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g but if you look at the second black peak on 6 the 15 month lag is too much the graph shows the black line peaking after the red when i reduce the lag to eight months these two peaks align graph 7 i like to think that the economy took 15 months to respond to the first black peak but only 8 months to respond to the second the second lag was only half as long this would mean that the metabolism of the economy was picking up and the economy was improving if i was the fed i would have said qe is working look at the low point before the second black peak it lines up well with the low in the red line so the same 8 month lag applies at that low as at the second peak and presumably during the rise to the second peak as well but now look at the decline from the second peak the black line appears to bottom out a couple months before the red this suggests that the economy s metabolism had slowed again that is plausible as the decline of the red is itself an indication of slowing perhaps that unexpected reversal is responsible for the wiggle of the black line visible in the early months of 2014 on 7 it looks as if the fed had already decided to bring the increase to a peak in those early months but suddenly the fed changed its mind and pushed the black line up again to a higher peak the same wiggle appears in the same place on the red line but it look longer for that wiggle to play out in red again this indicates a growing lag of course the black line on graph 7 is shown with an eight month lag so those early 2014 wiggles actually occurred about 8 months apart the third and final peak in the black line comes well before the third red peak on 7 the alignment is better with a 15 month lag as shown on graph 6 the longer lag implies a slowing economy this brings us to the final down slopes shown on the graph it looks like the downtrend in rgdp growth has been encouraged by the downtrend in base money growth let s look at that after the third and final peak the black line trends down the red does the same after the red line ends the black line continues downward to the end the lagged data lets us imagine the future of rgdp graph 8 the same data as graph 6 our window on it is different if the downtrend in rgdp growth is related to the downtrend in base money growth then we should expect rgdp growth to trend downward for another 15 months that can t be good the excel file this file contains vba code posted by the arthurian at 4 00 am 0 comments friday october 7 2016 the relation between money and economic activity changed in the mid 1980s from the opening paragraph of monetary cycles financial cycles and the business cycle a new york fed staff report by tobias adrian arturo estrella and hyun song shin a traditional view in monetary economics is that interest rates are transmitted via the money demand function and that the level of interest rates affects real consumption and investment however beginning in the mid 1980s the relationship between money and economic activity became highly unstable as rapid changes in the financial system started to change the nature and composition of monetary aggregates the relation between money and economic activity changed in the mid 1980s the authors continue as a result theories of monetary transmission that explicitly include quantities have lost prominence instead attention has turned to expectations based channels of monetary policy which emphasize the expectations theory of the yield curve and the role of expected future short term interest rates in determining the long term interest rate in this paper we re examine the transmission of monetary policy to the real economy and that s as much as i read of that the relation between money and economic activity changed as a result they say the quantity theory has lost prominence and expectations have gained in importance in the paper the authors focus on the changed relation i have to go to their conclusion to make sure i know what they are talking about here s their last sentence liquidity matters but in our framework liquidity should be defined as the growth rate of assets on key intermediary balance sheets not the quantity of money after the change they say the quantity of money still matters but the money itself is different what do i say all the time we use credit for money in the good old days we used money for money but now we use credit for money i ran into positive money the other day describing the uk economy 97 of the money in the economy today is created by banks whilst just 3 is created by the government government money is money bank money is credit it s a simplification but imagine that government money has no interest cost and bank money has a 5 interest cost in an economy with 100 government money we start with zero interest cost in an economy with 100 bank money we start with an interest cost equal to 5 of the quantity of money as time goes by money goes into savings and money goes out of the economy the money gradually disappears but the debt still exists the economy needs more money people need more money and borrow more and then there is more debt than money time goes by for 30 years or so and then there is a lot more debt than money eventually this changes the economy as the paper describes time goes by for another 30 years or so and people can no longer afford the debt and then you have a crisis what s wrong with that new york fed paper what s wrong is that the relation between money and economic activity changed in the mid 80s and the authors don t consider that to be the problem posted by the arthurian at 4 00 am 1 comments thursday october 6 2016 exactly hussman quotes mises the fact that each crisis with its unpleasant consequences is followed once more by a new boom which must eventually expend itself as another crisis is due only to the circumstances that the ideology which dominates all influential groups political economists politicians statesmen the press and the business world not only sanctions but also demands the expansion of circulation credit not only sanctions but also demands the expansion of circulation credit posted by the arthurian at 4 00 am 1 comments wednesday october 5 2016 what s wrong with the new richard vague article not much is wrong with it vague s the private debt crisis is very good but i do have a few remarks richard vague writes both private debt and government debt matter and both will be discussed here but of these two it is private debt that has the larger and more direct impact on economic outcomes and addressing the issues associated with private debt is the more productive path to economic revival exactly i get complaints from tards sometimes when i look at federal debt yet as richard vague says both private debt and government debt matter he adds it is private debt that has the larger and more direct impact yup when too high private debt becomes a drag on economic growth yup he explains it well too except he says consumers are in fact carrying 13 percent more debt as a percent of gdp than they were in 2000 the moment before the ill fated private debt boom that led to the 2008 crisis i m a little uncomfortable with this sentence because it suggests that the increase of debt to gdp is a problem period me i don t know that it s a problem if the increase is gradual i think it is but i can t prove it to my own satisfaction i ve looked at this before graph 1 private debt as a percent of gdp i draw a trend line richard vague draws a horizontal at the current level i m not sure my trend line has merit but i m sure his horizontal has none in that vein his chart 3 shows private debt to gdp for the six nations that have accounted for roughly 50 percent or more of global gdp since the industrial revolution the chart goes back to 1740 the lines go up as vague puts it the general trend is toward higher levels of debt he presents the chart as evidence of the path from low leverage to overleverage and that s what i think it is too but i can t accept the argument richard vague makes that it s a problem for as he points out the benefit of increasing leverage from low levels has played a central role in the miraculous gains in incomes over the 200 plus years since the industrial revolution what looks to us like low levels of leverage looked like high levels to people at the time see the problem something else overcapacity as mentioned short bursts of runaway growth in private debt have often led to crisis the united states in 2008 and japan in 1991 to name just two that is because so much lending occurs that it results in overcapacity far too much of something is built or produced housing and office buildings are two examples and too many bad loans are made i m not at all comfortable with that statement the goal is not just to tell a story that makes sense the goal is to understand the economy it is too easy in economic studies to come up with a story that sounds good and build on it decades later the story that was assumed to be correct turns out to be wrong but it has become part of the foundation supporting forty years work and no one is willing to dismantle enough of that work to remove the few bad bits even if people were willing and even if the mistake did get fixed we re dealing with the mindset of a generation here more than a generation all those people would have to change their minds and that s never going to happen science advances one funeral at a time that s where econ is today by the way i want no part in repeating such an error anyway 60 to 70 percent of assets are financial assets as opposed to productive assets two thirds of our assets produce nothing but income they don t contribute to capacity they contribute only to the cost of the output produced by non financial assets richard vague says we end up in crisis because so much lending occurs that it results in overcapacity and too many bad loans are made it s a great story but the problem is not that the lending creates overcapacity the problem is that the lending creates debt when you get too many loans too much debt really you get too much financial cost for the non financial sector to bear that s how bad loans arise the non financial sector starts defaulting and the financial sector starts to worry and when the financial sector starts to worry the economy is in trouble overcapacity the borrowed money had to go somewhere besides if finance wasn t worried today they d still be lending and we d still be adding to capacity so to speak and we wouldn t be calling it overcapacity i think vague s argument here is just wrong richard vague repeats his overcapacity story in regard to china in its rush to grow china has simply built far too many buildings witness the many ghost towns and produced far too much steel iron and other commodities and made far too many bad loans in the process its overcapacity is so pronounced that it will take years for true demand to catch up with this oversupply no if less income was taken by the financial sector the productive sector could afford to put those buildings to use and to put the steel and iron and other commodities to use and the loans would not have gone bad loans go bad because finance is drawing too much profit from the productive sector the productive sector withers for decades until the feedback effect makes the financial sector start to go sour then everything fails at once that s my story and i m sticking to it posted by the arthurian at 4 00 am 3 comments tuesday october 4 2016 the great moderation the more a man is imbued with the ordered regularity of all events the firmer becomes his conviction that there is no room left by the side of this ordered regularity for causes of a different nature albert einstein posted by the arthurian at 4 00 am 0 comments monday october 3 2016 some gossip about david ricardo from crisis chronicles the crisis of 1816 the year without a summer and sunspot equilibria at liberty street economics by jim narron and don morgan 1816 the year without a summer the financial and economic difficulties associated with the end of the napoleonic wars were exacerbated by extremely cold dark weather across northern europe and the northeastern united states in 1816 the poor weather was caused by the eruption in the dutch east indies indonesia of mount tambora which spewed smoke and ash into the atmosphere obscuring the sun so severe was the weather that snow was recorded in albany new york and in cities in northern europe in july the cold and dark caused widespread crop failures and severe famine across the northern hemisphere and 1816 became known as the year without a summer and the poverty year people were observed eating bread of sawdust and straw lord byron commemorated the calamity with a poem darkness the famine caused many german and swiss residents to flee certain starvation by traveling to russia and the americas while italians flocked to the cities hundreds of thousands died from the combined effects of typhus exposure and starvation food prices increased dramatically by 1817 and this led to one of the first direct public interventions in failed markets as local governments coordinated food imports to feed the starving however not all were in favor of public aid british political economist david ricardo argued that funds raised for employing destitute people were wastefully diverted from other productive employment posted by the arthurian at 4 00 am 0 comments sunday october 2 2016 i ll take it in cash please i have my problems 1 2 3 with scott sumner but at least he has an idea what i would call an original idea though i don t really know enough to say and he keeps pushing that idea and testing it more pushing than testing that s one of the problems i have with him but anyway this one i like got a blister on your pinky let s amputate your right arm there is a rising chorus in the economics community calling for the abolition of cash the argument is that cash is the cause of the zero bound problem the fact that nominal interest rates cannot be cut very far below zero and so it is claimed this causes weak growth in aggregate demand actually the severe recession of 2008 had nothing to do with the zero bound as interest rates were still above zero it was caused by tight money if you have the economic analysis wrong and you run with it your conclusions are very likely to be wrong as well and you see it often the focus on the zero bound problem once you decide that the zero bound problem is the problem everything that comes after is related to solving the zero bound problem but as scott says the 2008 recession had nothing to do with the zero bound rates went to zero in response to the recession deciding that we should eliminate cash is a bizarrely wrong conclusion to a very bad analysis of the state of the economy posted by the arthurian at 4 00 am 7 comments saturday october 1 2016 thomas palley on nirp from why zlb economics and negative interest rate policy nirp are...