extreme changes shown on these graphs are results of policy but you know the problem goes just a little deeper than policy what really must change are the flawed assumptions that underlie policy the assumption that if there is inflation there must be too much money and the assumption that credit use is unfailingly good for growth it remains true that if there is inflation because there is too much spending money then the quantity of spending money should be reduced that is not true however if there is inflation because there is too much credit use and it remains true that credit use is good for growth when there is little credit use but when credit use is already excessive when debt is already excessive increased credit use is not likely to be an effective way to boost growth even before policy can change our basic assumptions must change so what s missing from dirk bezemer s list let s go back to tweaking interest rates and stop there and ask why we might tweak them why tweak to hinder growth and undermine inflation or to encourage growth and end up with inflation and what do interest rates affect interest rates affect the price of credit and what is credit credit is the stuff that when you use it adds to your debt and creates future costs that will interfere with future economic performance what s missing from dirk s list concern with the accumulation of debt interest rates go up and down up and down up and down but the accumulation of debt goes up and up and up we ignore it at our peril what s missing from dirk s list as an essential component of monetary policy is the need to keep watch on the balance between accumulating debt and the quantity of spending money because you need spending money to pay down debt anything else you want to buy you can put it on credit but to pay down debt you need spending money posted by the arthurian at 4 00 am 0 comments tuesday april 24 2012 a roundabout definition of liquidity and other things it should be obvious that the rate of interest cannot be a return to saving or waiting as such for if a man hoards his savings in cash he earns no interest though he saves just as much as before on the contrary the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period j m keynes in a recent short sequence of gang8 messages i came upon a pdf by dirk bezemer and geoffrey gardiner innocent frauds meet goodhart s law in monetary policy the pdf relates the phrase innocent frauds to warren mosler and to charles goodhart but connects it ultimately to john kenneth gallbraith quoting galbraith to give meaning to the phrase bezemer and gardiner relate it to versions of the truth one such would be the version i hold money is a thing not a relationship in part 2 of the pdf bezemer and gardiner state three innocent frauds in monetary policy come together in a case study of the recent capital base enhancement by the uk government of royal bank of scotland rbs and the wider issue of quantitative easing the first innocent fraud is that money is a thing not a relationship but by lending banks enter into a contractual relationship and there are limitations to what the newly created liquidity can be used for as circumscribed by legislation liquidity creation by the government is not lent on by banks to the public even though the image is that the government pumps money into the system which then unclogs the credit pipelines to the economy the immediately next sentence in the pdf is the second innocent fraud is that the government does this with taxpayer s money so i m thinking what s in the whitebox here is an explanation of the reason that money is a relationship or rather the reason bezemer and gardiner think money is a relationship short form by lending banks enter into a contractual relationship ergo money is a relationship first off i wish they would call it a relation rather than a relationship relation refers to some kind of connection as by blood or contract relationship suggests some kind of sexual adventure every time i read it so by lending bezemer says lenders enter into a relation with borrowers and this relation apparently is money nonsense let s go back to supply and demand the potential lender has a supply of available credit the potential borrower has a desire to put credit to use a demand for credit the two meet perform contractual nookie nookie and money is born money is the offspring of the relation the relation between lender and borrower is this the lender permits the borrower to put credit to use in exchange for the promise to return the funds plus interest at some future date the credit part is the belief that repayment will be made the debt part is the obligation to repay the money itself is neither of these let me ask you this what happens if the contract is broken and the borrower never repays the lender and say the lender writes it off as a loss if that happens the contract is terminated right the relation between borrower and lender is terminated but the money continues to exist is that right if it is then the money exists independent of the relationship and if the money continues to exist after the relationship is terminated then the money is not a relationship the 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 f...