tag:blogger.com,1999:blog-77077937362884621132024-03-15T03:27:53.143-04:00Bubbles and BustsExploring economic and financial instability within global markets and economies.Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.comBlogger474125tag:blogger.com,1999:blog-7707793736288462113.post-20710992538291719342013-11-15T16:34:00.000-05:002013-11-15T16:34:39.158-05:00Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008<div class="MsoNormal">
Dear Readers,<o:p></o:p></div>
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Let me start off by sincerely apologizing for my abrupt and
now lengthy absence from the blogosphere. Although I have been absent from
blogging, my interest in the endogenous money hypothesis and Modern Monetary
Theory (MMT) continues to grow. <o:p></o:p></div>
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This semester I have been taking a directed readings course on
those topics with another GMU PhD student, <a href="http://www.pauldmueller.com/">Paul Mueller</a>. As part of the course,
we are co-writing two papers that will hopefully be published in an academic
journal. Our first paper, “<a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355178">Empirical Evidence for the Endogeneity of the Money Supply in the United States from 1971-2008</a>,” is now sufficiently complete to make publicly available. <o:p></o:p></div>
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The unique aspects
of our paper are the incorporation of Divisia monetary aggregates and a focus
on broader measures of the money supply (i.e. M3 and M4). While the
paper remains in draft status (so please do not cite this version), we would
greatly appreciate comments and suggestions for improving the paper before a
final draft is submitted for publication. The paper can be downloaded at SSRN (<a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355178">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2355178</a>).
Here is the abstract:<o:p></o:p></div>
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“This paper demonstrates that contrary to orthodox monetary
theory, fluctuations in total commercial bank loans affect the quantity of
various money aggregates, including the monetary base, but not vice versa. The
Granger causality tests that we run on lagged quarterly data strongly suggest
that changes in the money supply depend on private demand for commercial loans,
not “exogenous” changes in the monetary base. Our findings strongly contradict
the notion of a fixed “money multiplier.” The theory behind endogenous money is
that banks issue new loans (credit) on demand and look for reserves later. The
Federal Reserve must ultimately accommodate increases in demand for reserves
from the banking sector to maintain an interest rate target and, more
importantly, financial stability. These findings suggest that most economists
need to revise their theories about monetary policy and credit expansion.”<o:p></o:p></div>
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Thank you in advance for taking the time to help and for continuing
to follow my blog. <o:p></o:p></div>
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(Note: In the past couple days it has come to my attention
that using Granger-causality tests on the first differences of variables may
lead to invalid results. Apparently a separate technique, created by Toda and
Yamamato, generates more valid results using extra lags of the variables in
levels as exogenous variables in the regression. The preliminary results using
this method don’t materially alter the paper’s conclusion. Since each technique
has been used in recently published articles, we would appreciate insight from
other economists on which method (or both) to include our final version.) <o:p></o:p></div>
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</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com120tag:blogger.com,1999:blog-7707793736288462113.post-5503185841861594492013-03-29T15:42:00.000-04:002013-03-29T15:42:19.269-04:00"Cyprus Should Leave The Euro. Now."<b id="internal-source-marker_0.7907200106419623" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Yesterday banks in Cyprus opened for the first time in a week. Markets were seemingly calmed by the absence of immediate bank runs, however the ability of depositors to actually create a bank run has been prevented by strict capital controls. The real test for Cyprus banks will come when the capital controls are finally lifted. Although the restrictions are only supposed to be in place for 7 days, recent experience in Iceland suggests the better question is not when but </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">IF</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> the capital controls will be lifted. Based on the IMF’s recommendation, Iceland instituted capital controls back in 2008 for what was supposed to be a few months. Five years later the capital controls remain in place and are expected to continue for at least a couple more years. As a base case we should expect an announcement next week that Cyprus’ capital controls will remain in place for a few more weeks (possibly months). </span></b><b id="internal-source-marker_0.7907200106419623" style="font-weight: normal;"></b><br />
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<b id="internal-source-marker_0.7907200106419623" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">While the implementation of capital controls presents an interesting storyline, Paul Krugman has raised a much bigger question into the public spotlight. After being challenged to expand the boundaries of political possibility, </span><a href="http://krugman.blogs.nytimes.com/2013/03/26/cyprus-seriously/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Krugman</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> offered the following recommendation (emphasis added):</span></b></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">So here it is: yes, </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Cyprus should leave the euro. Now.</span></blockquote>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The reason is straightforward: staying in the euro means an incredibly severe depression, which will last for many years while Cyprus tries to build a new export sector. Leaving the euro, and letting the new currency fall sharply, would greatly accelerate that rebuilding.</span></blockquote>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The question for Cyprus is therefore whether “internal” or “external” devaluation offers the best prospects for the future? Let’s consider both of the options...</span></div>
<br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><div dir="ltr" style="margin-bottom: 0pt; margin-top: 0pt;">
<span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">“Internal devaluation” (i.e. income deflation)</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - In return for continued assistance from the Troika (EU/ECB/IMF), Cyprus has agreed to impose losses on equity and debt holders, as well as uninsured depositors, of the two largest banks (Bank of Cyprus and Laiki Bank). This marks a distinct change in policy, especially with regard to the latter two groups.* Since uninsured depositors held a majority of those banks’ liabilities, the focus has naturally been on that group. Based on recent estimates uninsured depositors in the Bank of Cyprus may lose approximately 40%, while Laiki Bank’s uninsured depositors will be entirely wiped out. </span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The sharp reduction in (perceived) wealth stemming from these actions will put severe downward pressure on national income. Individuals and businesses experiencing losses will try to increase saving by reducing spending. Banks fearing deposit flight and falling asset prices will try build a stronger base of capital by restricting the supply of credit and possibly selling assets. Adding to the fall, the government will be forced to accept a MoU (Memorandum of Understanding) that establishes policies to increase taxes and reduce spending. Combining these deflationary pressures, the overall economic results may rival (or exceed) Greece’s recent history.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">During the past 5 years Greece’s real GDP has declined by 20%</span><img height="534px;" src="https://lh5.googleusercontent.com/TEtq13GPipz5TOmAR1yOWaWI4S4sluCn6qCEbfLRzMcbxUQrxb-q1xkS8M1kZPkfkO8y1FDOOYqFUp3Rhgr6YES0Zax9bsIXVMuo8rS9P4zmWMiAs1qbA1m5nA" width="575px;" /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">and unemployment has nearly quadrupled from ~7% to ~27%.</span></div>
<iframe frameborder="0" height="325" marginheight="0" marginwidth="0" scrolling="no" src="https://www.google.com/publicdata/embed?ds=z8o7pt6rd5uqa6_&ctype=l&strail=false&bcs=d&nselm=h&met_y=unemployment_rate&fdim_y=seasonality:sa&scale_y=lin&ind_y=false&rdim=country_group&idim=country:el:cy&ifdim=country_group&hl=en_US&dl=en&ind=false&q=greece+unemployment+rate" width="400"></iframe>
<br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><div dir="ltr" style="margin-bottom: 0pt; margin-top: 0pt;">
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<b id="internal-source-marker_0.7907200106419623" style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">To offer some </span><a href="http://socialdemocracy21stcentury.blogspot.com/2013/02/the-great-depression-in-europe-selected.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">historical perspective</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, US unemployment during the Great Depression peaked at 25% and real GDP loss only exceeded 16% for one major European nation (Austria). Perhaps even more disheartening than the current data is recognition that output and unemployment appear unlikely to improve anytime soon. </span></b></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Returning to Cyprus, unemployment has already quadrupled over the past 5 years (~3.5% to ~14%; shown above). Based on current estimates of a 20-30% drop in real GDP, Cyprus’ unemployment rate could easily approach or eclipse Greece’s in the next few years. </span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">“External devaluation” (i.e. new currency)</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - If Cyprus were to leave the Eurozone, one of the first actions would be re-introducing the Cypriot pound at a heavily devalued rate against the euro. Not unlike the imposed losses on uninsured depositors, currency devaluation immediately imposes significant losses on all depositors. In this sense the impact on private demand would still be extremely deflationary, perhaps even more so. Though output and employment would fall dramatically, external devaluation presents reasons for potential optimism on both the foreign trade and government fronts. </span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Based on the recent bank losses and capital controls, Cyprus can no longer rely on its financial sector to support exports. By heavily devaluing its currency, Cyprus would be increasing its price competitiveness on the foreign market. However, as </span><a href="http://econospeak.blogspot.com/2013/03/why-wont-cyprus-obey-krugman.html?showComment=1364421594539#c6660890148208375953"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Barkley Rosser</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> points out:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">even with large elasticities [of trade relative to the exchange rate], there is the J-curve effect. Exports do not increase immediately, whereas the value of imports tends to jump up immediately with their price increases.</span></blockquote>
<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Aside from these timing issues, there is also a concern regarding the certainty of each effect. A large devaluation will definitely raise the cost of living for Cypriots but as </span><a href="http://econospeak.blogspot.com/2013/03/why-wont-cyprus-obey-krugman.html?showComment=1364419476558#c6610235808223797629"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">JW Mason</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> comments, it:</span><br />
<blockquote class="tr_bq">
<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">might not lead to higher net exports in the next few years, or ever. That’s the question -- not how big the devaluation would be, but how strongly it will affect trade flows.</span></blockquote>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">As for the government sector, returning to the Cypriot pound would remove some of the current fiscal constraints. This would permit the government to increase spending (ideally investment in a new export sector) and not raise taxes, raising private sector income. While these adjustments will not come remotely close to overcoming the other deflationary effects in the short-run, the counterbalance provided will be a significant improvement over current policy.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In asking “</span><a href="http://econospeak.blogspot.com/2013/03/why-wont-cyprus-obey-krugman.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+espeak+%28EconoSpeak%29"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Why Won’t Cyprus Obey Krugman?</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">” Rosser concludes:</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">While this devaluation might make it easier for Cyprus to recover several years down the road, that recovery would indeed be several years down the road, and in the meantime there would be a lot of pain for the entire citizenry that will not happen if they stay with the euro.</span></blockquote>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">If Greece has taught us anything about remaining with the euro, it’s that a lot of pain for the entire citizenry will happen regardless and a recovery may be decades down the road. </span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Cyprus is therefore faced with a choice between two terrible outcomes:</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">1) Remain in the Eurozone and experience a relatively slower “internal devaluation” whereby real output and employment experience large declines spread out over several years. A potential recovery is pushed even further into the future.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">2) Leave the Eurozone and experience a quick “external devaluation” whereby real output and employment fall dramatically in the next year or two, but a recovery several years down the road becomes far more probable. </span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><br /></span>
<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Where </span><a href="http://econospeak.blogspot.com/2013/03/why-wont-cyprus-obey-krugman.html?showComment=1364434257985#c1082868330806530216"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Rosser</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> and I find agreement:</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">is that the real real issue here has to do with time preferences. It may get down to hyperbolic discounting. People do not want to have pain in the near term. So, the fear by the whole population of near term pain in terms of standard of living may outweigh fear of a more gradual decline with rising unemployment, even though the shorter term sharp pain is likely to lead to a sooner turnaround to growth.</span></blockquote>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Although this psychological tendency is very normal, it can at times be detrimental to achieving longer-term goals. The cases of Greece, Spain, Italy, Portugal, Ireland, and now Cyprus are examples of such times. The severe pain of reduced standards of living and high unemployment will be felt one way or another, but the option of “external devaluation” offers potential for a better future five and ten years down the road. Therefore I concur with Krugman, “</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Cyprus should leave the euro. Now.”</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">* From my perspective, imposing losses on debt holders should have been done from the outset in the US and Europe. The apparent change in policy may raise costs of debt financing for the largest banks, but that should be a welcome change after years of enjoying a TBTF subsidy. </span></div>
</b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com17tag:blogger.com,1999:blog-7707793736288462113.post-8589359268810186562013-03-15T19:24:00.001-04:002013-03-15T19:24:23.947-04:00Hudson, Keen, Smith and Others Explain Why Private Debt is the Problem<b id="internal-source-marker_0.004193407949060202" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This past Wednesday I attended </span><a href="http://events.theatlantic.com/economy-summit/2013/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Atlantic’s Second Annual Economy Summit</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> featuring many previously high ranking government officials (e.g. Federal Reserve Chairman Paul Volcker, Secretary of the Treasury Robert Rubin, and FDIC Chairman Sheila Bair). Though these former public officials and many others remained focus on the issue of public debt and deficits, the conference was actually promoted on the basis of turning the focus to private debt. Since my understanding of economics suggests concerns over private debt should be the main focus of current policy, I was personally excited to hear from </span><a href="http://www.debtdeflation.com/blogs/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Steve Keen</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, Michael Hudson and </span><a href="http://www.nakedcapitalism.com/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Yves Smith</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">To provide a quick gist of the discussion during these morning panels and the detrimental effects of excessive private debt, here are a few snippets from Michael Hudson’s </span><a href="http://michael-hudson.com/2013/03/government-debt-and-deficits-are-not-the-problem-private-debt-is/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">prepared remarks</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span></b><br />
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<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The result of the private-sector debt overhang is a self-feeding spiral of debt deflation. Revenue earmarked to pay bankers is not available to spend on goods and services. Lower consumer spending is a major reason why firms are not investing in tangible capital to produce more output. Markets shrink, shopping malls close down, and empty stores are appearing for rent on major shopping streets from New York City to London.</span></b></blockquote>
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<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Slowing employment is causing a state and local budget squeeze. Something has to give – and it is largely pension plans, infrastructure spending and social programs.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">However, the one kind of debt we are not worried about is government debt. That’s because governments have little problem paying it. They do not need to balance their budget with tax revenue, because their central bank can simply print the money. On balance, the overall public debt rarely needs to be paid down. As Adam Smith noted in The Wealth of Nations, no government in history ever has paid off its public debt.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">…</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The policy lesson for today is that to avoid debt deflation, falling markets and unemployment, the economy needs to be revived. The way to do this is what was called for and indeed promised four years ago: a write-down of debts in keeping with the ability to pay.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Once this debt overhead is addressed, tax reform is needed to prevent a debt bubble from recurring. A tax system that favors debt financing rather than equity, and that favors asset-price “capital” gains and windfall gains over wages and industrial profits earned by producing tangible output, has been largely to blame. Also needing reform is tax favoritism for the offshore fictitious accounting that has become increasingly unrealistic in recent years.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Unless government fiscal policy addresses these issues, the U.S. economy will face the same kind of debt-deflation pressures and fiscal austerity that is now tearing the eurozone apart.</span></b></blockquote>
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">As the only two economists in attendance who predicted the financial crisis and subsequent stagnation, Hudson and Keen’s panel stood out in offering practical policy responses that will not further increase wealth inequality or the financial sector’s profits/influence:
<iframe allowfullscreen="" frameborder="0" height="260" scrolling="no" src="http://fora.tv/embed?id=17598&type=c" webkitallowfullscreen="" width="400"></iframe></span></b><br />
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://fora.tv/v/c17598">Good Debt, Bad Debt & Real Options for Economic Growth</a> from <a href="http://fora.tv/partner/Atlantic">The Atlantic</a> on <a href="http://fora.tv/">FORA.tv</a>
</span></b><br />
<b style="font-weight: normal;"><br /></b><b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">A brief detour from discussion of the conference, Professor Steve Keen has been working hard on building a computer program for building & visually simulating dynamic, monetary economics models:
</span></b><b style="font-weight: normal;"><a href="http://kck.st/XhKtdX"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">http://kck.st/XhKtdX</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">There are </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">only 2 days left</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> to show your support for the project on Kickstarter and help reach the secondary funding goal of $100,000. Please check out the Kickstarter page for more information and consider making a pledge to improve the future of economics:</span><br /><a href="http://www.kickstarter.com/projects/2123355930/minsky-reforming-economics-with-visual-monetary-mo"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">MINSKY: Reforming economics with visual monetary modeling</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Returning to the conference and giving credit where its due, The Atlantic has been working with and, in the afternoon session, featured Richard Vague’s work on “How to Deal With America’s Private Sector Debt Challenge”:
<iframe allowfullscreen="" frameborder="0" height="260" scrolling="no" src="http://fora.tv/embed?id=17606&type=c" webkitallowfullscreen="" width="400"></iframe></span></b><br />
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://fora.tv/v/c17606">How to Deal with America's Private Sector Debt Challenge</a> from <a href="http://fora.tv/partner/Atlantic">The Atlantic</a> on <a href="http://fora.tv/">FORA.tv</a>
</span></b><br />
<b style="font-weight: normal;"><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Slides from the presentation and a host of other fantastic data can be found at the </span><a href="http://debt-economics.org/"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Debt Economics</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> website. </span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Lastly I’ll recommend watching the first panel of the day which included not only Yves Smith but deficit doves Paul McCulley and Robert Kuttner:
<iframe allowfullscreen="" frameborder="0" height="260" scrolling="no" src="http://fora.tv/embed?id=17596&type=c" webkitallowfullscreen="" width="400"></iframe></span></b><br />
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://fora.tv/v/c17596">Robert Kuttner & Others Debate U.S.'s Addiction to Debt</a> from <a href="http://fora.tv/partner/Atlantic">The Atlantic</a> on <a href="http://fora.tv/">FORA.tv</a>
</span></b><br />
<b style="font-weight: normal;"><br /></b><b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">(Unfortunately the moderator was particularly determined to focus the conversation on the Ryan budget and public debt issues). </span></b><b style="font-weight: normal;"><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">While I don’t know how many conference attendees will have been swayed by the presentations above, I think it’s a step in the right direction that these discussions are at least taking place within the mainstream community. </span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">(Note: Although I was already a big supporter of Keen, Hudson, and Smith’s work, I should note that all three were incredibly gracious in conversation when I approached them. Separately, I apologize for the lack of blogging during the past couple weeks. My last midterm is Monday night and I hope to return to more frequent shortly thereafter.) </span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com8tag:blogger.com,1999:blog-7707793736288462113.post-48620745410870808852013-03-02T10:00:00.000-05:002013-03-02T11:12:52.298-05:00Targeting Nominal Wealth Leads to a Bubble Economy, Not Stabilizing the Business Cycle<b id="internal-source-marker_0.5318415947258472" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Over the past few years it has become increasingly clear that the Federal Reserve and federal government are targeting rising asset prices, rather than incomes, as a way of generating economic growth. A </span><a href="http://bubblesandbusts.blogspot.com/2013/02/the-dangers-of-misunderstanding.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">recent post</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> outlined some of the dangers of persistent negative real interest rates:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Households and businesses “with access to cheap borrowing” have been pouring money into stock, bond, housing and commodity markets rather than investing in tangible capital. The remarkable rise in asset prices has unfortunately not funneled down to households in the bottom four quintiles of income and wealth, only furthering the</span><a href="http://bubblesandbusts.blogspot.com/2013/02/inequality-really-is-holding-back.html"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">inequality gap</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Cullen Roche addressed a similar issue yesterday in a post on </span><a href="http://pragcap.com/the-feds-disequilibrium-effect-via-nominal-wealth-targets"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Fed’s Disequilibrium Effect via Nominal Wealth Targets</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Fed policy and the monetarist perspective on much of this can be highly destabilizing by creating this sort of ponzi effect where asset prices don’t always reflect the fundamentals of the underlying corporations. It’s not a coincidence that we’ve have 30 years of this sort of policy and also experienced the two largest nominal wealth bubbles in American history during this period.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The title of this blog is also not a coincidence, since my formative years encompassed both the dot-com and housing bubbles. My relatively limited experience with financial markets and macroeconomics (based on age) has been punctuated by financial instability. These memories are the driving factor behind my desire to study financial instability and inform policy decisions that can stabilize the business cycle.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In a recent post on </span><a href="http://feedproxy.google.com/~r/neweconomicperspectives/yMfv/~3/_OUHd0vIpUU/the-spinning-top-economy.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Spinning Top Economy</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, Matthew Berg helps further my goal with insight on measuring financial instability (my emphasis):</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Now we have Government IOUs on the bottom, serving as the base of the economy. Bank and Non-Bank IOUs are leveraged on top of those IOUs – somewhat precariously.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In fact, you can think of the economy as a spinning top rather than a pyramid. Like a spinning top, the more top-heavy the economy becomes, the greater its tendency to instability, and the more readily it will topple over and collapse in a financial crisis.</span></b></blockquote>
<br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><img height="239px;" src="https://lh3.googleusercontent.com/aB4W3nZvtFSYsWmo3DrMAEhrXnpLo0b-k2qUAdW66v_0naLuOiBG8JCZd93VvmGvs61PTvGP3jF1gorJygkFtGMZbGthI642tUzrLQry9_q8zPjulKpOdNcq4w" width="297px;" /></b></blockquote>
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /></b>
<br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Now, what happens if, as was the case during the dot-com bubble and the housing bubble, private sector net financial assets go negative but net worth continues to grow?</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In fact, the difference between the measures of net financial assets and net worth provides us with a good rule of thumb for how to spot a bubble economy. </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">If private sector net worth is growing at a greater rate than private sector net financial assets are growing, then that means that the economy – symbolized by our spinning top – is growing more top-heavy.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">So, what happens if we make the spinning top more top-heavy? You can go ask your nearest Kindergartener – it becomes more likely to topple over.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Since Matthew provides the guidelines for spotting “a bubble economy,” let’s take a look at the empirical data to see how well it aligns with the story. The first chart displays the growth rates of private sector net financial assets (NFAs) and private net worth over the past 20 years*:</span><img height="619px;" src="https://lh4.googleusercontent.com/sC4Hbvh0Z4YzYTYzuP5-udBf-o3Qtvuq4pJkNoydWqdEULwTP_IfXQvYcWy81JuDLX4R4FVnwnfil-uH11EDvNunbwiYXOqGznWWx2jnAhu3cz1B_OmpB4igbQ" width="598px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The negative growth rate in private NFAs corresponds with the Clinton surpluses, while the two positive surges are due to the Bush tax cuts and Bush/Obama stimulus measures. Turning to the growth in private net worth, the brief decline stems from the bursting dot-com bubble and the massive drop from cratering house prices. Combining the two measures will show when/if the economy was becoming “top-heavy” (first chart displays the past 50 years; second chart is the same data but only the past 20 years, for clarity):</span></b><br />
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<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Past 50 Years</span><img height="619px;" src="https://lh4.googleusercontent.com/JRdG8m6VzkH-8_ARjji3RAR1clLtqmUQAStGLMMPnBPkNYPMEN1KDRQdlGmmb5AeUZkZ2uWve-tAkvHYUIA_ZRyaG5HGbPwCFIIECYQWffAM5oKCpiuz8dvsxA" width="598px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b></div>
<b style="font-weight: normal;">
</b>
<div dir="ltr" style="margin-bottom: 0pt; margin-top: 0pt; text-align: center;">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Past 20 Years</span><img height="620px;" src="https://lh6.googleusercontent.com/fMjk-9nyGc8_9c0JJC2aGPhSNN_rrPAisgfhj8rWxqCSIzTKnynWuPF3X3naPgrhwcQXKA_udQy_NX8nYOfPsHVuBbznKhTEfjusTuIEDS84og0C6k_oxR_IEw" width="599px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span></b></div>
<b style="font-weight: normal;">
<span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Growth of private net worth began outpacing the growth of private NFAs in 1995 for the first time since 1979. The difference in growth rates then remained positive for 10 of the next 11 years. This streak is truly remarkable given that prior to 1995, the difference had only been positive in five other years dating back to 1961.** At the end of 2006, the U.S. economy was clearly more “top-heavy” than any previous time in the post-war era.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Over the past three decades, growth in private debt exceeding income and declining nominal interest rates have generated enormous returns for asset holders. Throughout the 1980’s and early 1990’s, federal deficits provided more than enough NFAs to keep pace with rising private net worth. Then, in 1995, deficits began decreasing just as the growth of net worth (and private debt-to-GDP) began accelerating higher. The unsurprising result has been more than a decade of meager asset returns, subpar economic growth and high unemployment. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The government policy of targeting nominal wealth, driven by an expansion of private debt, has failed not only at increasing net worth but also, and more importantly, at creating sustainable growth in output and employment. Going forward the focus of policy must return to promoting the growth of income and assets, which in turn will fuel higher output, employment and ultimately wealth. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">*Data for private net worth comes from the </span><a href="https://www.federalreserve.gov/datadownload/default.htm"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Federal Reserve’s</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><a href="https://www.federalreserve.gov/datadownload/Choose.aspx?rel=Z1"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Flow of Funds Accounts of the United<span class="Apple-tab-span" style="white-space: pre;"> </span>States (Z.1)</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Data for private net financial assets (NFAs) comes from the </span><a href="http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&910=X&911=0&903=137&904=1947&905=2012&906=A"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">National Income and Product Accounts (NIPA) at the BEA</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">**Aside from 1979, growth of private net worth exceeded the growth of private NFAs in 1961, 1965, 1969 and 1978 (0.05%).</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Related posts:</span><br /><a href="http://bubblesandbusts.blogspot.com/2013/02/the-rise-of-debt-interest-and-inequality.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Rise of Debt, Interest, and Inequality</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><a href="http://bubblesandbusts.blogspot.com/2013/02/fear-of-bubbles-not-inflation-returns.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Fear of Bubbles, Not Inflation, Returns to the Fed</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><a href="http://bubblesandbusts.blogspot.com/2013/02/bernanke-should-not-worry-about-bubbles.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Why the Federal Reserve Mandate Means That Bernanke Doesn't Have to Worry About Bubbles</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com7tag:blogger.com,1999:blog-7707793736288462113.post-61819033360115712542013-02-26T08:43:00.000-05:002013-02-26T08:43:29.799-05:00Adaptive Inflation Expectations Hypothesis Minimizes Effectiveness of Fed Communication at ZLB<b id="internal-source-marker_0.6724931383505464" style="font-weight: normal;"><a href="http://feedproxy.google.com/~r/blogspot/Hzoh/~3/3bwu3Vq-8hk/more-on-adaptive-inflation-expectations.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">More on the adaptive inflation expectations hypothesis</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Robert @ Angry Bear</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">My claim is that expected inflation over the next 5 (and 10 and 20) years is very similar to actual inflation over the past year. I think the data generally fit the crudest most mechanical adaptive expectations hypothesis.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This would be interesting for two reasons.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">First, the adaptive expectations hypothesis has been treated with utter contempt for roughly 4 decades. It is considered an example of the sort of thing which economists must utterly reject. The effort to replace it has lead to a lot of mildly interesting math and highly implausible assumptions. </span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Second, there is a huge and very vigorous discussion of forward guidance by the Fed Open Market (FOMC) Committee. It has been argued that even when the Federal Funds rate is essentially zero, the FOMC can stimulate the economy by causing higher expected inflation. It is generally agreed that the FOMC has been convinced by this argument. I think this implies that there should be anonalous increases in expected inflation on the dates when the FOMC began to try to cause higher expected inflation -- roughly the announcements of QE 1-4, operation twist and of forward guidance of how long it will keep the Federal Funds rate extremely low. An excellent fit of expected inflation using only lagged inflation creates serious difficulty for those who think the FOMC always could and finally has promoted higher expected inflation.</span></b></blockquote>
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<b style="font-weight: normal;"><img height="342px;" src="https://lh6.googleusercontent.com/2COPHnK1FbdVindSMCVdm5UCuBlGozHngCyg681w6MEL9vdBaR--bkFDhtEdtSUfUe6cqdlGXw0aSZ9XSLLyTqPU9QWgloCj2XivCTXAXdU15H2VZCxpLPvH0Q" width="572px;" /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;"><br /></span></b></div>
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<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - This topic is reminiscent of a chain of posts nearly six months ago that began with JW Mason’s inquiry,</span><a href="http://slackwire.blogspot.com/2012/07/does-fed-control-interest-rates.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Does the Fed Control Interest Rates?</span></a><a href="http://www.angrybearblog.com/2012/05/who-determines-short-term-interest.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Jazzbumpa</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> and</span><a href="http://newarthurianeconomics.blogspot.com/2012/08/but-why-jw-why-past-25-years.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Art Shipman</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> chimed in with their own opinions, the latter providing this relevant chart on the path of interest rates over time:</span><img height="330px;" src="https://lh5.googleusercontent.com/jkbjZBPRy7qNMraPkZMlrz3qfPp4eraE4t1ouY2xCVGk9hyoRAeOHRqqVxjss2I1kawcaeJ3KBtIaDfP1YfTOg9xzQHmyXhBMQ2jZoRYCXwmY4cLNUhsFqkCDQ" width="576px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Responding to the others’,</span><a href="http://bubblesandbusts.blogspot.com/2012/08/markets-determine-interest-ratesuntil.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">my view</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> was that:</span></b><blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">market expectations of future Fed action are sticky. During the post-war period until about 1980, inflation was consistently rising despite mainstream economic views that suggested those conditions would not persist. Following a lengthy inter-war period of near rock-bottom interest rates, market participants were slow to adjust expectations to the actual height of interest rates that would occur before sustained disinflation began. Once disinflation began in the early 1980’s, market expectations were equally slow in recognizing how long disinflation could persist and therefore how low the Fed would ultimately take rates (and hold at zero).</span></b></blockquote>
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Returning to Robert’s claim, I suspect the recent strong correlation between the previous year’s actual inflation and inflation expectations for the next 5 or 20 years is partially due to the lengthy period of low inflation that came prior. In other words, if inflation were to start trending higher or lower over an elongated period, I predict inflation expectations would lag actual inflation while moving in the same direction. The adaptive inflation expectations hypothesis will therefore still hold, only more years of recent data will need to be incorporated into expectations formation. Validation of this hypothesis will deal a serious blow to the perception that Fed communications at the ZLB are an effective form of stimulus.</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b></div>
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</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com9tag:blogger.com,1999:blog-7707793736288462113.post-1572295033556163202013-02-24T12:35:00.000-05:002013-02-24T12:39:12.096-05:00Quote of the Week...<br />
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<b id="internal-source-marker_0.47231879574246705" style="font-weight: normal;"><a href="http://www.amazon.com/Currency-Economics-Modern-Monetary-ebook/dp/B009XDGZLI"><img height="316px;" src="https://lh3.googleusercontent.com/Gu3RVw82sGD1wI7jE4SkyFAMURPwK77QldWw8m_KyR8Cipjnq0HK10eETEj-8qj3s4nhDJ8iANMrHFLU6t025J_CbqO3Bm0Ium7UMfjN9k2-aAG6WSYc48gwNw" width="245px;" /></a></b></div>
<b id="internal-source-marker_0.47231879574246705" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">...is from Warren Mosler’s<i> </i></span><a href="http://www.amazon.com/Currency-Economics-Modern-Monetary-ebook/dp/B009XDGZLI"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><i>Soft Currency Economics II (Modern Monetary Theory)</i></span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">the Fed must provide enough reserves to meet the known requirements, either through open market operations or through the discount window. If banks were left on their own to obtain more reserves no amount of interbank lending would be able to create the necessary reserves. Interbank lending changes the location of the reserves but the amount of reserves in the entire banking system remains the same. For example, suppose the total reserve requirement for the banking system was $ 60 billion at the close of business today but only $ 55 billion of reserves were held by the entire banking system. Unless the Fed provides the additional $ 5 billion in reserves, at least one bank will fail to meet its reserve requirement. The Federal Reserve is, and can only be, the follower, not the leader when it adjusts reserve balances in the banking system.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Bibliography</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Mosler, Warren (2012-10-25). Soft Currency Economics II (Modern Monetary Theory) (Kindle Locations 367-373). . Kindle Edition. </span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com2tag:blogger.com,1999:blog-7707793736288462113.post-58687091807654855222013-02-23T11:00:00.000-05:002013-03-02T05:38:28.024-05:00Why the Federal Reserve Mandate Means That Bernanke Doesn't Have to Worry About Bubbles<b id="internal-source-marker_0.19557773042470217" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Earlier this week I discussed </span><a href="http://bubblesandbusts.blogspot.com/2013/02/the-dangers-of-misunderstanding.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">the dangers of misunderstanding “helicopter money” and higher inflation targets</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. A focus of that post was the incentives stemming from negative real interest rates that will lead to greater investment in real assets, not businesses. The obvious implication is that negative real interest rates entail significant risk of spurring asset bubbles.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This discussion of asset bubbles comes on the heels of </span><a href="http://www.federalreserve.gov/newsevents/speech/stein20130207a.htm"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">St. Louis Federal Reserve Governor Jeremy Stein’s speech</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> that suggested the </span><a href="http://bubblesandbusts.blogspot.com/2013/02/fear-of-bubbles-not-inflation-returns.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Fed was becoming increasingly concerned about bubbles, not inflation</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. According to a recent </span><a href="http://www.bloomberg.com/news/2013-02-22/bernanke-said-to-minimize-asset-bubble-concern-at-meeting.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Bloomberg</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> article, apparently Fed Chairman Bernanke was not onboard with the supposed shift (h/t </span><a href="http://economistsview.typepad.com/timduy/2013/02/bernanke-not-afraid-of-bubbles.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Tim Duy</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">):</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Do Bernanke’s comments imply the change Stein alluded to is not really happening? Not necessarily. To understand why, one must consider the goals assigned to Bernanke or any Fed Chairman for that matter. The following is from </span><a href="http://www.federalreserve.gov/pf/pdf/pf_2.pdf"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Chapter 2</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> of the Federal Reserve System’s own publication, </span><a href="http://www.federalreserve.gov/pf/pf.htm"><span style="color: #1155cc; font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Purposes & Functions</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Although no explicit mention of preventing asset bubbles is made, the goal of stable prices leaves the door open for such an interpretation. Before addressing the Fed’s own interpretation of stable prices, its worth discussing the specific types of assets that are seemingly most prone to bubbles. The three major categories are commodities (e.g. oil, copper, sugar), financial assets (e.g. stocks and bonds), and housing. During the past decade real interest rates have actually been negative more often than not (Real Interest Rate = Effective Fed Funds rate - core PCE):</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="343px;" src="https://lh4.googleusercontent.com/ueGdHFIqNgeO0UBTPjzJyazCz1_NVQepslxi9uMstBo7s5fliqXJNdRniIugjhIItRP4jA5cXUAyILHkARxyKqjy_RdoB8A_42lM8-NO3gXZozW-d5UTmqwecQ" width="572px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Unsurprisingly the past decade has also witnessed asset bubbles in commodities, stocks and housing:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="343px;" src="https://lh6.googleusercontent.com/0NtAeLDqQoc9kEjgd18aOmxVBmLV-F2eP2wGS2YQbbA7Pvi6BE0LnDG__tNOPTaJlKEtcn9dLquYL8yWTwsK69tjFhBPqCEHDxLX3xOK7pcggjKfSwCnbxIiGQ" width="572px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Prices of these assets have clearly been anything but stable. So has the Fed failed in that aspect of its mandate? The answer is a resounding “</span><a href="http://bubblesandbusts.blogspot.com/2012/07/current-fed-policy-successful-at.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">NO</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.”</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">To remedy the cognitive dissonance readers may be experiencing, consider how the aforementioned real assets affect the </span><a href="http://research.stlouisfed.org/publications/review/08/05/part2/Wynne.pdf"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">FOMC’s preferred inflation measure, core Personal Consumption Expenditures (PCE)</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Financial assets are noteworthy in their distinct omission from the </span><a href="http://www.bea.gov/iTable/iTable.cfm?reqid=12&step=1&acrdn=2#reqid=12&step=3&isuri=1&1203=13"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">type of products making up PCE</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Commodities are included in the general price measure, however core PCE is calculated by excluding a couple of the more volatile commodity components: food and energy. Housing is actually included in core PCE but is calculated using </span><a href="http://www.newyorkfed.org/research/staff_reports/sr425.pdf"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">the space rent of nonfarm owner-occupied homes</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, not actual house prices. Focusing on core PCE thereby removes any direct concern with asset bubbles.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Bernanke has already announced his plans to step down as Fed Chairman early next year (2014). Given the Fed’s stated mandate and preferred measure of prices, it is no wonder that Bernanke is unconcerned with asset bubbles. The goals of his chair are to maximize employment and maintain stable prices. Since the types of assets prone to bubbling are not included in core PCE and appear relatively uncorrelated with that measure, to the degree that bubbles can benefit employment in the short run, they may actually be desirable.* </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">These institutional incentives of a Fed Chairman are unfortunately at odds with the country’s longer term economic goals. Asset bubbles created by excessive lending and/or negative real interest rates are always followed by busts. These busts are simply the recognition of malinvestment that already took place during the boom. If the booms are financed with significant leverage, the resulting deleveraging may lead to a debt deflationary spiral. Whether or not that’s the case, though it usually is, malinvestment suppresses both employment and economic growth over time.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">One can argue over whether Bernanke’s views on the effectiveness of monetary policy are correct or not, but his decision to ignore asset bubbles is perfectly rational given the circumstances. Shifting the Fed’s focus from inflation to bubbles will therefore require changing the institutional incentives. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">*The three major asset categories mentioned above presumably will have very different effects on employment. Among the three, commodity bubbles are least desirable from an employment perspective. Higher commodity prices generally hurt consumer spending, which may lead to a temporary decline in employment. Housing bubbles are the most desirable in these terms since the increased demand can generate a temporary employment boom in construction and housing-related services. </span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com7tag:blogger.com,1999:blog-7707793736288462113.post-6371530783370794492013-02-20T17:40:00.000-05:002013-02-20T17:42:41.088-05:00Fed Puts Macho Bada$$ery At Risk<b id="internal-source-marker_0.46020850841887295" style="font-weight: normal;"><a href="http://ftalphaville.ft.com/2013/02/20/1392452/rational-nerdiness-vs-macho-badaery-in-monetary-policy/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Rational nerdiness vs macho bada$$ery in monetary policy</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Cardiff Garcia @ FT Alphaville</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The US economy has had several false starts since 2009, and it’s likely that several tangled factors were responsible for their not lasting longer. It’s reasonable to think that one of these factors was that the initial reflationary effects of these unconventional measures faded, because of doubts about the Fed’s commitment to maintaining accomodative policy during a period of catch-up growth. If such growth threatened to generate above-target inflation, then monetary conditions could be expected to tighten.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The rational-nerdy thing to do was to soften the macho commitment to inflation and commit to a temporary period of inflation-tolerance, thereby balancing the two sides of the mandate — but to do so while retaining credibility on both. But as Harless notes, ceding a little ground on one side could be interpreted as ceding all ground. Being a “macho badass” central banker means credibly committing to </span><span style="font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">never</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> cede ground.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">…</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">All of which has been a long windup to saying that the appeal of the Evans Rule, and if we ever get it, some variation of NGDP level targeting, is this: they </span><span style="font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">institutionalise </span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">the macho badassery, which in a dual-mandate framework can only be applied to one of the two mandates.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - This post is reminiscent of a thread from last year involving</span><a href="http://www.angrybearblog.com/2012/05/fed-faces-end-game-and-blinks.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+blogspot%2FHzoh+%28Angry+Bear%29"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Steve Roth</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> and</span><a href="http://www.economist.com/comment/1432940#comment-1432940"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Ryan Avent</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> on</span><a href="http://bubblesandbusts.blogspot.com/2012/05/asymmetric-nature-of-monetary-policy.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Asymmetric Nature of Monetary Policy</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. In that post I made the following claim:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Whereas Roth suggests that asymmetric credibility stems from the Fed’s actions, I believe it is actually an inherent condition in our current monetary system. The Fed sets the base price for money and credit, but with private banks free to create credit, it holds relatively little control over the total amount outstanding at any time. As growth in the US has exceeded inflation for much of the past three decades, the conditions were ripe for borrowing and credit outstanding now greatly surpasses the sum of base money.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Even if the Fed promised indefinite QE, it’s hard to see the mechanism, aside from adjusting inflation expectations (wealth effects are minimal), by which this would spur real growth. Given the Fed’s skewed abilities and determination to maintain its credibility, it seems more obvious why inflation targeting remains prominent. Further, this may help explain why the Fed downplays its employment mandate (which should be removed anyways). Facing the endgame, the Fed knows it can reduce inflation (and growth) but remains unsure how successful it could be at achieving other targets.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Sucumbing to pressure, the Fed has finally decided to cede ground on its commitment to inflation. Unfortunately for the Fed, both inflation expectations and unemployment are not cooperating:</span></b><br />
<b style="font-weight: normal;"><a href="http://www.clevelandfed.org/research/data/inflation_expectations/"><img height="358px;" src="https://lh3.googleusercontent.com/yNBXmkfwX8k2kOefJUIYXnKrIwfTlzNBpPBwHmnXV0kKPg0sgaDZHCoBgEc8Hg_KTpAUzqvlSz1Q99cPfsPerYkMm2kJTx4zyyeD3_vSWmu1l9ddLegJAjoLUg" width="404px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://research.stlouisfed.org/fred2/graph/?id=UNRATE"><img height="344px;" src="https://lh5.googleusercontent.com/xobNWf-eFGpao8OOIBCHFC4YObpazz1vkhj0QgD5NKFtznJG_UpAbqSof9qccMcfJJ1lMriAmH_bbWNVx8hEzkp-RjjKDVRgy0n2PgUfWQFin-viv1lI2ZWM5g" width="573px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">At this point I doubt whether even altering inflation expectations would provide any boost to actual inflation or employment. If fiscal policy continues to contract the budget deficit, these numbers will continue moving in the wrong direction. The Fed has taken a big risk with its established credibility. I fear the results will be very disappointing.</span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com7tag:blogger.com,1999:blog-7707793736288462113.post-25483816953233920522013-02-20T10:00:00.000-05:002013-02-20T10:00:00.823-05:00(Late) 2013 Predictions<b id="internal-source-marker_0.4709018135908991" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Last year I took a chance and threw my</span><a href="http://bubblesandbusts.blogspot.com/2012/01/predictions-for-2012.html"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">own projections</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> into the ring. Similar to Byron Wien and Edward Harrison, I mostly selected events that were widely seen as having a low probability (less than 33%) but which I believed held a greater than 50% chance of occurring. </span><a href="http://bubblesandbusts.blogspot.com/2013/01/2012-predictions-results.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The final results were a bit disappointing</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, but that won’t stop me from trying again this year. Since these predictions already represent a late release, without further adieu, here are the 2013 predictions:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">1) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Spain requests access to ECB’s OMT</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Since ECB President Mario Draghi announced the OMT program, yields on Spanish debt have fallen rather dramatically. Although this eases financing pressure, it has done little to alter the actual economy’s downward spiral. During 2012 Spain’s GDP growth became increasingly negative, </span><a href="http://www.cnbc.com/id/100418408/Spain_Q4_GDP_Falls_18_YearonYear_Worse_Than_Forecast"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">falling by 1.8% year-on-year in the fourth quarter</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Meanwhile unemployment continues its meteoric rise to over 26% for the general population and nearly 60% for youth. With the large banks still severely undercapitalized and households over-indebted, private sector lending continues to decline:</span><br /><a href="http://www.creditwritedowns.com/2013/02/is-spains-economic-contraction-now-self-perpetuating.html#utm_source=rss&utm_medium=rss&utm_campaign=is-spains-economic-contraction-now-self-perpetuating"><img height="272px;" src="https://lh3.googleusercontent.com/eklXujsIzpX8xYD4TqQvvQPzUgpmDOkL5WES_bIBN80ygHomUtsOpaMsB_nCkfHk1OAjB_1bkfHouzTRq4BZ_LtUTOwJdiIeEwGUs9Ad_xBn4uStPwZ5iKgF1Q" width="421px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><br /></span></b><br />
<div>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Seeing no recovery and potentially a worsening decline, “bond vigilantes” will eventually </span><a href="http://www.multiplier-effect.org/?p=6635"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">test Draghi’s threat</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. At that point Spain will be forced to accept a Memorandum of Understanding (MoU) in return for ECB bond-buying through the OMT program.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">2) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">The Euro finishes the year above $1.30</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - After falling nearly 10% during the first half of 2012, the euro has more than recouped its losses on the back of optimism and deflationary policies. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://seekingalpha.com/article/1203061-ecb-may-weaken-the-euro-soon-watch-hicp?source=google_news"><img height="250px;" src="https://lh3.googleusercontent.com/dEbFtTFw9pne53V7UcqtRzniRDW6EvC3TpcBcFSx4Yh3xFTpV_Q4xvD22ixxi0gFcro1OrSVuj_DmbPW8HCbG0Nlf25zCFriWoAxJjcs-ZXfcRXjTQMlIuu0Vg" width="573px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">At points during 2013 the optimism is likely to fade, but I expect politicians and central bankers will take the necessary steps to quell fears for the time being. Unfortunately those steps will involve further deflationary policies that push the euro higher. These competing forces will largely cancel out, leaving the euro close to or above where it began the year. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">3) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">The Eurozone remains in recession the entire year</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - </span><a href="http://www.nasdaq.com/article/ecb-forecasters-lower-euro-zone-growth-forecast-20130214-00164#.USRctKUiYWA"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Forecasters now expect euro-zone economic activity to be flat this year, down from a previous prediction of 0.3% growth made just three months ago</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Last year saw practically continuous downgrades to GDP growth forecasts and I expect this year to be no different. Austerity measures are momentarily easing, but more will likely be enacted based on the outcomes of several elections. The recent </span><a href="http://bubblesandbusts.blogspot.com/2013/01/strengthening-euro-may-reignite-eu.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">appreciation of the euro</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> against several major currencies will also dampen growth by putting pressure on net exports. With banks across Europe trying to build up capital and persistently high unemployment, the private sector will remain especially weak. Though Germany may experience a temporary rebound, the Eurozone as a whole will not register GDP growth this year. </span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">4) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">The Japanese yen rises above 90 per $</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Since the election of PM Shinzo Abe, the yen has fallen fast and is down more than 20% from recent highs. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="231px;" src="https://lh5.googleusercontent.com/UHRH7VgrjExql_2kMhn4JG1rRm4Eob4MdK_uC44xZ45Yc4X9dSeAaZCet1aWdMa3gSSd3dMHWndluUHm7ItmAms2a6E-fNjVr1U54x_N2Yb6AOz1lpmums1KLg" width="410px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">During this time the Nikkei has risen more than 20%, yet yields on Japanese sovereign debt are little changed. This suggests many foreigners may be speculating on the supposedly forthcoming monetary and fiscal stimulus. As previously stated, </span><a href="http://bubblesandbusts.blogspot.com/2012/12/the-real-story-behind-japans-re.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">the fiscal stimulus will probably be small and short-term</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. On the monetary front, short of actually entering the foreign exchange market, the Bank of Japan (BOJ) has essentially no mechanism to spur inflation and thereby cause a sustained depreciation of the yen. When market participants recognize the inability of Japan to avoid continued deflation, the yen will return to appreciating against the dollar.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">5) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Gas prices will peak above $4.20 per gallon and set a new yearly record-high average above $3.75 per gallon</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - </span><a href="http://www.businessinsider.com/more-bad-news-at-the-gas-pump-for-the-us-consumer-2013-2"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Gasoline prices have been on the rise for the past 31 days</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, currently </span><a href="http://fuelgaugereport.aaa.com/"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">averaging approximately $3.75 per gallon</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Though this current streak will probably end soon, prices are unlikely to give back much of the gains before beginning the typical rise into summer. The ongoing potential for flare ups in the Middle East will keep prices elevated throughout the year. Higher gas prices, which already account for 4% of before-tax household income (chart below), will be a drag on consumer spending in 2013.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://macromon.wordpress.com/"><img height="329px;" src="https://lh6.googleusercontent.com/Ag_9PvwehGsgkNiDEy5tPhvTXxX_GpllBcpsOO8SNNqqD9DnfxOu8amEuPS0v_H91KJyCXVbXbDpezYi3kEDz-iN31VVkaRjrKJE8BQAxIvhBaIh1rMM8lAPjw" width="576px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">6) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">U.S. Yearly GDP growth falls below 1.5%</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Forecasts of ~3% annual GDP growth over the past couple years have been overly optimistic as </span><a href="http://www.economonitor.com/blog/2013/02/italian-austerity-in-the-polls/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">real growth in 2011 and 2012 was merely 1.6% and 1.9%, respectively</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Apparently forecasters are being a bit tamer in their estimates this year, now expecting only 2% annual growth. Unfortunately I suspect these estimates will once again prove too optimistic. Various tax hikes and the upcoming sequester (which will go through in some respect) will reduce the budget deficit by a few percent this year. Housing is likely to remain a bright spot, but further declines in interest rates will not lead to similar magnitudes of the wealth effect. Credit remains tight for many households and small business, which should also limit private sector activity. All of these factors combined will probably not be enough to bring about a new recession but will lead to the lowest annual growth rate during this upswing.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://www.staffingindustry.com/site/Research-Publications/Daily-News/Economists-revise-up-US-job-growth-estimates-24686"><img height="307px;" src="https://lh3.googleusercontent.com/NoGHDcQZTuReURarJfvrTPYOIZTfBUDNo38Y00IRGLQ6FdkI3Te4LXF94JGaawz-3K9BNM37sucfJoNsuhvgJGEu9WFL2vvGV0RoPW3O8ER9RmZICZVlYamqjg" width="573px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">7) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">U.S. Unemployment rises above 8%</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Currently sitting at 7.9%, the unemployment rate is forecast to decline during 2013. Due to weaker GDP growth, corporate revenues will barely rise again this year. As companies face increasing pressure to maintain profit margins at record levels, a new wave of layoffs may occur. Separately, continuing economic growth will encourage previously discouraged workers to re-enter the job market. Both of these factors will lead to slightly higher measured unemployment.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">8) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Federal Reserve forecasts shift first rate hike to 2016</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - After extending their forecast for the first rate hike to 2015, the Federal Reserve changed its tactics to a more rule-based monetary policy. The Fed has, in effect, promised </span><a href="http://www.businessinsider.com/fed-announces-evans-rule-2012-12"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">to keep rates low until we've hit either 6.5 percent unemployment or 2.5 percent inflation</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Based on the above outlook for unemployment and a continuing decline in inflation expectations (chart below), FOMC members will revise their own forecasts and push back expectations for the first rate hike.</span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://www.clevelandfed.org/research/data/inflation_expectations/"><img height="358px;" src="https://lh6.googleusercontent.com/1U-MJYXCG_Fiadt4mQjDPYhIZrYWENhM9Vq1BwIElk1uJAAddwnYl97lBi1EnZHhMmfEfxoxhLYhmusNNXquYzvv3sL90kA34HNYSHAnipRnh_uWjeqOBsvbPw" width="404px;" /></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">9) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">U.S. Corporate Earnings (ex-Federal Reserve) finish year below 2012 peak</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Meager revenue growth was not enough to prevent U.S. Corporate Profits after tax from reaching record highs in the fourth quarter of 2012 on the back of record profit margins. <a href="http://ycharts.com/indicators/corporate_profits/chart#series=calc:,type:indicator,id:corporate_profits&maxPoints=650&zoom=10&format=real"><img alt="US Corporate Profits After Tax Chart" src="http://media.ycharts.com/charts/c9041565cb991f1865675035a9154467.png" /></a></span></b><br />
<div style="font-size: 10px;">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://ycharts.com/indicators/corporate_profits">US Corporate Profits After Tax</a> data by <a href="http://ycharts.com/">YCharts</a></span></b></div>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">As global growth slows in 2013, revenues will come under further pressure. At this point the ability of firms to continue cutting costs without sacrificing output seems limited, which means margins may begin to compress. As margins revert to previous norms, earnings will register a yearly decline.</span></b><b style="font-weight: normal;"><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">10) </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Bonds outperform stocks</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - During the first seven weeks of this year the stock market has been on fire, even though earnings estimates continue to fall.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://www.businessinsider.com/stocks-rise-earnings-expectations-fall-19-2013-2#comments"><img height="444px;" src="https://lh5.googleusercontent.com/ndkNktMrkcMOeBcF_VrO_HOtI7TT2s7j7-2_hf34cKLL5UBst3nNALFY_tVlnKFJ8HiJzI4RBLtgRHR_jLnFpCnsEm_X_dZanqXU3nRoK-tyw0BoLuC3PpLJlQ" width="575px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Multiple expansion is currently being driven by the Federal Reserve’s actions despite their ineffectiveness at generating actual NGDP growth. When investors eventually turn their attention to continuing troubles in Europe, ongoing deflation in Japan, and/or weakening growth in China, U.S. earnings may once again enter the picture. Recognition that S&P 500 earnings growth has slowed substantially may cause the market to give up much of this year’s gain. These concerns combined with declining inflation expectations will result in many investors returning to the safety of U.S. Treasuries. The subsequent rise in prices (decline in rates) will generate another year of positive returns for the Treasury market. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Will my predictions prove too pessimistic once again? Only time will tell...</span></b></div>
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</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-88331608427779100302013-02-18T18:04:00.001-05:002013-02-18T18:15:01.469-05:00The Dangers of Misunderstanding "Helicopter Money" and Higher Inflation Targets<b id="internal-source-marker_0.15794380055740476" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Ashwin Parameswaran has a fantastic post today explaining why </span><a href="http://www.macroresilience.com/2013/02/18/helicopter-money-is-not-dangerous-all-macroeconomic-policy-is-dangerous/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Helicopter Money Is Not Dangerous, All Macroeconomic Policy Is Dangerous</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> “</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">in the sense that irresponsible implementation can lead to macroeconomic chaos.” Before jumping into the main attraction of the post, I want to briefly clarify a general discrepancy regarding what helicopter money actually entails. </span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">More than forty years ago, Milton Friedman</span><span style="background-color: white; color: #222222; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><a href="http://en.wikipedia.org/wiki/Deflation"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">famously quipped that price deflation can be fought by "dropping money out of a helicopter."</span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 9px; vertical-align: super; white-space: pre-wrap;">[37]</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> Friedman was referring to central bank policy and, to this day, a “helicopter drop” is typically associated with monetary policies, such as quantitative easing (QE). This is an unfortunate interpretation of monetary policy since most central banks, including the Federal Reserve, are as equally unable to actually implement a “helicopter drop” today as they were back in 1969. Willem Buiter clarifies how the policy could realistically be implemented in a paper on “</span><a href="http://www.willembuiter.com/helinber.pdf"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Helicopter Money</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">” (equations omitted):</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Technically, if the Central Bank could make transfer payments to the private sector, the entire (real-time) Friedmanian helicopter money drop could be implemented by the Central Bank without Treasury assistance.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">…</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The legality of such an implementation of the helicopter drop of money by the Central Bank on its own would be doubtful in most countries with clearly drawn boundaries between the Central Bank and the Treasury. The Central Bank would be undertaking an overtly fiscal act, something which is normally the exclusive province of the Treasury.</span><span style="font-family: Arial; font-size: 9px; vertical-align: super; white-space: pre-wrap;">47</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">An economically equivalent (albeit less entertaining) implementation of the helicopter drop of money would be a tax cut (or a transfer payment) implemented by the Treasury, financed through the sale of Treasury debt to the Central Bank, which would then monetise the transaction. If the direct sale of Treasury debt to the Central Bank (or direct Central Bank lending to the Treasury) is prohibited (as it is for the countries that belong to the Euro area), the monetisation of the tax cut could be accomplished by the Treasury financing the tax through the sale of Treasury debt to the domestic private sector (or overseas), with the Central Bank purchasing that same amount of non-monetary interest bearing debt in the secondary market, thus expanding the base money supply. (2004: p. 59-60)</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">One might inquire whether changing to a “<a href="http://bubblesandbusts.blogspot.com/2013/01/furthering-understanding-of-permanent.html"><span style="color: blue;">permanent floor</span></a>” monetary policy regime alters the necessity of monetisation. Apparently prepared for such a future outcome, Buiter says:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This difference between the effects of monetising a government deficit and financing it by issuing non-monetary debt persists even if the interest rates on base money and on non-monetary debt are the same (say zero), now and in the future. When both money and bonds bear a zero nominal interest rate, there remains a key difference between them: the principal of the bonds is redeemable, the principal of base money is not. (2004: p. 10)</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Although monetisation may be necessary to achieve the full effect of “helicopter money,” this practice does not alter the dangers associated with the Treasury’s actions. As Ashwin points out:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; color: #222222; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Whether they are monetised or not, excessive fiscal deficits are inflationary</span><span style="background-color: white; color: #222222; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span></b></blockquote>
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">On the topic of inflation, I have recently been engaging in a debate with Mike Sax (see </span><a href="http://diaryofarepublicanhater.blogspot.com/2013/02/sumner-on-difference-between-mmers-and.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">here</span></a><span style="background-color: white; color: #222222; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">and</span><span style="background-color: white; color: #222222; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><a href="http://diaryofarepublicanhater.blogspot.com/2013/02/is-inflations-social-menace-overrated.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">here</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">) about the potential benefits of targeting a higher inflation rate. This policy has garnered support from both sides of the political and economic aisle (New Keynesians and Monetarists), yet I think its potential benefits are being extremely oversold. My two basic arguments against such a policy are the following:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">1) Higher inflation does not necessarily entail higher nominal wages (which many people clearly assume). </span></b><br />
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><a href="http://advisorperspectives.com/dshort/updates/Household-Income-Distribution.php"><img height="474px;" src="https://lh4.googleusercontent.com/dFVoqnyWCVFilGKJ_c2HRWNEWndQTkXaRsVHTS90NF2Qmz5uspqe27_2ni6gVfTpWfbZyfP8M-bkjtx4Y0VslW6HUtbZpCV6duoV4Q7_q0Mb_5QcJUGtXK4nLg" width="572px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Aside from the top quintile of households, real income has been </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">declining</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> for nearly 15 years. The only way higher inflation helps reduce real debt burdens is if nominal wages increase faster than nominal interest rates on debt. If instead higher inflation stems primarily from higher costs-of living (nominal food and energy prices), than most Americans may find themselves in the precarious position of requiring even more debt to maintain current living standards. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">2) Higher inflation alters saving, investment and consumption decisions which can lead to a misallocation of capital. On this second point is where Ashwin’s post really hits home:</span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">During most significant hyperinflations throughout history, the catastrophic phase where money loses all value has been triggered by the central bank’s enforcement of highly negative real interest rates which encourages the rich and the well-connected to borrow at negative real rates and invest in real assets. The most famous example was the Weimar hyperinflation in Germany in the 1920s during which the central bank allowed banks and industrialists to borrow from it at as low an interest rate of 5% when inflation was well above 100%. The same phenomenon repeated itself during the hyperinflation in Zimbabwe during the last decade (For details on both, see my post </span><a href="http://www.macroresilience.com/2012/10/12/hyperinflation-deficits-and-real-interest-rates/"><span style="background-color: white; color: #004477; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">‘Hyperinflation, Deficits and Real Interest Rates’</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">).</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This also highlights the danger in simply enforcing a higher inflation target without taking the level of real interest rates into account. For example, if the Bank of England decided to target an inflation rate of 6% with the bank rates remaining at 0.50%, the risk of an inflationary spiral will increase dramatically as more and more private actors are tempted to borrow at a negative real rate and invest in real assets. Large negative real rates rarely incentivise those with access to cheap borrowing to invest in businesses. After all, why bother with building a business when borrowing and buying a house can make you rich? Moreover, just as was the case during the Weimar hyperinflation, it is only the rich and the well-connected crony capitalists and banks who benefit during such an episode. </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">If the “danger” from macroeconomic policy is defined as the possibility of a rapid and spiralling loss of value in money, then negative real rates are far more dangerous than helicopter money.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">These pernicious traits of higher inflation and especially negative real interest rates are entirely compatible with recent experience. Households and businesses “with access to cheap borrowing” have been pouring money into stock, bond, housing and commodity markets rather than investing in tangible capital. The remarkable rise in asset prices has unfortunately not funneled down to households in the bottom four quintiles of income and wealth, only furthering the </span><a href="http://bubblesandbusts.blogspot.com/2013/02/inequality-really-is-holding-back.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">inequality gap</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Recognition of these effects is precisely why </span><a href="http://bubblesandbusts.blogspot.com/2013/02/fear-of-bubbles-not-inflation-returns.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">a Federal Reserve fearing bubbles, not inflation, would be a significant step in the right direction</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">To be clear, similar to </span><a href="http://www.macroresilience.com/2013/02/14/helicopter-drops-do-not-imply-higher-inflation/"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Ashwin</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, I am in favor of “helicopter money” and believe higher wages for the bottom 80 percent are key to ending the balance sheet recession as well as ensuring more sustainable growth and unemployment going forward. Targeting higher inflation and larger negative real interest rates is the wrong approach to achieve these goals and may actually work in the opposite direction. Yes, all macroeconomic policy is dangerous. But even more dangerous is misunderstood and misrepresented macroeconomic policy.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Bibliography</span><br /><span style="background-color: #f2f2f2; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Buiter, Willem H., Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap (December 2003). NBER Working Paper No. w10163. Available at SSRN: http://ssrn.com/abstract=478673</span></b></div>
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</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com15tag:blogger.com,1999:blog-7707793736288462113.post-69572217209411616322013-02-17T18:18:00.000-05:002013-02-17T18:18:39.538-05:00Quote of the Week...<b id="internal-source-marker_0.7602145271375775" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"></b><br />
<div style="text-align: center;">
<b id="internal-source-marker_0.7602145271375775" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><b id="internal-source-marker_0.7602145271375775" style="clear: left; display: inline !important; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><a href="http://www.amazon.com/Absolutely-Small-Explains-Everyday-ebook/dp/B0042JSNTU/ref=sr_1_1_title_1_kin?s=books&ie=UTF8&qid=1361141688&sr=1-1&keywords=absolutely+small+how+quantum+theory+explains+our+everyday+world"><img height="357px;" src="https://lh3.googleusercontent.com/eLO1pxbWfrA2Fb-kEAglF9jxu-sVuNXDMlh_6v3D6w2sgQDP3P6i05ejhxUOhVRus-kU3vZtvSkQf8LKIEGubBXOT0dA75oAGur5bSQi29fVbwJvVz6zMZ1-TQ" width="357px;" /></a></b></b></div>
<b id="internal-source-marker_0.7602145271375775" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">...is from Michael D. Fayer’s illuminating book, </span><a href="http://www.amazon.com/Absolutely-Small-Explains-Everyday-ebook/dp/B0042JSNTU/ref=sr_1_1_title_1_kin?s=books&ie=UTF8&qid=1361141688&sr=1-1&keywords=absolutely+small+how+quantum+theory+explains+our+everyday+world"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Absolutely Small: How Quantum Theory Explains Our Everyday World</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">: </span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The uncertainty principle says that you can know something about the momentum of a particle and something about the position of a particle, but you can’t know both the position and the momentum exactly at the same time. This uncertainty in the simultaneous knowledge of the position and the momentum is in sharp contrast to classical mechanics.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">…</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In classical mechanics, you can know x </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">and</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> p. In quantum mechanics, you can know x </span><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">or</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> p. Generally for quantum particles, absolutely small particles, you know something about p and something about x, but you can’t know both precisely simultaneously.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">As the above quote demonstrates, even in physics, true uncertainty exists at absolutely small levels. More importantly, the persistence of uncertainty at a micro level does not prevent greater clarity from being achieved at a macro level. In fact, the different levels may operate under entirely different organizational principles. Unfortunately economics has not yet come to terms with the scientific advancements of quantum theory. If economics truly wishes to mimic physics, than as a science it has fallen even further behind. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Bibliography</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">FAYER, Michael D. (2010-06-16). Absolutely Small: How Quantum Theory Explains Our Everyday World (Kindle Locations 1223-1244). Amacom - A. Kindle Edition. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com4tag:blogger.com,1999:blog-7707793736288462113.post-69265225504715774242013-02-16T08:38:00.003-05:002013-02-16T08:38:54.590-05:00Macro Theorizing in a Non-Ergodic World<b id="internal-source-marker_0.13674244238063693" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-weight: normal;"><a href="http://worldcomplex.blogspot.com/2011_10_01_archive.html"><img height="649px;" src="https://lh4.googleusercontent.com/cvxWYiO2Rd4w5KQLGoB8g8dhkYLUvSoymgRv4ANAMzGi4OKMzQAoZcZYHRaXHhqQ2PudQXmN586ZlOpe0Y5E8W1OUYBpAXwxQoI0w1ZJkBQeCZsnCv9QpY3nrA" width="587px;" /></a></span><span style="font-family: Arial; font-size: 15px; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">1) </span><a href="http://larspsyll.wordpress.com/2013/02/10/ergodicity-the-biggest-mistake-ever-made-in-economics/" style="font-weight: normal;"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Ergodicity – the biggest mistake ever made in economics</span></a><span style="background-color: white; color: #0090da; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">by Lars P Syll</span></b><br />
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<b style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">Samuelson said that we should accept the ergodic hypothesis because if a system is not ergodic you cannot treat it scientifically. First of all, that’s incorrect, although I think I understand how he ended up with this impression: ergodicity means that a system is very insensitive to initial conditions or perturbations and details of the dynamics, and that makes it easy to make universal statements about such systems …</span></b></blockquote>
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<b style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">Another problem with Samuelson’s statement is the logic: we should accept this hypothesis because then we can make universal statements. But before we make any hypothesis—even one that makes our lives easier—we should check whether we know it to be wrong. In this case, there’s nothing to hypothesize. Financial and economic systems are non-ergodic. And if that means we can’t say anything meaningful, then perhaps we shouldn’t try to make meaningful claims. Well, perhaps we can speak for entertainment, but we cannot claim that it’s meaningful.</span></b></blockquote>
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<b style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">…</span></b></blockquote>
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<b style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">The only reason risk exists is that we cannot go back and make decisions over again. Economics got very confused about the point of dealing with risk, and had to resort to introducing psychology and human behavior and all sorts of things. I don’t mean to say that we don’t need behavioral economics. What I mean is that there are lots of questions in economics that we can only answer behaviorally at the moment, but at the same time we have a perfectly formal natural physical analytic answer that’s very intuitive and sensible and that comes straight out of recognizing the non-ergodicity of the situation.</span></b></blockquote>
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<b style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">To be blunter, I’m pointing out that economics is internally inconsistent. I accept all the models that economists have developed. I could critique them, but I’m not worried about that. I didn’t make them up, the economists did. But when the economists treat the models as if they were ergodic, that’s when someone has to say “stop, that’s enough.”</span></b></blockquote>
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<b style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="color: #333333; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">-Ole Peters</span></b></blockquote>
<b style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts<span style="font-weight: normal;"> - This timely quote will provide sufficient background for recognizing the importance of the following paper/post...</span></span><br /><span style="font-family: Arial; font-size: 15px; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"></span><span style="font-weight: normal;"><br /><a href="http://www.aguanomics.com/2009/11/blowing-bubbles.html"><img height="436px;" src="https://lh5.googleusercontent.com/VtuDrLqI3qmsmDVZlcFu4IC7A6bQGMgXN7Jveyf8Gjr60uJo4jQrJYPoXebKzpwmpErki7jCYpWiW3YH9Atww7RwjDUEPiRXh2ObLCLjAn8hyGDzC-twHU6m3w" width="473px;" /></a></span></b><span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"></span><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">2)</span><a href="http://noahpinionblog.blogspot.com/2013/01/the-power-and-terror-of-irrational.html" style="font-weight: normal;"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The power and the terror of Irrational Expectations</span></a><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> by Noah Smith @ Noahpinion</span></span><blockquote class="tr_bq">
<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">But to me, that's not even the most disturbing implication of Malmendier's finding, and of this type of expectations model in general. In most theories of non-rational expectations, like Bayesian learning or rational inattention, expectations evolve in a smooth, stable way. And so these models, as Chris Sims</span><a href="http://www.econ.yale.edu/~dirkb/teach/pdf/sims/2007%20inattention.pdf" style="font-weight: normal;"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">writes</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">, look reassuringly like rational-expectations models. But there is no guarantee that real-world expectations must behave according to a stable, tractable model. I see no </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">a priori</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> reason to reject the possibility that expectations react in highly unstable, nonlinear ways. Like tectonic plates that build up pressure and then slip suddenly and unpredictably, expectations may be subject to some kind of "cascades". This can happen in some simple examples, like in the theory of "</span><a href="http://www.jstor.org/discover/10.2307/2138632?uid=3739808&uid=2&uid=4&uid=3739256&sid=21101590502913" style="font-weight: normal;"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">information cascades</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">" (In that theory, people are actually rational, but incomplete markets prevent their information from reaching the market, and beliefs can shift abruptly as a result). In the real world, with its tangle of incomplete markets, bounded rationality, and structural change, expectations may be subject to all kinds of instabilities.</span></span></blockquote>
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<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">In other words, to use Lucas' turn of phrase, expectations might just make </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">themselves</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> up...and we might get any result that we </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">don't</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> want.</span></span></blockquote>
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<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">What if inflation expectations change suddenly and catastrophically? That would probably spell the death knell for macro theories in which the central bank can smoothly steer the path of things like inflation, NGDP, etc. It would raise</span><a href="http://noahpinionblog.blogspot.com/2012/12/the-omnipotent-fed-idea.html" style="font-weight: normal;"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">the specter of an "inflation snap-up"</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> (or "overshoot", or "excluded middle") - the central bank might be unsuccessful in beating deflation, right up until the moment when hyperinflation runs wild.</span></span></blockquote>
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<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">And what would be the implications of financial markets and financial theories of the macroeconomy? Belief cascades could obviously cause asset market crashes. It seems like sudden changes in expectations of asset price appreciation might also cause abrupt and long-lasting changes in saving and investment behavior. Which in turn could cause...well, long economic stagnations.</span></span></blockquote>
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<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;">A very disturbing thought.</span></span></blockquote>
<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> - </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> While I have yet to read the</span><a href="http://emlab.berkeley.edu/~webfac/obstfeld/ulrike.pdf" style="font-weight: normal;"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">recent paper</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: normal; vertical-align: baseline; white-space: pre-wrap;"> by Ulrike Malmendier, I think Noah’s final comment is probably representative of most mainstream economists and perhaps a large percentage of the general population. The basic idea that expectations may not be formed by stable processes suggests that reality is non-ergodic and future outcomes may be path dependent. If so, not only would mainstream macro theories be severely undermined, but also the notion that we can control the future. Although I recognize this lack of control can be scary, in many ways the uncertainty of life is what makes living so special. As the first quote demonstrates, many heterodox economists have already come to terms with the non-ergodic nature of reality and set out to create macro theories acknowledging reality as such. Ultimately I am a firm believer that accepting greater uncertainty allows for advancements in protecting against the unknown risks. The current state of macroeconomics would benefit greatly from moving in that direction.</span></span><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com12tag:blogger.com,1999:blog-7707793736288462113.post-61730543903764605512013-02-15T20:21:00.000-05:002013-02-15T20:24:51.600-05:00The Current State of Macroeconomics<b id="internal-source-marker_0.10143963969312608" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><a href="http://www.touchstone-blog.com/tag/tax-dodge/?doing_wp_cron=1360976371.0028049945831298828125"><img height="278px;" src="https://lh5.googleusercontent.com/yti8S3YdlBHmrx9KRcWsZD0pPY1XroIYZ1XoqJvGd0Tb3vEHFU--11qICp6Qi-7ky3PEej2xteGdw2lTKxVEzhpODwzqeHhsfjnzgz7bELbVxEklk9qIlMXBSw" width="480px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">1)</span><a href="http://unlearningeconomics.wordpress.com/2013/02/08/against-friedman-why-assumptions-matter/"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Against Friedman: Why Assumptions Matter</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Unlearningecon @ Unlearning Economics</span></b><br />
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In my opinion, Friedman’s essay is incoherent even on its own terms. He does not define the word ‘assumption,’ and nor does he define the word ‘prediction.’ The incoherence of the essay can be seen in Friedman’s own examples of marginalist theories of the firm. Friedman uses his new found, supposedly evidence-driven methodology as grounds for </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">rejecting</span><a href="https://docs.google.com/viewer?url=http%3A%2F%2Fweb.usal.es%2F~bustillo%2FCurvadecoste1.pdf"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">early evidence</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> against these theories. He is able to do this because he has not defined ‘prediction,’ and so can use it in whatever way suits his preordained conclusions. But Friedman does not even offer any testable predictions for marginalist theories of the firm. In fact, he doesn’t offer any testable predictions at all.</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Friedman’s essay has economists occupying a strange methodological purgatory, where they seem unreceptive to both internal critiques of their theories, and their</span><a href="http://unlearningeconomics.wordpress.com/2012/01/10/thats-ok-in-practice-but-does-it-work-in-theory/"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">testable predictions</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. This follows directly from Friedman’s ambiguous position. My position, on the other hand, is that the use and abuse of assumptions is always something of a judgment call. Part of learning how to develop, inform and reject theories is having an eye for when your model, or another’s, has done the scientific equivalent of</span><a href="http://en.wikipedia.org/wiki/Jumping_the_shark"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">jumping the shark.</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> Obviously, I believe this is the case with large areas of economics, but discussing that is beyond the scope of this post. Ultimately, economists have to change their stance on assumptions if heterodox schools have any chance of persuading them.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - This essay by Friedman, </span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Methodology of Positive Economics,</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">”</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> marked the beginning of my PhD program and helped shape my views about mainstream economics. Despite our (Unlearning Econ and mine) very different backgrounds, as usual, I came to a very similar conclusion:</span></b><br />
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Friedman sets out on the difficult task of developing a positive economics with normative implications. While his efforts to prove that a hypothesis must not be judged solely by the realistic nature of its assumptions were valiant, this strength of his paper has been largely overlooked. Instead, Friedman’s normative views regarding determination of a theory’s validity, choosing among competing valid hypotheses and application to specific circumstances have indoctrinated economists with a means to defend orthodox, mainstream economics from all criticism.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial;"><span style="white-space: pre-wrap;"><br /></span></span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://www.cbsnews.com/8301-34227_162-57569034/state-of-the-union-familiar-economic-themes/"><img height="312px;" src="https://lh4.googleusercontent.com/lXyR6FiQq4JCqc95r0sNDNBftFtRuOuwcbs5ooOaVL7fFCGZEPeWYes7XlCl77ouFW-UFR_BEFnxgq1u7zXdkf7Ih_ds4fbfkQEkzpBU0LcHSILvTp8pAcgjTA" width="583px;" /></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">2)</span><a href="http://feedproxy.google.com/~r/neweconomicperspectives/yMfv/~3/7r7P3EIuLtc/the-state-of-the-economic-union.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The State of the Economic Union</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Dan Kervick @ New Economic Perspectives</span></b><br />
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">The Most Urgent Problems We Face</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">2. Working People and Capital Moving in Opposite Directions</span></b></blockquote>
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<ul style="margin-bottom: 0pt; margin-top: 0pt;"><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;">
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Corporate profits are up 36% since January 2008, and up 200% since January 2001.</span></li>
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The share of national income going to working people has fallen 6.2% since January 2008, and 11.2 % since January 2001.</span></li>
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">For the bottom fifth of wage earners, the number of annual hours worked increased by 22% between 1979 and 2007, but real hourly wages increased by only 7.7%. For the period between 2000 and 2007, real wages in this group actually fell by 3.2%</span></li>
</b></ul>
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</b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">3. An Unstable Financial Economy</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"></b><br />
<ul style="margin-bottom: 0pt; margin-top: 0pt;"><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;">
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Although household debt has declined since the peak of the recession, it remains very high by historic standards. Total household credit market liabilities as a share of GDP are now over 81%. This compares to 43% in 1970, 49% in 1980, 60% in 1990, and 67% in 2000.</span></li>
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The financial sector remains dangerously large, and growing, with an 8.4% share of GDP – bigger than it was just before the recession. The US financial industry now accounts for 30% of all domestic corporate profits.</span></li>
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The total outstanding debt of the domestic financial sector is over 87%, down from 107% at the beginning of 2007, but still much higher than in January 2000 (80%), January 1990 (44%) and January 1980 (19%).</span></li>
</b></ul>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;">
</b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">4. Socioeconomic Inequality</span></b></blockquote>
<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></span><br />
<ul style="margin-bottom: 0pt; margin-top: 0pt;"><span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;">
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The after tax income of the top 1% of households, adjusted for inflation, has risen by about 130% since 1967. The income of the next 20% has risen by 28%. The incomes of all other income groups have fallen.</span></li>
<li dir="ltr" style="font-family: Arial; font-size: 15px; list-style-type: disc; vertical-align: baseline;"><span style="background-color: white; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The richest 1% of Americans control 34.6% of Americans’ net worth. The bottom 90% control 26.9% of net worth.</span></li>
</span></ul>
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<span style="font-family: Arial;"><span style="white-space: pre-wrap;"><br /></span></span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><b>Woj’s Thoughts</b></span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Dan lays out seven different problems that currently plague America, of which three are listed above. These specific selections were chosen because I personally found them most compelling, as presented, not to imply they’re the most important. Dan also presents five immediate actions the federal government could take to address these issues. I don’t necessarily support all of the proposals but they represent a good starting point for debating how to best turn the economy around. </span></span><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com1tag:blogger.com,1999:blog-7707793736288462113.post-57422171548088963052013-02-15T14:03:00.002-05:002013-02-15T14:03:37.876-05:00Exchange Rate Intervention Is Gaining Popularity, Again <b id="internal-source-marker_0.9354216188658029" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><a href="http://www.tutor2u.net/blog/index.php/economics/comments/exchange-rates-student-handout"><img height="429px;" src="https://lh4.googleusercontent.com/T-VgsmTcCFsPHI15w5n9-gdHjbqNuPt5LfmEogCZW-9Vtukx_sFfcc7jONAEiMKvosoJJo8q2XCIKzYjSc2A_gMd2SHH5rDIAIHhAiNP3RjhnHgFLYY_pjEgdA" width="572px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">1)</span><a href="http://www.3spoken.co.uk/2013/02/musings-on-mmt-firming-up-soft-bits.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Musings on MMT - Firming Up The Soft Bits</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Neil Wilson @ 3spoken</span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Effect on the Exchange Rate</span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The problem here I think is a matter of viewpoint. The world </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">is</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> a closed system. Each individual monetary area operates within that closed system. So if you press in one area, the results of that will pop up somewhere else in the world.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The world can be modelled as an interacting set of non-convertible floating rate monetary systems (with pegged nations treated as part of the currency area they are pegged to). So that means for your currency to go down </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">all</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> the others have to go up. It only takes the central bank of one of the other areas to start buying your currency to halt that decline.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">And if a currency area has an export led policy, then they will intervene to assist their exporters by providing liquidity in the currency the exporters actually want - their own. This is pretty much what the Swiss did against the Euro, and frankly as the Chinese central bank does against pretty much everything.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">So I think </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">the driver is not so much demand for your currency, as desire to access your market by foreign exporters.</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> And that is obviously linked to how wealthy your country is perceived by export-led nations. (my emphasis)</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Recently I’ve spent significant time thinking about</span><a href="http://bubblesandbusts.blogspot.com/2013/01/the-impossible-trinity-or-permanent.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">exchange rate movements in relation to the current monetary system</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. My initial impression was that two separate theories may be necessary to explain the effects of trying to depreciate or appreciate a given currency. Neil’s observation in bold may provide a common link to explain observed changes. The focus on exports (trade) does, however, leave out demand for access to financial markets as a potential driver. While this may only be meaningful for the largest developed countries, all of these questions will require further exploration.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">2)</span><a href="http://moslereconomics.com/2013/01/30/a-word-on-the-euro-us-deficit-doves-and-the-japan/"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">a word on the euro, US deficit doves, and Japan</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Warren Mosler @ The Center of the Universe</span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Japan’s weak yen, pro inflation policy seems to have been all talk with only a modest fiscal expansion to do the heavy lifting. Changing targets does nothing, nor does the BOJ have any tools that do the trick as evidenced now by two decades of using all those tools to the max. And while I’ve been saying all the while that 0 rates, QE, and all that are deflationary biases that make the yen stronger, there is no sign of that understanding even being considered by policy makers, so expect more of same. What has been happening to weaken the yen is a quasi govt policy of the large pension funds and insurance companies buying euro and dollar denominated bonds, which shifts their portfolio compositions from yen to euros and dollars, thereby acting to weaken the yen. I have no idea now long this will continue, but if history is any guide, it could go on for a considerable period of time. Yes, it adds substantial fx risk to those institutions, but that kind of thing has never gotten in the way before. And should it all blow up some day, look for the govt to simply write the check and move on.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Though I expect the yen to strengthen a bit by the end of the year, the willingness of Japanese pension funds and insurance companies to continue increasing fx risk remains a wildcard. Considering the large negative impact on GDP from declining exports in the fourth quarter, it will be interesting to see what effect the weakening yen has on Japan’s trade balance going forward. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://www.businessinsider.com/economist-warns-of-japan-fiscal-crisis-2013-2"><img height="640" src="https://lh3.googleusercontent.com/CUHs8pqavAJrWblFwcMdHsoD8KD6J90I63i_tOvNS4UVHEHc1qs_2FfVp4L-Y7f9VnvNO_Y2I3Vk3XtdDEzyuSOPeISbIAyd1HZMduyamUXJPLOks4maIrwFeA" width="452" /></a></b><br />
<br /><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-9314287466503993682013-02-14T18:25:00.000-05:002013-02-14T18:25:13.165-05:00Bubbling Up...<b id="internal-source-marker_0.6582234380766749" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">1)</span><a href="http://pragcap.com/buffetts-favorite-valuation-metric-surges-over-the-100-level"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Buffett’s Favorite Valuation Metric Surges Over the 100% Level</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Cullen Roche @ Pragmatic Capitalism</span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">For the first time since the recovery began, Warren Buffett’s favorite valuation metric has breached the 100% level. That, of course, is the Wilshire 5,000 total market cap index relative to GNP. See the chart below for historical reference.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">I only point this out because it’s a rather unusual occurrence and the recent move has been fairly sizable. It happened during the stock market bubble of the late 90′s, but then occurred again just briefly during the 2006-2007 period when the valuation broke the 100% range in Q3 2006 and stayed above that range for about a year. We all know what followed the 2007 peak in stock prices.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="394px;" src="https://lh5.googleusercontent.com/ajjrnGTMS776EmqaQnhxnRk25XpOmqIQgmPA2UG7Wj1oGycajun2BxKjEV8S3b0rKG4B7NqniON9bpsyU2zzXL3gMVsq8BwWtI5hWAiiBtluOeLC66BCGZQRmg" width="592px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - These days it’s becoming increasingly tough to find stock market indicators that are not either approaching all-time highs or levels that have only been reached just prior to the onset of a bear market. As shown by the previous two market peaks, clearly this measure can go higher still. Nevertheless, this metric supports the view that the current bull market is much closer to the end than the beginning.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">2)</span><a href="http://conversableeconomist.blogspot.com/2013/02/a-future-of-low-returns.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">A Future of Low Returns?</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Timothy Taylor @ Conversable Economist</span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Here's a figure showing U.S. experience in the long run. The bars on the far right show how annual returns on equity have outstripped those for bonds and for bills from 1900-2012. The middle bars show a similar pattern, a bit less extreme, for the last half-century from 1963-2012. The bars on the far right show the 21st century experience from 2000-2012. Stocks have offered almost no return at all; neither have bills. Bonds have done fairly well, given the steady fall in interest rates, but as interest rates have headed toward zero, the gains from bonds seem sure to diminish, too.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><img height="412px;" src="https://lh6.googleusercontent.com/-JCa_ps_MAp8F-8y6TOEJucKBt7eA-zUvIMC8FJiqDxkztuhCWxLWQktxlLaJc0gjX4X9EAElB7baekBYV4SPFonMwSg629TZg80kzb-tqdfDxTMFvrSKobqfQ" width="584px;" /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Dimson, Marsh, and Staunton have some grim news for those waiting for a bounceback to 20th century levels of returns: "[M]any investors seem to be in denial, hoping markets will soon revert to “normal.” Target returns are too high, and many asset managers still state that their long-run performance objective is to beat inflation by 6%, 7%, or even 8%. Such aims are unrealistic in today’s low-return world. ... The high equity returns of the second half of the 20th century were not normal; nor were the high bond returns of the last 30 years; and nor was the high real interest rate since 1980. While these periods may have conditioned our expectations, they were exceptional."</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Most people are probably aware that equity returns have been dismal, so far, during the 21st century. What I find striking is how small the gap between equities and bonds has been over the past fifty years. Sure 2.3% in real terms is significant, especially over a long-time horizon, but given the severely different levels of risk shouldn’t this figure be higher? For those interested in many other great charts and more in-depth discussion, check out the</span><a href="http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Credit Suisse Global Investment Returns Yearbook 2013</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. </span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-18592081417162363042013-02-14T14:48:00.000-05:002013-02-14T14:48:40.149-05:00European Markets and GDP Move in Opposite Directions during 4th quarter<b id="internal-source-marker_0.2698208277579397" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><a href="http://www.businessinsider.com/eurozone-gdp-falls-06-2013-2"><img height="422px;" src="https://lh5.googleusercontent.com/F6sbuz9D-eoj8RsUc8tavNzln40PiHEmGUU7BnOcuV8NY7nf_H7z0SlaoqYhO7AXD1qdTViDkul2g9tPEdzPnXx7txqDetgu22sqv96wFJSYcuWe37BXRQ_8qQ" width="599px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">With data now confirming Europe’s awful fourth quarter on the </span><a href="http://feedproxy.google.com/~r/TheMoneyGame/~3/bu6tTg30jaY/morning-markets-february-14-2013-2"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">GDP</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> and </span><a href="http://feedproxy.google.com/~r/TheMoneyGame/~3/z91p_D3ue4o/the-eurozones-youth-unemployment-crisis-2013-2"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">unemployment</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> front, it may be time to reconsider whether recent optimism is truly warranted...</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><a href="http://www.zerohedge.com/news/2013-02-06/europes-fragile-bubble-citis-buiter-warns-unrealistic-complacency"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Europe's A Fragile Bubble', Citi's Buiter Warns Of Unrealistic Complacency</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> courtesy of Zero Hedge</span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">We recognise that, in a decentralised market economy where expectations of the future, moods, hopes and fears drive private (and sometimes also government) behaviour directly and </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">through their effect on the prices of real and financial assets, today’s subjective expectations and other psychological characteristics in part determine what tomorrow’s fundamentals will be</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Irreversible or costly-to-reverse decisions like capital expenditure, human capital formation, resource extraction etc, are driven by subjective expectations and moods, making the </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">distinction between a fundamentally warranted asset boom and a bubble slightly fuzzy at the edges</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">But this indeterminacy</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, bootstrapping, self-validating characteristic of complex dynamic economic systems inhabited by partially forward-looking households, firms and policy makers – called reflexivity by George Soros – </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">can be taken too far</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Mere optimism and confidence will not permit the authors of this note to bootstrap themselves into winning the men’s doubles at Wimbledon 2013. The fact that financial markets have radically reduced their implied estimates of the likelihood of sovereign default in the periphery of the EA (other than in Greece) and of senior unsecured bank debt restructuring throughout the EA, core as well as periphery, should not stop us from continuing to analyse carefully the fundamental drivers of both sovereign credit risk and senior unsecured bank debt credit risk. When we do this, </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">the conclusion that the markets materially underestimate these risks is, in our view, unavoidable</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Actions by central bankers and politicians in the Euro Area, U.S., and Japan are increasingly betting on the fact that optimism and confidence alone will solve the problems underlying the presently weak economic growth. On this matter I side with Buiter in thinking markets have gotten well ahead of economic realities, especially in the Euro Area periphery. Recent flare-ups highlight the ongoing undercapitalization of banks and the inability of fiscal policy to either reduce unemployment or meet given targets. Political fallout from recent scandals and a</span><a href="http://bubblesandbusts.blogspot.com/2013/01/strengthening-euro-may-reignite-eu.html"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">strengthening euro may reignite the EU crisis</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://www.businessinsider.com/the-eurozones-youth-unemployment-crisis-2013-2#here-is-a-look-at-the-entire-picture-with-youth-unemployment-plotted-along-the-x-axis-18"><img height="442px;" src="https://lh3.googleusercontent.com/aevhQHiMO8wR2nf_-3cww7S7xw3wbVCjJ0hJHjF994tRjxxmfQuWMaI_jQnCkP8QLybgw1ZIQEJ1WeSau1SdSrtAeQqaAGpngasy-hxw-89kVTmFRmcHXAKezA" width="590px;" /></a></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-4468080305175902962013-02-14T11:40:00.000-05:002013-02-14T11:42:14.593-05:00Will the Bank of Japan End Up Owning the Entire Stock Market?<b id="internal-source-marker_0.45137408282607794" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><a href="http://pragcap.com/japan-does-the-full-ponzi"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Japan Does the Full Ponzi</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Cullen Roche @ Pragmatic Capitalism</span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">I saw this headline over at</span><a href="http://www.calculatedriskblog.com/2013/02/nikkei-opens-up-sharply-following.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> Calculated Risk regarding</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> the new “monetary policy” in Japan:</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">And from the Japan Times:</span><a href="http://www.japantimes.co.jp/news/2013/02/10/business/japans-economic-minister-wants-nikkei-to-surge-17-to-13000-by-march/"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Japan’s economic minister wants Nikkei to surge 17% to 13,000 by March</span></a></b><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Economic and fiscal policy minister Akira Amari said Saturday the government will step up economic recovery efforts so that the benchmark Nikkei index jumps an additional 17 percent to 13,000 points by the end of March.</span></b><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">“It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech.</span></b><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Nikkei 225 stock average, which last week climbed to its highest level since September 2008, finished at 11,153.16 on Friday.</span></b><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">“We want to continue taking (new) steps to help stock prices rise” further, Amari stressed …</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">…</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Yes, the Bank of Japan might create some real wealth (for some market participants) in the near-term and might thereby make Japan appear better off than they really are, but there’s absolutely no underlying fundamental change in the corporations that make up this index that should lead one to believe that these price changes are justified. And when the Ponzi scheme is exposed the market collapses thereby destroying wealth for all the current participants leaving us right back where we started.</span></b></blockquote>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This is ponzi based monetary policy. It’s based on a false understanding of market dynamics, a false understanding of real wealth, and it’s very likely to cause disequilibrium in the long-term.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - While these comments made investors giddy, as expected, I can’t help but feeling that the continued onslaught of “open mouth” operations from Japanese officials is masking their deficient understanding of modern monetary economics. If </span><a href="http://pragcap.com/robert-shiller-debunks-stock-market-wealth-effect"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">wealth effects from higher stock prices are largely irrelevant in the U.S.</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, what are the odds the effect will be greater in Japan where equities play a much smaller role in household portfolios?</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><a href="http://www.boj.or.jp/en/statistics/sj/sjhiq.pdf"><img height="418px;" src="https://lh4.googleusercontent.com/tNm72tBnxX0qlPZUoajgwztm51svfrFTgZ7gG8yT45v93n7eo0mMdQiZ35xTXWvaaPaH35V2rGhRYcfVpTRkHTfO7ZyMrCQgND4xIC--ma8f1naqw5mHwOGNhQ" width="618px;" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">As </span><a href="http://www.creditwritedowns.com/2013/02/currency-war-or-something-altogether-different.html#utm_source=rss&utm_medium=rss&utm_campaign=currency-war-or-something-altogether-different"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Niels Jensen</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> makes clear in his most recent investor letter, the Nikkei’s recent surge combined with a plunging Yen suggests the pressures in both markets are arising primarily from foreign investors.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Prior to PM Abe taking office </span><a href="http://bubblesandbusts.blogspot.com/2012/12/the-real-story-behind-japans-re.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">I was skeptical of fiscal and monetary policies actually being enacted that would materially raise either inflation or real GDP growth</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> (effectively NGDP). Since then a minor fiscal stimulus package was announced along with a higher inflation target and commitment to future QE. Looking beyond the initial market optimism, none of these measures will actually generate the economic results to match the widespread wishful thinking. </span><a href="http://feedproxy.google.com/~r/TheMoneyGame/~3/0GOJE5xULT4/miss-japanese-gdp-falls-01-2013-2"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Fourth quarter NGDP was just recently announced at zero percent and real GDP fell for the third consecutive quarter</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Unless further drastic policy actions are taken, I suspect future quarters will more closely resemble the current quarter than the hoped for 4% NGDP growth.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">(Note: Cullen describes Japan’s theoretical new policy as a Ponzi scheme, but I think that terminology may be incorrect in this situation. Since the Bank of Japan (BoJ) can create an unlimited supply of reserves, it does not require any new lending to continually maintain any price for the Nikkei it chooses. The scariest outcome is not that the scheme would collapse, but that the BoJ would end up controlling all currently public corporations.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">To be clear, I doubt that outcome would happen in practice. The more likely endgame is that the policy becomes politically unacceptable and then the BoJ retracting its price target leads to a spectacular (ponzi-esque) crash.)</span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-85232567634159966602013-02-13T19:50:00.000-05:002013-02-13T19:50:28.762-05:00The Money Multiplier Doesn't Exist<b id="internal-source-marker_0.1746741789393127" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><a href="http://www.thoughtofferings.com/2011_06_01_archive.html"><img height="345" src="https://lh6.googleusercontent.com/zFC3BlVRAnyLyd6nSzyRtyfedSRWqbSjqJZuzpO9VzV2taNqwPQ0eKyDo6fJQdhTy1CnmeCdFDmpyQ0Ym_-97Vm8gjAWIW5yG3P4AKwK0KL9YW9SxYO-zwxvVA" width="640" /></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><a href="http://feedproxy.google.com/~r/espeak/~3/iK4U0ZRLnzo/the-myth-of-money-multiplier.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Myth Of The Money Multiplier</span></a><span style="color: #1155cc; font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">by Barkley Rosser @ EconoSpeak</span></b><br />
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">That Fed control over the money supply has become a phantom has been quite clear since the Minsky moment in 2008, with the Fed massively expanding its balance sheet without much resulting increase in measured money supply. This of course has made a hash of all the people ranting about the Fed "printing money," which presumably will lead to hyperinflation any minute (eeek!). But the deeper story that some of us were unaware of is that apparently this disjuncture happened a long time ago. Even so, one of our number pointed out that official Fed literature and even many Fed employees still sell the reserve base story tied to a money multiplier to the public, just as one continues to find it in the textbooks, But apparently most of them know better, and the money multiplier became a myth a long time ago.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Rosser refers to a paper from </span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">the Federal Reserve Board’s Finance and Economics Discussion Series that was the source of a recent</span><a href="http://bubblesandbusts.blogspot.com/2013/01/quote-of-week.html"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Quote of the Week</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span><br /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">“</span><a href="http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">” (by Seth B. Carpenter and Selva Demiralp, May 2010):</span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">As I noted in that post:</span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">If staff members at the Federal Reserve are aware of the</span><a href="http://bubblesandbusts.blogspot.com/2012/07/the-money-multiplier-fairy-tale.html"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">money multiplier myth</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> than surely Bernanke and the other board members have heard the arguments. Unfortunately most mainstream economists, especially monetarists, continue to promote monetary stimulus </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">as if</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> the old regime still persists.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Fortunately the economics professors at James Madison stumbled across this paper and were convinced of its conclusion. Hopefully they will join a minority of current economists in training future economists to recognize the money multiplier does not exist.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Related posts:</span><br /><a href="http://bubblesandbusts.blogspot.com/2012/08/fullwiler-main-shortcoming-of-money.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Fullwiler - "The main shortcoming of the </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">money multiplier</span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> paradigm"</span></a><br /><a href="http://bubblesandbusts.blogspot.com/2012/06/ior-killed-money-multiplier.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">IOR Killed the Money Multiplier</span></a><br /><a href="http://bubblesandbusts.blogspot.com/2012/11/fighting-for-endogenous-money-on-two.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Fighting for Endogenous Money on Two Fronts</span></a></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com11tag:blogger.com,1999:blog-7707793736288462113.post-42274439348518530982013-02-13T16:28:00.000-05:002013-02-13T16:28:38.572-05:00The Fed's Massive Accumulation of Treasuries Won't be Unwound<b id="internal-source-marker_0.3509201353881508" style="font-weight: normal;"><a href="http://feedproxy.google.com/~r/TheMoneyGame/~3/MevhctCxc3M/fed-balance-sheet-fairy-tale-ending-2013-2"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The Federal Reserve Will Need A 'Fairy Tale Ending' To Unwind Its Balance Sheet</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Peter Tchir @ Money Game</span></b><br />
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><img height="147" src="https://lh5.googleusercontent.com/OetMRK1W2MAqnna6231ksafmWQV1khC8BO44dAKbxyjCPgzCJETpxQDGRSRM1DPifPLiA6HnnQbTgE8wk6FHaxgMXSKa6PwPBynFwiWPQnc7YWBWt6ECB81aQQ" width="640" /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">I don’t see how the Fed announces anything that talks about taking down the balance sheet. Not now, and possibly not ever. The moment people get concerned, the market will start pricing in the unwind, no one will want to buy the long end of the curve and it will play havoc with rates.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Who in their right mind would buy 10 year treasuries when you know that the equivalent of multiple years of supply is being sold by the Fed along with the ones the Treasury department will need to sell. It isn’t like the Treasury department will be able to stop issuing bonds. They have to deal with rolls and frankly with ongoing deficits.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">As a hedge fund, are you really going to “fight the fed” and buy 10 year bonds once you think they need to sell them? I don’t think so. More importantly, who will make a nice 10 year mortgage when the 10 year treasury is selling off?</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">That is the problem. The Fed has built up such a large portfolio, that the only likely way to exit it is through letting it mature. That at least takes the $2 trillion seller out of the market (remember, they are still in buying mode).</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Due to the potential damage a sell off occurs, both in the cost of funds for the treasury, but more importantly in the knock on effect it has on other yield products, I would expect the Fed to defend any big move aggressively. Not only do they have the money to do it, but the float is small enough it may take far less than people think to defend the market.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - Six months ago I argued that an</span><a href="http://bubblesandbusts.blogspot.com/2012/08/interest-on-reserves-regime-will-rule.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">"Interest-On-Reserves Regime" Will Rule Monetary Policy For The Foreseeable Future</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> because:</span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">departing from this new regime will ensure that any future rate hikes be preempted by a reversal of the balance sheet expansion (or excess sale of Treasuries). Balance sheet contraction, through open market operations, could very well depress asset values and raise long-term interest rates. If this occurs, the Fed would be effectively causing a new crisis just as the economy is becoming increasingly stable.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Tchir’s post breaks down the Federal Reserve’s current Treasury holdings, which amount to approximately 40 percent of outstanding supply in the 5 to 30 year maturity range. With the Federal Reserve now purchasing $45 billion of Treasuries per month, those percentages are set to grow rapidly in the coming year(s). Given the potential fallout from even signaling an end to current rounds of QE, I fail to see why future FOMC members would take the risk of actively reducing the monetary base when other options exists. This outlook for monetary policy is precisely why it’s so important to</span><a href="http://bubblesandbusts.blogspot.com/2013/01/furthering-understanding-of-permanent.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">further understanding of the Permanent Floor</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-10122541353170930652013-02-12T18:23:00.000-05:002013-02-12T18:23:24.593-05:00Fear of Bubbles, Not Inflation, Returns to the Fed<b id="internal-source-marker_0.3896387198474258" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; color: #222222; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">St. Louis Federal Reserve Governor Jeremy Stein recently gave a speech titled "</span><a href="http://www.federalreserve.gov/newsevents/speech/stein20130207a.htm"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Overheating in Credit Markets: Origins, Measurement, and Policy Responses</span></a><span style="background-color: white; color: #3c78d8; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.</span><span style="background-color: white; color: #222222; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">"</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Carola Binder was struck by the historical relevance of the chosen terminology and offered the following comment in a post on </span><a href="http://carolabinder.blogspot.com/2013/02/overheating-and-fed.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Overheating and the Fed</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In the</span><a href="http://www.nytimes.com/2013/02/08/business/fed-official-sees-tension-in-some-credit-markets.html?_r=1&"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">New York Times</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, Binyamin Applebaum writes that Stein's speech "underscored that the Fed increasingly regards bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth." In fact, the Fed's concern about bubbles is not so new. After the Great Depression, it was widely believed that the stock market overheated in the 1920s, leading to the Great Crash in 1929 and the</span><a href="http://emlab.berkeley.edu/users/cromer/CRomerQJE1990.pdf"><span style="background-color: white; color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">onset of the Depression</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. In those days, the word for bubbles or overheating was </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">speculation</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, and it became a dirty word indeed. After the Great Depression, speculation remained a major concern of the Fed. The Fed very explicitly regarded bubbles as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Apparently the Fed has come full circle. Carola goes on to provide a couple excerpts from FOMC minutes during the 1950’s, the last time the Federal Reserve was concerned with asset bubbles instead of inflation. The subsequent change in thought is not overly surprising given that stock markets flatlined starting in the mid-1960’s, as inflation picked up and became a major cause for concern throughout the 1970’s. What is disturbing, is the Federal Reserve’s failure to recognize the changing landscape over the past three decades. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">During that time, commercial bank lending has largely shifted its priorities from financing tangible (capital) investment through business loans to financing the purchase of already existing assets (e.g. houses, stocks and bonds):</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="384" src="https://lh6.googleusercontent.com/KlDAA3pRCgLq8I67acqFl04_6K5aEqOajlpXSu2RlC-H576zk6AcPJWkUeW_73TMPkk18Wj-jLmMr8bVY0crsrqyKfz6oMFa9sZsTH3iZEyIpyc6nyZnsf6egA" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">(BUSLOANS = Commercial and Industrial Loans; REALLN = Real Estate Loans; LOANS = Loans and Leases at All Commercial Banks)</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">It should therefore come as no surprise that the transmission mechanism of monetary policy is now primarily through various asset markets (i.e. </span><a href="http://bubblesandbusts.blogspot.com/2013/01/tax-policies-created-real-estate.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">real estate monetary standard)</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Consider the following charts showing various asset prices and inflation rates during the past 30 years:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Stocks</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="384" src="https://lh6.googleusercontent.com/GWsPGjPs81J7usBVytfL0x28CVwTgjpELHMLdVGNHQfCqJwqfHvIBR6EnKsw2PFv-ilAB35Q0isi8SjRKRt87_YSCFEwJ7T0ex3jrkff5lG0N53YDj2C_I4REg" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">High-Yield Corporate Debt</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="588" src="https://lh5.googleusercontent.com/w2pjkmWyq8snexD9ZiuQiOXiSn2OKME-uyXiUszwTgncodTiuVKrOqJVwkLf3NXE8IKUBe5nR3tdvz1vfk6uj775-EqctP_m_-4boXSLnMWMLBBI-ZPxoSp3yg" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Houses</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="427" src="https://lh5.googleusercontent.com/CmqLNJ-FLVpuXU4Dbnc2tvn3-lhfTrYqOWVr_j2oVcrJvNeic3DxVYwC4MODIGrbKO78ZyuYYctBcWt7RUTYTFl0rbUOCPqv9ZePmCjX_l4UPeztkCGVXThsmQ" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Inflation</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="384" src="https://lh6.googleusercontent.com/wG-STTZtfxNyfVDN7ofZgJ7vBrtz37PDraisuAgWHf3tcqr1hHb2eJdA6DmaE0QpKFL_Fij4CokemyXj_s4HDE-EvCFuVU7mtkPZ2LXBcU6mWja6zeRh2nEvdw" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Over the past few years I’ve been very critical of the Federal Reserve’s actions spanning the last couple decades. One of the primary reasons behind this view was the incessant focus on limiting inflation and utter lack of concern regarding asset bubbles. The present risk of a zero interest rate policy (ZIRP) and</span><a href="http://bubblesandbusts.blogspot.com/2012/09/qeternityand-beyond.html"><span style="color: black; font-family: Arial; font-size: 15px; text-decoration: initial; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">QEternity</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> lies mainly in inflating new asset bubbles, not creating excessive measured inflation. If the Fed has finally come back around to this realization, that would certainly be a big step in the right direction.</span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-50732987715638774532013-02-12T14:46:00.000-05:002013-02-12T14:46:18.887-05:00Misstating Corporate Earnings<b id="internal-source-marker_0.45112163899466395" style="font-weight: normal;"><a href="http://www.wilmott.com/blogs/satyajitdas/index.cfm/2013/2/9/Perceptions-of-Beauty--Stock-Valuations"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Perceptions of Beauty & Stock Valuations</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> by Satyajit Das @ Fear & Loathing in Financial Markets</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Stock spruikers argue that equities are “undervalued”. But changes in the economic environment may make quaint measures such as price-earning (“PE”) ratios misleading. In a world of low growth, the dynamics of corporate earnings, which ultimately underlie stock prices, have become more complex.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Profit margins and cash flow improve, perversely, in a period of low growth. Initially, companies cut costs improving profitability. As revenues are stagnant, companies have no need to invest in expanding capacity or working capital, releasing cash flow.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Reduction in depreciation charges and the ability to use cash flow to reduce debt reduces interest expenses. In the present cycle, sharp decreases in interest rates, though not necessarily interest margins, have also improved profit margins.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">These effects are short term. In effect, they misstate earnings.</span></b></blockquote>
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; font-weight: bold; vertical-align: baseline; white-space: pre-wrap;">Woj’s Thoughts</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> - After recently being called a permabear, a separate post on my equity outlook is certainly called for. In the meantime, consider the many ways (more at the link) in which Das shows companies are effectively misstating earnings. Although Das’ list is long, I think it is far from exhaustive. My general view is that companies are finding clever ways to increase current earnings at the expense of future capacity to drive revenues higher (i.e. borrowing to fund stock buybacks). If revenue growth continues at a pace well below previous cycles, earnings may peak much lower than most expect and P/Es of an earlier day may no longer be warranted.</span></b>
<a href="http://ycharts.com/indicators/sandp_500_sales_per_share/chart#series=agg:last,units:,freq:,calc:,type:indicator,id:sandp_500_sales_per_share,,agg:last,units:,freq:,calc:,type:indicator,id:sp_500_eps,,agg:last,units:,freq:,calc:,type:indicator,id:sp_500_operating_eps&maxPoints=550&zoom=10&format=indexed"><img alt="S&P 500 Sales Per Share Chart" src="http://media.ycharts.com/charts/dd053efbac3309325f42e6db394689f4.png" /></a><br />
<div style="font-size: 10px;">
<a href="http://ycharts.com/indicators/sandp_500_sales_per_share">S&P 500 Sales Per Share</a> data by <a href="http://ycharts.com/">YCharts</a></div>
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</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com0tag:blogger.com,1999:blog-7707793736288462113.post-50639248324338185802013-02-12T08:00:00.000-05:002013-02-12T08:00:08.989-05:00Still No Rush to Buy a Home<b id="internal-source-marker_0.9365009020548314" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The beginning of a new year is apparently as good a time as any to start thinking about buying a new home. At the start of 2012 I found myself frequently engaged in discussions about whether or not it was finally the “right” time to buy a house. Mortgages with 30-year fixed rates were being offered around 4% and prices appeared to be stabilizing. Despite the widespread optimism, my conclusion was:</span></b><br />
<blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">When deciding whether or not to purchase a home, there are certainly a whole host of factors to consider that were not discussed here (family, job security, income, savings/debt, location, etc). The purpose is to provide an alternative perspective to the seemingly common perception that now is the best time to buy and those who fail to act will miss a great opportunity. While I don’t rule out that possibility, I believe the outlook for home prices and mortgage rates suggests this window of opportunity will remain open for a few years. In fact, those who wait may be rewarded with lower mortgage rates and more house for their money. </span><a href="http://bubblesandbusts.blogspot.com/2012/01/dont-rush-to-buy-home.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">There is no rush to buy a home!</span></a></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Now with the benefit of hindsight, my judgment appears to have held up relatively well. Although house prices have risen approximately 6 percent in the past year:</span></b><div>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><img height="505px;" src="https://lh4.googleusercontent.com/7Ac3dzTurMI2JKd1fOAiO-IlmvlQN7aduQhKM_t8-AWVSpQDXMkPOWihJgV1hZ_iAG_faFrMyGFg9f6ty9ra4495Uk9uAK7el0hEjXu90l3FdfPwuo9i83LYAA" width="560px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">30-year fixed rate mortgages touched a new low of 3.3%:</span></b><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><img height="309px;" src="https://lh6.googleusercontent.com/L4wnRx7CgFPIs5NQIaUS2Fu-jpXIIrP6POkncO0RW0YboE1ovYgBnyW7dIwES2LBJagp0YQc7k8towDKcAQQNtlGdm3Nkfo4snHXnjPQlNEFygYp6iFKCFzZoQ" width="515px;" /></b><b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">With 2013 only a month old, conversation among friends and family about buying new homes has picked up once again. Oddly enough, the substantial rise in prices over the past year is stoking demand for housing. (I say oddly because basic economics suggests demand should decrease when prices rise) However, before offering my views on future house prices, let me say a few words about mortgage rates. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Over the past few months the FOMC has initiated QE3 (</span><a href="http://bubblesandbusts.blogspot.com/2012/09/qeternityand-beyond.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">QEternity</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">) and QE4, which involves purchasing $40 billion of Agency-MBS and $45 billion of Treasuries per month. Despite jubilant asset markets, inflation (core-PCE) and GDP growth remain well below 2 percent. This failure to stimulate real growth will likely lead the FOMC to extend its pledge of maintaining interest rates near 0 until at least 2016. Based on this combination of QE, ZIRP, low inflation, and stagnating growth, the chances of mortgage rates rising back above 4 percent anytime soon seems very limited.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Returning to the future direction of house prices, I remain skeptical that household balance sheets have been sufficiently repaired to permit a new debt-led boom. One of the better resources for housing market insights, </span><a href="http://www.doctorhousingbubble.com/housing-inventory-back-to-2001-levels-real-estate-inventory-for-sale/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Dr. Housing Bubble</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> has highlighted the recent surge in investment demand. Meanwhile, Diana Olick discusses reports that </span><a href="http://feedproxy.google.com/~r/TheMoneyGame/~3/tAUzVkpam00/americans-are-tapping-home-equity-again-2013-2"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Americans are tapping their homes for cash again</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. Clearly aspects of the previous bubble are returning, which makes it tough to rule out further gains in the short-term. That being said, </span><a href="http://pragcap.com/robert-shiller-dont-invest-in-housing"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">US residential real estate just isn’t a great investment in real terms and here is Robert Shiller explaining why</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span></b><blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">“Housing is traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So, the new ones are better….So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000′s. And I don’t expect it to come back. Not with the same force. So people might just decide, ‘yeah, I’ll diversify my portfolio. I’ll live in a rental.’ That is a very sensible thing for many people to do.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">…From 1890 to 1990 the appreciation in US housing was just about zero. That amazes people, but it shouldn’t be so amazing because the cost of construction and labor has been going down.</span></b></blockquote>
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">…They’re not really an investment vehicle unless you want it for your personal reasons.”</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">If you want more proof, here is the chart Shiller is referencing:</span><img height="374px;" src="https://lh3.googleusercontent.com/zLw48uBQQha9I8l-RaeFON8U0osVEqvmuo9KqL6HeXecj6q7_TRh4IUkJ_etYqRCi2Hu45GJOxl_5QpAs37OxOuSejhWqW3BbRoTMzh0xZ9QTdUiHX8BlXBnWA" width="559px;" /><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><b id="internal-source-marker_0.9365009020548314" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">My recommendation therefore remains basically the same as last year. Housing prices and mortgage rates may have bottomed, but the odds of either rising substantially in the next couple years remains small. Ultimately you should buy a house that you want to live in, not that you hope will be a good investment. If you plan on buying, just remember, there is no rush to buy a home!</span></b></b></div>
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</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com1tag:blogger.com,1999:blog-7707793736288462113.post-7779025990112901422013-02-11T12:46:00.001-05:002013-02-11T12:46:11.804-05:00The Rise of Debt, Interest, and Inequality<b id="internal-source-marker_0.5735915645491332" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">According to </span><a href="http://krugman.blogs.nytimes.com/2013/02/08/corporate-hoarding-and-the-slow-recovery/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Paul Krugman</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, he’s “</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">had a mild-mannered dispute with Joe Stiglitz over whether individual income inequality is retarding recovery right now.” Since both Nobel Laureates were focusing on gross private savings, I broke down that measure by individual components and sub-components. Insights gained from those charts led to the </span><a href="http://bubblesandbusts.blogspot.com/2013/02/inequality-really-is-holding-back.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">conclusion</span></a><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> that:</span></b><br />
<blockquote class="tr_bq">
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This data is consistent with rising income and wealth inequality but requires reversing Stiglitz’s “underconsumption” hypothesis. Trying to maintain relative consumption levels, many households clearly chose to rely on previous savings or new debt as a means of temporarily boosting consumption. As inequality continues to rise, wealthy households are now electing to retain more of their savings within corporations. It doesn’t take a leap of faith to suggest this combination of factors depresses aggregate demand.</span></b></blockquote>
<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Still unconvinced, Krugman has been searching for further data (see </span><a href="http://krugman.blogs.nytimes.com/2013/02/08/corporate-hoarding-and-the-slow-recovery/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">here</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> and </span><a href="http://krugman.blogs.nytimes.com/2013/02/09/profits-and-business-investment/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">here</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">) that would lead him to believe </span><a href="http://bubblesandbusts.blogspot.com/2013/02/inequality-really-is-holding-back.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">inequality really is holding back the recovery</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Hoping to aid Krugman in his quest and expand upon my “overconsumption” theory, let me respond to a critique of the previous post. Over at </span><a href="http://mikenormaneconomics.blogspot.com/2013/02/joshua-wojnilower-inequality-really-is.html"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Mike Norman Economics</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, a commenter (</span><a href="http://www.blogger.com/profile/04815033054435303399"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Ryan Harris</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">) kindly noted the obvious omission of interest income and sectoral balances. After sorting through </span><a href="http://www.bea.gov/itable/"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">interactive data from the Bureau of Economic Analysis</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, here are net amounts of monetary and imputed interest by sector [positive (negative) total implies sector receives (pays) net interest]:</span><br /><img height="585" src="https://lh6.googleusercontent.com/05-nsrfdwy8yOu6GkBQvDl8AmQA_rMG5HiLM3FyWZOvtnEE9SGpAbJBIBTgHgVpZsSqIOTbzAT8YeieDwh3vhjgF0BpDfKpnQqV1WwiOXqFST7Fc6x5fyZeyEA" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><b id="internal-source-marker_0.5735915645491332" style="clear: left; display: inline !important; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"></b></b><br />
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<b id="internal-source-marker_0.5735915645491332" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><b id="internal-source-marker_0.5735915645491332" style="clear: left; display: inline !important; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><b id="internal-source-marker_0.5735915645491332" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Unsurprising to those familiar with sectoral balance analysis, households net interest position took a sharp turn upwards when federal budget deficits began expanding more rapidly in 1980:</span></b></b></b></div>
<b id="internal-source-marker_0.5735915645491332" style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><b id="internal-source-marker_0.5735915645491332" style="clear: left; display: inline !important; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><img height="384" src="https://lh4.googleusercontent.com/LDBZbjX6hkmsWEFktGPGwAPZjoW1wl-u5WMxCU5GT-90Eddxqb1iCZfCOUCCbGBtnCxhT5hvDJIzVdMR7SL3t_apZC1_a3C2GIGsiq6ND6H2dW_L4499bT4_Ug" width="640" /></b><br /><b id="internal-source-marker_0.5735915645491332" style="clear: left; display: inline !important; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Around the same time, household interest income received a significant boost from the nonfinancial business sector. The pronounced decline in the net interest position of that sector aligns closely with high interest rates of the preceding period and a massive expansion of nonfinancial corporate debt shortly afterwards:</span></b><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="380" src="https://lh5.googleusercontent.com/644oZGg9aUM9HjUwE0whoDtHJWhlfp6zn88c9D64ViP9vgRQkzRmsximDM73TuV-g5kz9QPEM-11rHTpTI-EqPPbx6XULzIkkag1T3FPHy3wrx-B9qHqB80jIg" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Since then the rise and fall of nonfinancial interest payments (and outstanding debt) has tracked the business cycle, with the overall trend remaining steadily lower (higher net payments and outstanding debt). Although these transfers support household income, they also increase income inequality since wealthy households hold a vast majority of financial assets (including corporate debt).</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Turning to the foreign (rest of the world) sector, the U.S. current account (trade) balance fell heavily in the 1990’s:</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="384" src="https://lh3.googleusercontent.com/YZqTVba7CoqPWcigpjAoE_yk9Ydx1M7FR6KqWH95kY4RoDlBTEOqNkX9Y4epRFKefHs6U68yYjWzDg-dUXl2oR5HosWxtVYR00IRNqjLKxHYPI1rZxQtjhT3Rg" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Foreign countries began amassing large quantities of U.S. financial assets (primarily Treasuries) corresponding to the substantial trade deficits. The growth in net interest receipts arising from these holdings represents an ongoing leak in domestic aggregate demand. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">With the beginning of a new millennium and the dot-com bubble, a hostile environment was created for the household net interest position. Federal budget surpluses, declining interest rates, rapidly expanding trade deficits, and increasing payments to the financial sector (for housing) led to a nearly 40% decline in household net interest receipts. Combined with increasing income inequality, many households drew upon savings and increased demand for new debt to maintain previous levels of consumption. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">A side effect of the budget surpluses was a growing desire for safe financial assets separate from U.S. Treasuries. Securitization provided a means for new loans of varying risk to be converted into supposedly “super-safe” assets and transferred off of bank’s balance sheets. These factors encouraged banks to meet the surging demand for new loans coming from households (Chart: Household Debt-to-GDP):</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="384" src="https://lh6.googleusercontent.com/Au_SHV61p9WZO9_hh4B-WhGkFd08606f46kvnGXMQxHgCwPfEDvt-T2JoZCmEN_txIaof0OeBW-cSSpu3ctJdGY-k4NKkEw5uqewf3UrtNQCw6LBkYhMMHYzDg" width="640" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The effects of these transactions can also be seen in the transfer of net interest payments from households, and later businesses, to the financial sector. Apart from adding to inequality, these transfers reduce aggregate demand since, as Michael Hudson notes in </span><a href="http://www.amazon.com/THE-BUBBLE-BEYOND-Michael-Hudson/dp/3981484207"><span style="color: #1155cc; font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">The Bubble and Beyond</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, “financial institutions tend to save all their income.” (2012: Kindle Locations 6814-6815)</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Since the financial crisis ended, the trend towards higher net interest receipts by the financial sector and greater net interest payments by the nonfinancial corporate sector have returned. These transfers of income up the income/wealth ladder serve to exacerbate the weak demand stemming from two decades of stagnating household interest income. Unfortunately, and so far unsuccessfully, public policy (fiscal and monetary) remains dedicated to originating a new private debt led boom. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The changes in net interest payments/receipts over the past few decades highlight the growing income and wealth disparities present in our society. For many years households dug themselves deeper in debt to maintain relative consumption levels. The costs of excessively accumulating private debt have now been recognized, but the burden of interest payments suppressing aggregate demand will be felt for years to come. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="background-color: white; color: #333333; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Bibliography</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Hudson, Michael (2012-10-04). THE BUBBLE AND BEYOND (Kindle Locations 6814-6815). ISLET. Kindle Edition. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com12tag:blogger.com,1999:blog-7707793736288462113.post-80354041533559683112013-02-10T13:29:00.000-05:002013-02-10T13:29:07.764-05:00Quote of the Week...<br />
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<b id="internal-source-marker_0.42111271526664495" style="font-weight: normal;"><img height="320" src="https://lh6.googleusercontent.com/no-J1uXCwPbIvJajrVpIBkj93tH8XClWctOivsc82IXcsvNEMfbIkwAPDvWyTG5Yi-AoYuj4fbJkMJusSct4FeaPIgh2OK1YTD5gtONVt2flSq33yxKwaY4gQA" width="204" /></b></div>
<b id="internal-source-marker_0.42111271526664495" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">...is from Roger Garrison’s </span><a href="http://www.amazon.com/Time-Money-Macroeconomics-Structure-Foundations/dp/0415771226/ref=sr_1_1?ie=UTF8&qid=1360519801&sr=8-1&keywords=time+and+money+garrison"><span style="color: #1155cc; font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Time and Money</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> (2007):</span></b><blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In response to the question "What about expectations?", we get New Classical monetary misperception theory, real business cycle theory, and new Keynesian theory. This is the state of modern macroeconomics. While each of these theories include rigorous demonstrations that the assumptions about expectations are consistent with the theory itself, none are accompanied by persuasive reasons for believing that there is a connection between the theoretical construct and the actual performance of the economy over a sequence of booms and busts. Applicability has been sacrificed to rigor. The Keynesian spur has led us to this dead end. </span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">Time and Money</span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> is one of several assigned books for my macroeconomics course this semester. The second chapter displays Garrison’s strong grasp of other modern macro theories and their unfortunate divergence from trying to model/explain the world as we know it. Having only read through chapter three, which begins to lay out the foundation of Austrian Business Cycle Theory (ABCT), I’ve already come across several discrepancies with modern monetary operations. In forthcoming posts, I hope to address these disagreements and outline a new theory that combines the positive features of Post-Keynesian monetary economics and Austrian capital theory. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><br /><span style="font-family: Arial; font-size: 15px; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">Bibliography</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Roger W. Garrison (2007-03-16). Time and Money (Routledge Foundations of the Market Economy) (Kindle Locations 801-806). Taylor & Francis. Kindle Edition. </span></b><div class="blogger-post-footer"><img src="http://c.statcounter.com/counter.php?sc_project=8122563&java=0&security=716cf152&invisible=1" alt="." border="0" height="1" width="1" />
</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com3tag:blogger.com,1999:blog-7707793736288462113.post-27449018739355267092013-02-06T14:53:00.000-05:002013-02-06T14:53:22.400-05:00Inequality Really Is Holding Back the Recovery<b id="internal-source-marker_0.1910782370250672" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">A couple weeks ago Nobel Laureate Joseph Stiglitz generated a heated debate among economists by claiming “</span><a href="http://opinionator.blogs.nytimes.com/2013/01/19/inequality-is-holding-back-the-recovery/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Inequality Is Holding Back the Recovery</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">.” Paul Krugman, another Nobel Laureate who is normally on Stiglitz’s side in these debates, actually took a somewhat </span><a href="http://krugman.blogs.nytimes.com/2013/01/20/inequality-and-recovery/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">opposing position</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">:</span></b><blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">First, Joe offers a version of the “underconsumption” hypothesis, basically that the rich spend too little of their income. This hypothesis has a long history — but it also has well-known theoretical and empirical problems.</span></b></blockquote>
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<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">It’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve know that this fact is to an important degree a sort of statistical illusion. Consumer spending tends to reflect expected income over an extended period. If you take a sample of people with high incomes, you will disproportionally include people who are having an especially good year, and will therefore be saving a lot; correspondingly, a sample of people with low incomes will include many having a particularly bad year, and hence living off savings. So the cross-sectional evidence on saving doesn’t tell you that a </span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; vertical-align: baseline; white-space: pre-wrap;">sustained</span><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> higher concentration of incomes at the top will lead to higher savings; it really tells you nothing at all about what will happen.</span></b></blockquote>
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<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">So you turn to the data. We all know that personal saving dropped as inequality rose; but maybe the rich were in effect having corporations save on their behalf. So look at overall private saving as a share of GDP:</span></b></blockquote>
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<b style="font-weight: normal;"><img height="315" src="https://lh5.googleusercontent.com/PPDzcFGCPYtEsulEnO3CSpagx5EjAEOdffY97d2_Klm43n5MEnTo88FK7IQKs9S3Cr0n8TM2oQVi9V57sf6W-5l9C4eImWGFHirbO3ZVcdHew_XuEHDpE8gOqA" width="400" /></b></div>
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<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The trend before the crisis was down, not up — and that surge with the crisis clearly wasn’t driven by a surge in inequality.</span></b></blockquote>
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<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Not convinced by Krugman’s analysis, </span><a href="http://newarthurianeconomics.blogspot.com/2013/01/a-high-drift-factor.html"><span style="background-color: white; color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Arthur Shipman</span></a><span style="background-color: white; color: #333333; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">considers other potential reasons that gross saving might have fallen in response to rising inequality. As he wisely points out, the above trend is reminiscent of the change in inflation rates:</span><img height="312px;" src="https://lh5.googleusercontent.com/bJYXNVSzBSHtP28qGeRbRtgnMztlmXnAXgMk_gMHdNTLGX8N_Z4a2i59kddnFFdgpfstWsWBfLVKevlLyfmhzIQdJpODrxZfSSseSm-yAWfFYe2vDDhPSrbvIw" width="520px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">and even more so, the pattern of interest rates:</span><img height="312px;" src="https://lh3.googleusercontent.com/yFggqpmiDLaK8PXOP6SjlRS2B0Qk4wPeaq4_v_fhmZATYdgtAfW6b3NrWNZwxB3cuZVBlZckOex6SjoQk5kUhEuex4znYED_wiF7V1yp6XZmaJ5Ycbdiy3DjwA" width="520px;" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Still unsatisfied, Arthur concludes:</span></b><blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">So are there a lot of explanations for why Krugman's graph goes up and down?</span></b></blockquote>
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<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">There must be.</span></b></blockquote>
<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">While I won’t disagree with Arthur’s conclusion, I think a potentially satisfying explanation does exist if one disaggregates gross private saving.</span></b></div>
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<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"> </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Gross private saving = personal saving + wage accruals less disbursements + consumption of fixed capital (domestic business + households and institutions) + undistributed corporate profits with inventory valuation and capital consumption adjustments.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"><br /></span></b></div>
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<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Using </span><a href="http://www.bea.gov/itable/"><span style="color: #1155cc; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">interactive data from the Bureau of Economic Analysis</span></a><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">, Krugman’s chart can be recreated to depict each of the disaggregated measures as a percentage of GDP:</span></b></div>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><img height="553" src="https://lh5.googleusercontent.com/Ydp8tSkWxm74KyY-csqOs2ZWJ5Hf802yNEXm0TY6N6DXc4aEBFWutUBXaZq3BgEiEyazT9AvRQlk8Ge96efPejed2p7KAxGSFPnIxY62q4iPSyF2J9zxxIqcdg" width="640" /><b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">This chart makes it patently obvious that the sharp swings in gross private saving, as a percentage of GDP, are almost entirely due to changes in personal saving and undistributed corporate profits with inventory valuation and capital consumption adjustments.</span></b><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b></div>
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<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Specifically focusing attention on the period from the mid-1980’s up to the recent crisis, the entire decline in gross private saving is basically due to declining personal saving. Can this observation be reconciled with rising inequality during the same time period?</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">In my view, the staggering fall in personal saving can not only be reconciled with rising inequality but also with declining inflation and interest rates. Rising income and wealth inequality starting in the 1980’s meant that many households could no longer maintain relative levels of consumption based solely on disposable income. Assuming this trend would not persist indefinitely, or maybe just unwilling to lower relative consumption, a proportion of households either drew upon previous savings or sought out loans (new debt) to temporarily raise consumption. As the upward trend in inequality persisted, more households elected to reduce savings or, having exhausted their savings, increase demand for debt. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b><b id="internal-source-marker_0.1910782370250672" style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Coincidently, inflation and interest rates were steadily declining during these years. Combined with numerous new debt subsidies and implicitly increasing federal backing, banks were all too eager to meet the rising demand for credit. This explosive expansion of credit is readily apparent in the following chart of household debt to GDP:</span></b></div>
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<b style="font-weight: normal;"><span style="font-family: Arial;"><span style="white-space: pre-wrap;"><br /></span></span><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><img height="239" src="https://lh6.googleusercontent.com/uLhIUifFPl254DgpeDYyXMEOVNv6Q6ajOHUANJOe-nPYkunnvxFxKMLB6vNSej6KyU52PbAG-joVf3pX8ToZC4jRpjRWHJtJIOwCHAkQqNUPhP0IWvRpvMlBzQ" width="400" /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The concurrent drawing down of savings and growing stock of outstanding debt among households provides a very straightforward explanation for how inequality drove the observed decline in personal saving. </span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Returning to the disaggregated chart of saving as a percentage of GDP, the reasons behind the sharp rise during and after the recent crisis are also much clearer. On the household side, declining home values and rising unemployment clearly brought about a shift in personal saving. Having already amassed a large stock of debt, households were pressured to increase saving in order to meet the principal and interest payments coming due. Furthermore, recognition by many households that previous saving was insufficient for present retirement plans may have added to the rise in personal saving.</span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Switching to the corporate side, the change in undistributed corporate profits can also be disaggregated into its distinct parts:</span></b></div>
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<b style="clear: left; float: left; font-weight: normal; margin-bottom: 1em; margin-right: 1em;"><img height="461px;" src="https://lh4.googleusercontent.com/rmRAxBWoMcmrMRxltT9NJfhZ6BxBXBHEXbufLIH3d7vCl6DNm8mR1r33ig7ZrgyuCEGuI4i4TOqEW0kodHtrIXRAoBxtWb6OeQvuNHr6oibGX7olZKyZa2ij1w" width="633px;" /><b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">The recent crisis saw an unparalleled fall and rise in undistributed corporate profits that returned the percentage to heights previously witnessed only briefly sixty years ago. It’s also worth noting that undistributed corporate profits had risen significantly following the bursting of the dot-com bubble. Contrary to Krugman’s claim, this suggests wealthy households were and are continuing to use corporations as a means of effective saving. </span></b><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span></b></div>
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<b style="font-weight: normal;"><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;"></span><br /><span style="font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">By disaggregating the data for gross private savings, the drivers behind the large fluctuations and trends become increasingly apparent. This data is consistent with rising income and wealth inequality but requires reversing Stiglitz’s “underconsumption” hypothesis. Trying to maintain relative consumption levels, many households clearly chose to rely on previous savings or new debt as a means of temporarily boosting consumption. As inequality continues to rise, wealthy households are now electing to retain more of their savings within corporations. It doesn’t take a leap of faith to suggest this combination of factors depresses aggregate demand. Stiglitz is therefore correct in concluding:</span></b><blockquote class="tr_bq">
<b style="font-weight: normal;"><span style="background-color: white; font-family: Arial; font-size: 15px; vertical-align: baseline; white-space: pre-wrap;">Now we realize that we are paying a high price for our inequality and that alleviating it and promoting growth are intertwined, complementary goals. It will be up to all of us — our leaders included — to muster the courage and foresight to finally treat this beleaguering malady.</span></b></blockquote>
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</div>Anonymoushttp://www.blogger.com/profile/00720722626969395929noreply@blogger.com5