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lculation when you ve done all the years a graph of your numbers takes on a different shape that s because you have removed the inflation from the numbers usually we do a second step we multiply all the values by 100 or we pick a base year and multiply all the values by the base year price level the second step scales the numbers up so you can visually compare your results to the numbers you started with but this scaling up really has nothing to do with removing inflation from the numbers that all happens in step one to make an inflation adjustment of debt we should do exactly the same thing divide each year s debt by the same year s price number the trouble is that when you take any one year s total debt it is not the debt of just one year it is the debt of many years if we take the gdp number for 1980 and divide it by the price number for 1980 that s fine but if we take total debt for 1980 and divide it by the price number our answer is wrong total debt for 1980 includes debt from 1979 and 1978 and 1977 and even some left over debt from 1965 when prices were much lower our calculation does not allow for that so our answer is wrong if you are taking the price level out of debt the 1980 price level only applies to 1980 s additions to debt to remove the price level from the debt that still remains from 1965 you have to divide it by the 1965 price level for all the years you have to do this but nobody does this if you re looking at debt for 1980 and you divide the total debt by the price level for 1980 the adjustment of left over debt from 1965 is understated this understatement changes the shape of the graph when you make the graph the old debt is shown falsely low and then the erosion of debt by inflation appears to be less than is actually the case every year s debt has to be figured separately just as every year s gdp is figured separately what you have to do is start at the beginning adjust each year s addition to debt separately and total up the adjusted numbers as you go a few days back nonny presented this graph which is not adjusted for inflation graph 1 total debt as a percent of gdp nonny said one can use the graph to pinpoint the timing of the big changes jazz responded yep reagan and bush jr jazz refers to the big increase from 1980 to 1986 and the big increase after the year 2000 there is nothing wrong with the graph except that it includes the effects of inflation if inflation was always the same it wouldn t matter but inflation is not always the same therefore inflation changes the shape of the graph so we don t really know if the big increase from 1980 to 1986 was due to a big increase in debt or if it was due to the ending of the great inflation what s missing from nonny s graph or not missing but hidden within it is inflation when we look at this graph we are not so much seeing the relation between debt and output as we are seeing the different effects of inflation on debt and output nonny says the plots of debt gdp or debt income are all time plots of the nominal measures of both components combined into a ratio at the time of collection that is inflation or deflation comes out in the wash yes it is true there is inflation in the numerator and denominator both so you would think the inflation gets divided out of the picture or comes out in the wash as nonny says but the the size of the effect of inflation is greater for debt than it is for output because today s total debt includes debt from a time when prices were lower for any given year there must be two different inflation adjustments one for gdp and another for debt because the two calculations differ inflation does not simply come out in the wash when you look at debt relative to gdp posted by the arthurian at 4 00 am 3 comments thursday june 21 2012 on the meaning of two goals persistent attempts to expand the economy beyond its long run growth path will press capacity constraints and lead to higher and higher inflation without producing lower unemployment or higher output in the long run in other words not only are there no long term gains from persistently pursuing expansionary policies but there s also a price higher inflation the federal reserve bank of san francisco what strikes me immediately is the absolute assurance of that statement it is by no means offered as an economic theory but as certain beyond doubt what strikes me next is that i don t like the statement i still want to get the economy growing i want to get around the obstacle that frbsf puts in my way but you know it has to be true persistent attempts to expand the economy beyond its long run growth path will press capacity constraints even if we don t know what the long run growth path is actually i m thinking they meant the long run potential growth path yeah that s what i was thinking i m going with it if i m putting words in frbsf s mouth so be it persistent attempts to expand the economy beyond its potential will press capacity constraints and lead to higher inflation tautology isn t it repeating the same thought in different words no the quote sets up potential output as a standard by which perfection is measured sorta like the model hollie witchey or the phrase don t mess with mother nature you can t do anything about inflation the quote tells us you can t do anything about unemployment and you can t do anything about capacity constraints except of course you can make demand side sacrifices to a supply side god but you know we ve been pressing capacity limits and getting inflation at lower and lower levels for two generations now so frbsf s analysis is iffy and you know we don t really know the true path of potential output yes without doubt there is one and that fact adds strength to frbsf s claim but don t let them fool you just because there is a true path of potential output doesn t mean we re on that path and it doesn t mean if we re not on it that we know why we re not on it from the same article monetary policy has two basic goals to promote maximum sustainable output and employment and to promote stable prices are the two goals ever in conflict yes sometimes they are one kind of conflict involves deciding which goal should take precedence at any point in time another kind of conflict involves the potential for pressure from the political arena wrong answer hey i know they dumb this stuff down so that people like me can get it but the second kind of conflict they describe has nothing to do with economic analysis and the first one is just a bad answer if you have two goals you re supposed to have two goals you re not supposed to have one goal for a while and then switch off and have the other goal for a while if that is your strategy you failed from the start despite what everyone says though the federal reserve is not a complete and utter failure there was a time there after the second world war when inflation and unemployment were both pretty low for a spell two goals to control inflation by limiting demand and to control unemployment by unleashing demand are the two goals ever in conflict the two goals are always in conflict it is a beautiful day there is a magnificent wide boulevard with fields of flowers left and right we put the top down we drive when there is inflation there is too much spending the road is too wide on the right policy makes a correction and the pavement narrows a bit when there is unemployment we need more spending the road is too wide on the left policy makes a correction and the road narrows a bit we drive the road occasionally narrows a bit we drive the road narrows we find ourselves coursing a mountain with solid rock on the one side and sheer drop on the other we drive the road narrows there is inflation and the rock face comes closer to us there is unemployment and the sheer drop comes closer to us we drive suddenly we realize there is no guarantee that the road will always be as wide as our vehicle then it starts to snow the economy of the 1950s provided a wide boulevard for policy actions but the road narrowed substantially by the 1970s and it has continued to narrow while both the terrain and the weather became less accommodating our own policy choices narrow the options left open to us and put us on a path we cannot navigate going to a place we do not want to be the problem is not the federal reserve the problem is that we do not know how to deal with the fact that our goals are always in conflict we want to be moving full speed ahead but policy has created a narrow washed out dangerous dirt road that leads up a mountain to nowhere we know there is a true path of potential output just as there is a median family income and just as there is a best case in any set of options there is some dispute over what that true path is so policymakers work backwards believing that if there is too much inflation we are pressing the limits of capacity and the road must be narrowed further but it is our make the road narrow policy that undermines and reduces the long run potential growth of output when their concern is inflation policymakers raise interest rates and take money out of circulation when their concern is unemployment they reduce interest rates and encourage the use of credit but our concern really is always inflation and unemployment two goals to honor these goals policymakers raise and lower interest rates and they take away money but encourage the use of credit they take away money but encourage the use of credit they make using money more costly and they leave us with nothing but debt making money more costly is an unintended consequence of policy it arises from the effort to meet goals that are always in conflict and debt debt is not the consequence of government spending or prodigal consumers or bad business practice not the massive debt we have our debt is an unintended consequence of policies that remove money from circulation and encourage the use of credit it is all just one big mistake posted by the arthurian at 4 00 am 8 comments wednesday june 20 2012 second thoughts from gene hayward whose posts have the best long titles on the web a quick reference visual of federal govt spending another reminder of the failure of the political class and the public that enables them easy reference visual that shows current federal government spending in the broad budget categories healthcare includes medicare medicaid social security and interest on the national debt are areas of mandatory spending must be carried out regardless whether the govt has the money or not some would say that defense should be in that category as well the safety net contains unemployment compensation food assistance and other income support programs this is considered for the most part a mandatory part of the budget too the mandatory items mentioned above are the biggies in terms of serious budget issues but are smalls in terms of political emphasis the powers that be are feasting on the everything else in the budget in which each item represents a tiny part of the whole source christian science monitor so of the six categories shown as many as five everything except everything else are mandatory that leaves 20 cents on the dollar from which to make cuts that can t be good if we are trying to cut spending and balance the budget i followed gene s link to the christian science monitor where peter grier writes there s a lot of talk about cutting the us deficit but very little actual cutting of deficit one reason there s not much easy to cut oh sure you know generally that social security is expensive and the pentagon isn t cheap and so on but despite what you may hear on cable news shout shows there is no magic fount of wasteful spending the elimination of which will put the us budget in the black lazy bureaucrats too few foreign aid too small military bands please where s the fbi where s the epa the interior department and so on what about scientific research that comes under the miscellaneous category known as stuff we haven t mentioned so far because it s not very big relatively speaking all together it accounts for the last 20 percent of us spending that s why it s hard to reduce the deficit by cutting nondefense bureaucracy you can t balance the budget by squeezing only one fifth it almost sounds like the csm wants to call defense spending discretionary rather than mandatory that would double the cut able part of the budget to two fifths i don t have a political or military opinion on cutting defense just an economic one i think if you want to cut the military you should want it out of some sense of what s right and wrong not just because we can t afford it and that gets me to my post title short as it is according to gene we can t cut 80 of the budget and the 20 we can cut includes the fbi and the epa and stuff like that which probably should be bigger not smaller this need we have to cut government spending is a real problem you know people say it all the time there are no easy answers so to the people who think we need to make those cuts to you i say this second thoughts anyone maybe the economy is trying to tell us something maybe we re going about this all wrong maybe austerity in government budgets is not the solution it is cracked up to be that sounds like i think the government should spend more that s not what i think me myself i like to say we have to stop spending so much time focused on the solution and spend lots more time on analysis of the problem we have to figure out what the problem really is and we have to be careful in our figuring there has been none of that as long as i have been watching here s my analysis we don t have the debt and deficits because the government is spending too much we have the debt and deficits because we use credit for money when you use credit for money it becomes literally impossible to reduce debt literally impossible to reduce debt not because of how much we spend but because of what we use for money posted by the arthurian at 4 00 am 0 comments tuesday june 19 2012 the misery index nice graph from inflationdata com except for brief spikes early on the misery index before 1970 was low also it reached a low around 1998 but the low was not sustained posted by the arthurian at 4 00 am 3 comments monday june 18 2012 some are happy with the status quo from a recent post at asymptosis recessions are nature s way of keeping the little guy down here s a picture the well off have done fine in the greatest economic downturn in eighty years their median net worth went up that red line there the one that goes up that shows income of the top 10 reminds me of my definition of recession a recession is a time when fewer people do well posted by the arthurian at 4 00 am 3 comments sunday june 17 2012 real flatulence following up on this morning s post i refigured real debt using the formula i figured out some weeks back which allows for the fact that debt is a stock not a flow using these corrected debt numbers this mor...