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omises that should never have been made europe is on the verge of collapse because governments there can t figure out how to deal with their debts nations around the globe have debt to g d p ratios at or approaching 90 percent the point at which growth slows and prosperity stalls it all goes back to the increase in the tolerance for debt no david as rex nutting says excessive private debt created the problem but what it all goes back to is policies that encourage credit use and the accumulation of debt private debt and public policy focus on these two things everything else follows democrats and republicans argue about how quickly deficits should be brought down but everybody knows debt has to be restrained at some point the problem is that nobody has been able to find a political way to do it no david the problem is that nobody considers the economic way to do it what about private debt brooks 1 excessive private debt leads to inadequate growth 2 inadequate growth leads to excessive public debt what about private debt the era of indebtedness began with a cultural shift it will require a gradual popular shift to reverse today s wisconsin vote might mark the moment when the nation s long debt indulgence finally began to turn around what about private debt fool posted by the arthurian at 4 00 am 9 comments labels debt and inflation sunday june 10 2012 rex nutting u s debt load falling at fastest pace since 1950s from marketwatch at the wall street journal by rex nutting if you want to know why economic growth has been so tepid here s your answer four years after the storm hit the economy is still deleveraging and it s very hard for any economy to grow when everyone is focused on increasing their savings the rapid rise in federal debt over the past four years has distracted us from the big picture the level of public debt is indeed worrisome but it s not as big a worry as the economy s total level of debt public and private as much as we hear politicians pundits tea party patriots and the congressional budget office obsessing about government debt it was excessive private debt not public debt that caused the 2008 financial meltdown and it was private debt some of it since transferred to the public that lies behind the current european debt crisis economists who have studied the impact of indebtedness have found that low levels of debt are essential to growth but that high levels of total outstanding debt can hurt an economy beyond a tipping point adding on more debt will reduce growth over the long run even if it inflates a bubble in the short run at low levels debt is good it is a source of economic growth and stability concluded stephen cecchetti m s mohanty and fabrizio zampolli economists for the bank of international settlements in a paper presented at the federal reserve s jackson hole conference last august beyond a certain point debt becomes dangerous and excessive and can lead to increased volatility financial fragility and slower growth it can even bring down the real economy with it as we have seen read the bis paper the real effects of debt according to a study by mckinsey published earlier this year u s households may have two more years of deleveraging left before their debts are sustainable again if mckinsey is right the u s economy may have to endure a couple more years of slow growth thank you rex the only thing i don t like in that is the waiting why wait fix the problem ht the dixie dove posted by the arthurian at 4 00 am 0 comments saturday june 9 2012 who cares what reagan was paul krugman from reagan was a keynesian as many economists have pointed out america is currently suffering from a classic case of debt deflation all across the economy people are trying to pay down debt by slashing spending but in so doing they are causing a depression that makes their debt problems even worse yes this is exactly the situation in which government spending should temporarily rise to offset the slump in private spending and give the private sector time to repair its finances no in this situation the government should admit it made policy mistakes that led to the creation of all this debt that people are trying to pay down today in this situation the government should repair those finances itself the federal reserve should take the responsibility and pay down private debt this way people wouldn t have to be slashing spending and causing a depression there is no link between decisions to increase government spending and decisions to reduce personal indebtedness having the government spend more does nothing for people s debt we need direct policy action to reduce the problem reduce private sector debt do it now posted by the arthurian at 4 00 am 8 comments friday june 8 2012 creative destruction romney s jobs record from char weise at creative destruction here s total private sector jobs in massachusetts and the us from 1990 to 2012 from the bls the shaded area is romney s term as governor 2003 06 clearly massachusetts economy underperformed in the romney years private sector employment rose by 1 5 in massachusetts versus 5 7 in the us overall posted by the arthurian at 4 00 am 0 comments thursday june 7 2012 likewise if you mow the lawn often enough it looks good but put the mowing off a day and clippings will clump up like a hayfield in need of baling so then you have to go and mow sooner the next time and higher than you want and you have to be inventive with the mowing pattern so the clumps get smaller instead of bigger and then you have to mow it again sooner and again and then maybe you can cut it a little shorter if you wait until it looks like you need to mow the lawn you waited too long if you wait until it looks like debt is creating problems you waited too long posted by the arthurian at 4 00 am 2 comments wednesday june 6 2012 one for you three for me it is true to follow up on yesterday s post that for nonfinancial corporations the share of real assets has been falling while the share of financial assets has been rising graph 1 financial red and nonfinancial blue shares of total nonfarm nonfinancial corporate assets it is also true as we observed some time ago that the profit to nonfinancial corporations has been falling as a share of total corporate profits while that of financial corporations has been on the rise graph 2 financial red and nonfinancial blue shares of total corporate profits this gets me wondering about what is left as the profit from real assets to nonfinancial corporations if we take their profit from financial assets and count it with the profit of financial corporations i suspect the profit from real assets has been falling and is rather low why do i think this because economic growth is not good and because profit is the engine that drives enterprise i m gonna assume that the split between financial and nonfinancial profit of nncb nonfarm nonfinancial corporate business follows the same pattern as the split between assets shown on graph 1 above starting with graph 1 and factoring in fred s nonfinancial corporate business profits after tax shows us the profit to nonfinancial corporations arising from financial and nonfinancial sources in billions graph 3 financial red and nonfinancial blue profits arising from nonfarm nonfinancial corporate assets profits from the two sources have become nearly equal but i remind you that graph 3 shows the profit of nonfinancial corporations only now we shall add the profit of financial corporations i add it to the red line to the financial profit of nonfinancial corporations graph 4 total corporate profits from financial sources red and productive sources blue it may clarify the picture to see this profit breakdown expressed as percent of total corporate profits graph 5 percent of corporate profits from financial sources red and productive sources blue in the 1950s about 60 of corporate profits came from real production and the rest from finance during most of the great inflation the ratio was 50 50 today about 25 of corporate profits come from real production three quarters comes from finance from other people s debt posted by the arthurian at 4 00 am 5 comments tuesday june 5 2012 fred at random 3ao the random eyes sidebar link turned up a comparison of two items from nonfarm nonfinancial corporate business balance sheets totals assets and total financial assets graph 1 fred s 3ao two lines going up the higher line the blue line is total assets the lower line the red one is financial assets everything below the red line down to the zero line is financial assets everything above it up to the blue line is productive assets if i divide the red line values by the blue line values and multiply by 100 to convert to percent i get to look at the history of financial assets as a percent of total assets for nonfarm nonfinancial corporate business graph 2 financial assets as a percent of total assets after the 1982 recession a straight line increase of financial assets up to 50 of total corporate assets as much as half the assets are financial assets half the assets of non financial corporations are now financial assets tax law made that happen i m sure of it posted by the arthurian at 4 00 am 2 comments monday june 4 2012 a beautiful mind the reasoning is from marcus nunes one of the effects of the ongoing crisis characterized by an abrupt and steep fall in ad aggregate demand was to bring back the discussion of what should be the target of mp monetary policy to the proponents of the view that the central bank should have as its objective the stability of ad this is the key to macroeconomic stability national or global marcus seems to be one of those proponents for this group shocks to ad are the true source of macroeconomic volatility while inflation is just a symptom of those shocks just like in medicine symptoms may be related to different causes so that prescribing the correct treatment is not trivial i like that inflation is a symptom marcus sets up an example an economy with nominal expenditures growing at the rate of 5 and an rgdp growth of 3 per year the difference leaves us 2 annual inflation then he introduces a change let us suppose that the economy experiences a real or productivity shock that permanently raises the level of potential rgdp fig 8 in this case rgdp growth increases to 4 and inflation falls to 1 with ad growth remaining at 5 tidy and simple and easy to understand rgdp real output increases by 1 inflation decreases by 1 and the total remains the same marcus nunes figure 8 in marcus s figure 8 the green line represents the path of real output or rgdp it is a straight line meaning that the growth rate is constant the angle or slope of the line represents the 3 growth rate this original path is shown as a dotted green line continuing at 3 once the change begins the red line shows the effect of the change the slope of the line is steeper and the rate of growth is more 4 during the change rather than 3 but once the new higher level is achieved the rate of growth returns to 3 so we see that the new higher green line runs parallel to the original green line it is significant that marcus supposes a change that permanently raises the level of potential rgdp the level not the rate of growth if it was a change to the rate of growth the new green line would show a steeper slope like the red line this is not the argument as nunes puts it note that in time the economy returns to point a with growth falling back to 3 and inflation moving back to 2 the level of rgdp is permanently higher and the price level will be permanently lower the orange and purple lines on figure 8 show what happens with inflation during the changes to output described here marcus continues this will be the outcome if the fed keeps the growth of ad at 5 however if it strives to keep inflation at 2 after it falls to 1 as a result of the positive supply shock increasing ad growth implies that the economy will be growing above its potential we begin with 5 ad realized as 3 real growth and 2 inflation a new technology or something suddenly means we can have a higher though not faster growing level of output the economy temporarily grows at a faster rate to reach the new target level the economy grows 1 faster and prices go up 1 slower so temporarily we have 4 real growth and 1 inflation the growth of ad remains at 5 but nunes says suppose monetary policymakers rely on inflation targeting they see the decline of inflation from 2 to 1 and they are concerned that the economy is slowing so they boost aggregate demand to compensate as a result rgdp growth increases from 4 to 5 and inflation increases from 1 to 2 total ad growth rises from 5 to 7 my numbers now nunes says inflation pressures will appear ad will have to be constrained policymakers will reduce interest rates and boost growth in order to keep inflation on target in this case rgdp and employment volatility will certainly be higher than if the fed had operated to keep ad growth stable rather than relying on inflation targeting with fed officials scurrying to outguess the economy s performance nunes would target ngdp on a reasonable path and let economic forces duke it out to divvy up the spoils between inflation and real growth marcus nunes makes an awesome argument in his post nunes shows several graphs of us economic data and ties the argument back to actual events ad instability after 1998 is associated with fed actions first the fed reacted to a below target rate of inflation and then in the opposite direction reacted to an exuberant rgdp growth rate this is indicative that an it regime has an important flaw that manifests itself when the economy experiences supply shocks he summarizes if monetary policy is successful in keeping ad growth stable the system adjusts while volatility remains low if the fed manipulates ad influenced in turn by an inflation below target and then influenced by rgdp growth above potential the system also adjusts in the sense that inflation returns to target and growth to potential but the shocks to ad resulting from these manipulations impart an undesired high level of volatility to the system in other words rather than relying on inflation targeting with fed officials scurrying to outguess the economy s performance nunes would target ngdp on a reasonable path and let economic forces duke it out to divvy up the spoils between inflation and real growth marcus it s a great argument maybe i will stop saying ngdp targeting does nothing for growth maybe i have to state my objection more clearly for the record i really like the idea to let market forces determine the split between real growth and inflation within the ad growth window that the fed provides i do like it but the split will not be good marcus until the cost push pressures are dealt with cost push pressures arising from the excessive reliance on credit resolve those pressures and your market forces will treat us well fail to re...