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income than they otherwise would this is not true rising debt over the past 30 years is entirely a matter of disinflation and higher interest rates there has been no long run increase in borrowing when mason says this is not true he is referring to the belief that households chose higher levels of consumption relative to income for the past 30 years he is not referring to the common trope that financialization increased obviously financialization increased update 4 25 am posted by the arthurian at 4 00 am 0 comments monday may 19 2014 the repayment of household debt when there is a dollar of debt for every dollar of income paying down 10 of the debt takes 10 of the income when there is 10 of debt for every dollar of income paying down 10 of the debt takes all of the income i ve seen graphs of debt repayment as a percent of disposable income never saw anything on the amount of debt repaid as a percent of debt outstanding we can look at debt service to see how much debt we pay off each year and then compare debt paid off to debt outstanding to see the relation between these two at fred a search for debt service turned up lots of hits one of the first was household debt service payments out of disposable personal income i know there are measures of household debt so household debt service payments might make a good comparison i looked a little more and found three measures of debt service as a percent of disposable personal income graph 1 three measures of debt service out of disposable personal income at first glance the blue line looks a lot higher than the others but the vertical axis doesn t go all the way down to zero so the red and green are higher than they look i wonder if i add the red and green together do they equal the blue graph 2 consumer mortgage debt service payments as of dpi red dashed overlaid on household debt service payments as a percent of dpi blue looks like it from here that could be useful information so anyway i ll use the total the household debt service number i should be able to get household debt service in dollars or billions by undoing the percent of dpi calculation if i was figuring debt service as a percent of disposable personal income i d divide debt service by disposable personal income dpi and multiply by 100 to undo the calculation and get the debt service number back i d divide by 100 and multiply by dpi now i know how to get household debt service from fred s household debt service ratio divide by 100 and multiply by dpi graph 3 household debt service payments in billions for dpi i used fred s dspi crap it only goes back to 1980 oh well now we can look at household debt service payments the number from graph 3 as a percent of household debt graph 4 household debt service payments as a percent of household debt for household debt i used fred s cmdebt wellsir it seems we re paying down debt even slower now than before the crisis that can t be good notice the flat spot there in the latter 1990s when the economy was doing good i wonder what this ratio looked like before 1980 posted by the arthurian at 4 00 am 6 comments sunday may 18 2014 simple debt is a stock that accumulates year upon year income is a flow that starts again at zero every year therefore unless we choose to prevent it debt will grow till it dwarfs income posted by the arthurian at 4 00 am 0 comments saturday may 17 2014 nuanced monetarism in the general theory maynard keynes said we can draw the line between money and debts at whatever point is most convenient for handling a particular problem in capitalism and freedom milton friedman wanted to carefully manage the quantity of money but he didn t care what money was managed what monetary aggregate it didn t concern him at all according to keynes where you put the dividing line between money and debt depends on the problem you re trying to solve according to friedman it doesn t matter where you put the dividing line posted by the arthurian at 4 00 am 1 comments friday may 16 2014 something must have caused it yesterday s post was too brief to be so thumbs downish i didn t feel good about that and i want to take a longer look at marcus nunes s post today marcus opens with an excerpt from mian and sufi that lays out their picture of why the housing bubble tanked the economy and the tech bubble didn t the sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them disproportionately affecting poor homeowners who then stopped spending what about the tech crash in 2001 stocks were held almost exclusively by the rich the tech crash concentrated losses on the rich but the rich had almost no debt and didn t need to cut back their spending an interesting picture from my perspective marcus then quotes david beckworth who disputes mian and sufi s view beckworth admits it is true there was far more u s household debt leading up to the great recession than the 2001 recession but he considers debt a symptom not a cause in my view beckworth says the underlying cause was interest rate targeting central banks running up against the zlb the failure by central banks to get around the zlb caused most of the household deleveraging not the other way around monetary policy in other words was too tight during the crisis monetary policy was too tight beckworth says relative to what i don t read much beckworth so i don t know but i imagine he d say money was too tight relative to the needs of the economy to this straw beckworth i must reply that s not specific enough if money is tight then obviously it is tight relative to the needs of the economy but interest rates are at the zero bound that s as loose as money can get so the problem cannot be that interest rates are too high in the same david beckworth post that marcus nunes quoted beckworth says the real problem is the zlb debt itself is not the problem this is because for every debtor there is a creditor who could provide offsetting spending if the interest rates adjusted down to their natural rate level this adjustment process is impeded when the natural interest rate is negative since nominal interest rates cannot go below zero percent now steve roth responds to the for every debtor there is creditor part of that i think it s the best banks are not intermediaries argument i ve ever seen but i m going to skip right over it because i have a different concern beckworth says debt only became a problem because the natural interest rate is negative okay but why is the natural rate of interest negative sunspots c mon david something must have caused it interest rates are as low as they can go we can t fix the problem by lowering rates more so it s obvious to me that the problem is not that interest rates are too high the problem is not that money is too tight there must be some other problem that is related to money and interest rates that problem is debt excessive private sector debt look lowering interest rates did fix the problem before we got to the zlb it worked by making credit less expensive other people may offer complicated explanations but if you lower interest rates you make credit less expensive but now we ve reached the lower limit and credit is still too expensive that s beckworth s argument i think so suppose it s true how can we make credit less expensive when interest rates are low as they can go let me ask the question another way how can we make total debt less expensive without lowering interest rates only one way reduce the size of total debt the trouble is we need some interesting new economic policy to make it happen because as things stand now the only way available to us to reduce the size of total debt is to pay debt down and paying debt down takes money out of circulation and then you get the situation where interest rates are at the zero bound and money still seems too tight 17 may 2014 edit changed other people may have complicated explanations to other people may offer complicated explanations posted by the arthurian at 4 00 am 0 comments thursday may 15 2014 marcus comes up empty marcus nunes the fact is that in after 2007 the poor man was doubly penalized on the one hand his nominal income took a plunge and insult was added to injury when his job was taken away the chart compares nominal income growth ngdp during the two cycles is it hard to see why consumer spending and all the other components of gdp and employment crashed the chart shows a big drop in nominal gdp during the great recession looking at that big drop marcus says it is easy to see why consumer spending and all the other components of gdp crashed marcus says in other words that the reason all the components of gdp crashed is that gdp crashed sir that explains nothing posted by the arthurian at 4 00 am 11 comments wednesday may 14 2014 one interesting thought posted by the arthurian at 4 00 am 0 comments tuesday may 13 2014 gavin kennedy a metaphor is a metaphor gk at adam smith s lost legacy in treating a metaphor as a real entity which they believe actually operates in society you end up with fantasies when these fantasies are believed by economists including nobel prize winners you leave reality and belittle claims to economics being a science posted by the arthurian at 4 00 am 1 comments monday may 12 2014 fungal inflation kinda makes you miss the good old days when we didn t need the fungus excuse to raise prices oh sure there were newsworthy shortages of toilet paper and sugar and cabbage patch dolls back when but at least we didn t have to worry about the cabbage patch fungus posted by the arthurian at 4 00 am 2 comments sunday may 11 2014 myth in the myth of the great moderation from a five minute video you can see at lars p syll naked capitalism heteconomist economonitor syll says just watch it but i can t i have to say something when i see something wrong i have to say something don t you here s a snapshot from the video third item on the lists says there was a change from wage led growth to debt led growth i have trouble with that it suggests new borrowing grew significantly faster in the later period but that s not correct back in march at new left project andrew kliman evaluated sam gindin s take on the global economic crisis kliman wrote according to gindin workers incomes stagnated as their wages declined or grew slowly this not only boosted profits but also contributed substantially to the growth of the financial sector as workers became dependent on credit in order to keep their standard of living from falling in particular they came to depend heavily on their homes as collateral for borrowings however although gindin cites a lot of data elsewhere in his article almost no hard evidence accompanies this account of capitalism under neoliberalism and the hard evidence fails to support much of it since something like this account has become conventional wisdom among much of the left it is important to review the facts in detail according to kliman the conventional wisdom is not correct he says the share of personal consumption spending funded by consumer credit i e all household borrowing except for home mortgages did not rise over time in other words consumption did not increasingly come to depend on consumer credit consumption did not increasingly come to depend on consumer credit that assertion of kliman s stopped me cold the first time i read his article it should make you stop too it should make you second guess yourself as it did me well maybe you don t like second guessing yourself but i m pretty sure you do like this the fisher dynamics of household debt as mark thoma said this research knocks a hole in the story that it was lack of self control that caused the increase in household debt prior to the financial crisis when thoma says it wasn t a lack of self control he means it wasn t increased borrowing that caused debt to increase at thoma s link jw mason summarizes the research it s a well known fact that household debt has exploded in recent decades rising from 50 percent of gdp in 1980 to over 100 percent on the eve of the great recession it s also well known that household borrowing has increased sharply over this period in fact though while the first of these is certainly true the second is not mason says the same thing as kliman we think consumption increasingly came to depend on credit since 1980 but that s not correct now you have to stop and think now you have to take a step back from the conventional wisdom doesn t matter how cute that five minute video was we have to get this right debt grew faster after 1980 than before not because of an increase in borrowing but because of the disinflation posted by the arthurian at 4 00 am 7 comments saturday may 10 2014 squaring the circle from the world economy may well be stuck in neutral for years it is now nearly seven years since the start of the financial crisis yet despite growing evidence in america and britain of a return to relative normality something remains profoundly broken at the heart of the world economy one manifestation of this much discussed among the officials finance ministers and central bankers gathered in washington this week for the spring meeting of the international monetary fund is the persistence of unnaturally low interest rates very low interest rates are in essence the natural corollary of a stagnating economy money has rarely been as abundant and cheap but there is nowhere productive for it to go unfortunately no meaningful way of squaring the circle is offered money has rarely been as abundant and cheap but there is nowhere productive for it to go that s not quite right there is nowhere profitable for the money to go in the productive sector that s what they mean i think but it s not what they said and being unclear on that small point is the reason there seems no way to square the circle there s too much money in finance not enough money is spent out of finance basically not enough money is pissed away money that you piss away is how other people make a profit if you refuse to do anything with your money other than count it nobody can profit at your expense if the people with all the money all hang on to it nobody can make a profit as long as nobody can make a profit there is nowhere profitable for money to go and when there s nowhere profitable for money to go people say things like there is nowhere productive for it to go posted by the arthurian at 4 00 am 0 comments friday may 9 2014 maybe the problem is excessive debt syll quotes roger farmer the nk economist accepts milton friedman s concept of the natural rate of unemployment which asserts that in the long run there is a unique equilibrium level of unemployment associated with stable inflationary expectations if inflation appears following a recession a policy maker who accepts nk economics will infer that the economy is operating above potential if unemployment is now 6 rather than 3 it must be that the natural rate of unemployme...